Amazon’s SERP Experiments Reveal Valuation Risks For Sellers
Amazon reminds sellers that everything on its platform – including key determinants of their success, failure and valuation – remain entirely at Amazon’s discretion.
Amazon’s recent experiments with its search results pages underscore its capacity to radically reshape the online retail landscape. In the second half of August 2023, Amazon expanded an experiment it had briefly conducted in December 2022, in the way ratings are displayed in search results. Instead of total rating counts, customers would see merely the average star rating, combined with the proportion of ratings that were either five-star or four & five-star. There were a number of variations, but the biggest change was the absence of total rating counts. According to Momentum Commerce, between August 15 and 25, 2023, 24.5% of searches on Amazon.com displayed no ratings counts in the search results.
Amazon’s August 2023 experiment statistics. Source: Momentum Commerce
This represents a fundamental change in the way competing products are presented on the platform. While rankings were apparently unaffected and the total numbers of ratings and reviews did not change (and were still visible on the product pages), the fact that customers were not able to instantly compare total ratings between products on search engine results pages (SERPs) meant that these metrics instantly held less value. Ratings and review “moats”, built up over years, appeared to vanish. In their place were average rating scores and recency-driven metrics such as the “number of units purchased in the last week/month”. It appeared that Amazon was considering abandoning the long-standing cross-sectional comparison of product ratings in favour of a time-series model.
Thankfully for the sellers adversely affected by these changes, Amazon substantially reversed the experiments in most cases. By August 26 only 4.9% of searches on Amazon’s US marketplace showed no rating counts, according to Momentum Commerce.
However, the experiments are a stark reminder that even the most fundamental drivers of a brand’s performance can be altered or removed, without notice, on Amazon’s marketplace.
Rating & review moats contribute enormously to the advantage held by incumbent brands on the platform, driving higher sales for these brands compared to newcomers with fewer ratings, while enabling these sellers to be less dependent on paid customer acquisition. With lower total advertising costs and higher ROAS, these incumbent brand owners benefit from a virtuous cycle that reinforces their success. Leadership positions in ratings and rankings are therefore highly valuable and contribute substantially to the valuation of the brand itself.
Disrupting this ecosystem in this way therefore changes not only the competitive landscape on the marketplace, but the valuations of each of the competing brands.
While it remains uncertain whether Amazon will permanently implement these changes – perhaps they tested negatively, we simply don’t know – the experiments highlight the precariousness of every third-party merchant’s position on Amazon: especially those in leadership positions and those who rely most heavily on the platform.
While it is in Amazon’s interest to have a thriving third-party marketplace, the retail giant has made it clear many times in the past that it serves customers, not merchants. As long as this belief remains central to the company’s ethos, sellers will always be at risk of having major changes suddenly imposed on them for the sake of an improved customer experience.
“Ratings and review ‘moats’, built up over years, appeared to vanish”
Let’s consider the implications of a scenario where Amazon decides to permanently remove total rating counts from its search results pages.
Marketplace Implications
Competitive Dynamics: By reducing the importance of lifetime rating counts, Amazon would give every seller, irrespective of their history, a fighting chance. This adjustment would make the marketplace more appealing for DTC brands and new product innovators, potentially encouraging new entrants onto the platform. However, alienating their largest and most loyal sellers is not necessarily a wise move. Amazon has a symbiotic relationship with these sellers, since these larger, trusted merchants can be relied on to provide high quality products and good customer service in a way that newer sellers cannot.
Advertising Dynamics: As a result of the reduction in competitive advantage for the incumbents, these established brands will likely find it necessary to increase spending on advertising to maintain their visibility. This increase in advertising demand will consequently lower the ROAS for the sector, making competition even fiercer as they strive to keep their top spots.
Fraud Mitigation: By placing emphasis on recent reviews, Amazon will reduce the impact of historical fraudulent reviews that could otherwise artificially inflate or deflate ratings. Reducing the impact of fraud and enabling quality products to stand out could substantially improve the customer experience. On the other hand, Amazon doesn’t tend to trust newer sellers nearly as much as long-standing ones, often for good reason. A change like this could enable sellers with a shorter-term mindset to succeed on the platform, thus encouraging those who don’t provide long-term support, those who sell shorter-lasting products, or even those who commit fraud of other kinds than simple review manipulation.
Product Innovation: By reducing the “comfort” of incumbent brands and therefore helping newcomers, Amazon would arguably force these brands to innovate and improve their products more frequently, theoretically improving the customer experience.
M&A Implications
The shift from lifetime reviews to recency-based metrics would introduce new opportunities and challenges in determining the value of an e-commerce business. With these new dynamics:
New Players Gain Value: Companies with fewer but recent high-quality reviews could see a significant uptick in their valuation as they now become more competitive against established brands. High-quality recent reviews could translate into better search rankings, increased sales velocity, and ultimately, higher valuation metrics.
First-Mover Advantages Diminish: Legacy brands that relied on their review ‘moat’ may find their valuations impacted, as their first-mover advantage wanes. If Amazon moves towards emphasizing recent performance, these brands could lose ground to newer, agile competitors, requiring them to innovate faster to maintain their valuation.
Valuation Uncertainty Reigns: Notwithstanding the previous two points, the most likely outcome from such a change would be reduced confidence from buyers in the long-term likelihood of success of any brand on the Amazon platform, given their exposure to such dramatic changes. If rolled out permanently, a change like this would result in a discounting of the value of these brands, across the spectrum.
“Reducing the value of its own marketplace to merchants is clearly not Amazon’s intention, but its continued subordination of sellers’ interests to those of customers will inevitably force many Amazon-only brands to explore other channels for the first time”
“Non-Amazon” Metrics Increase In Importance
It appears unlikely that Amazon will permanently remove rating counts from SERPs. But given the risk that it could make changes which undermine a brands competitive advantage, it is becoming clearer that brands need to focus on everything else that drives value. Genuine brand equity, product differentiation, intellectual property and other barriers to competition are among the elements that have come into sharper focus.
Furthermore, diversifying away from the Amazon platform itself is now more important than ever. While strong sales and profitability on the platform (and the factors that drive this, such as ratings and rankings) will continue to have value, acquirers will increasingly prefer that brands have a multi-channel presence. Reducing the value of its own marketplace to merchants is clearly not Amazon’s intention, but its continued subordination of sellers’ interests to those of customers will inevitably force many Amazon-only brands to explore other channels for the first time.
Amazon-native (and Amazon-only) brands will continue to have value of course. But experiments like these highlight the value in diversifying away from being solely reliant on the platform.
Conclusion
Amazon’s August 2023 tests not only expose vulnerabilities in what drives value for online retail brands, but also serve as a stark reminder that Amazon can dramatically alter the rules of the game for both buyers and sellers at any time. For operators in this space, staying ahead of the curve is imperative.
About Hahnbeck
Amazon’s SERP experiments do not simply represent a tweak, but a transformation, underscoring the need for a specialised M&A advisory service. At Hahnbeck, we are continuously adapting our valuation models and diligence processes to align with market changes. With our sector specific expertise, we can identify unique growth levers and potential pitfalls for businesses in the e-commerce and SaaS sectors, ensuring that the true value of our clients’ businesses are reflected in any deal.
To enquire about Hahnbeck’s M&A advisory services please email info@hahnbeck.com in the first instance.