If Inflation is Up, Why Are Retail Media Prices Going Down?

While prices for many goods and services are increasing, the retail media segment of the digital advertising market is experiencing a decrease in prices. In fact, prices have dropped by 12% over the past year.

According to data from Skai, retail media cost per click fell from $1.02 in Q3 2021 to $0.90 in Q3 2022, with average pricing dropping from a high of $1.07 in Q4 2021. Despite this, there has been a significant increase in total spend for retail media, rising by 45% year over year, along with a 61% rise in retail media impressions.

The laws of supply and demand govern inflation. In the consumer economy, it occurs when there is too much demand and too little supply. This is what happened in the US economy, where there was a surge in disposable income due to stimulus checks and PPP loans, leading to low unemployment and rising wages, which further fueled consumer demand. At the same time, global supply chain disruptions limited the availability of products in various retail sectors, resulting in inflation.

Oppositely, the retail media advertising market has seen an increase in supply surpassing the increase in demand. As more retail media networks appear, expand their ad formats and inventory, and attract more buyers, the number of impressions is increasing rapidly. However, the growth of impressions (61%) is now outstripping the growth in ad spending (45%). This has resulted in a decrease of 12% in CPCs in the most recent quarter.

So, in other words, a bunch of ad inventory has been created.  So much, in fact, that despite general inflation in the economy, prices for media are actually trending down. 

Retail media and social are facing similar reductions in ad rates. Both search and social are following a similar pattern: ad spending is up by 12%, while impressions have grown by around 30%, causing ad rates to fall. As traffic and clicks start to decline, leading search and social platforms are adding more ad loads to keep the growth going. However, this comes with the risk of overwhelming their platforms with ads and alienating users.

Retail media has a greater potential for ad revenue growth. RMNs are better equipped to boost ad loads compared to search and social as they are still in a growth phase and have more inventory to offer. For example, Walmart, the second-largest RMN after Amazon, implemented changes in June 2022 that lowered CPCs such as a second-price auction and search algorithm changes, as per Skai. Other RMNs are also using new methods to expand the size, relevance, and usability of their platforms, which is attracting more investment from brands.

Brands can invest confidently in retail media as ad prices are not affected by inflation. In general, digital ad prices are correlated with inflation as they are based on consumer spending. However, individual digital ad markets have their unique dynamics. While retail media ad spending increases, the increase in supply is still greater than the increase in demand. As long as this remains the case, CPCs will remain stable. However, it may be safer to invest in retail media platforms that are still growing.