This is part 1 of a series of six articles. Be sure not to miss Part 2 – The Strategic Evolution of E-Commerce, Part 3 – Retail Performance: The Keystone, Part 4 – The Attention Tax, Part 5 – After the Attention Tax: The Strategic Playbook, and Part 6 – The Hail Mary.

Retail Media is the most important business model in e-commerce. Not the largest — that is still product sales. But the most important, because it is the profit engine that funds everything else: lower prices, faster delivery, better technology, and market expansion. Amazon's advertising business surpassed $46 billion in 2023. Walmart Connect, Instacart Ads, Mercado Libre's advertising division — every major marketplace is building or scaling a Retail Media operation. The industry-wide consensus is that Retail Media is the future of e-commerce profitability.

That consensus is correct. But it is also incomplete.

Most companies treat Retail Media as an advertising business — a department that sells placements to brands and agencies, operates with its own P&L, and reports its success in CPMs, click-through rates, and ad revenue growth. This is Retail Media 1.0. It works. It generates extraordinary margins. And it leaves an enormous amount of strategic value on the table.

This article introduces what I call Retail Performance — the next evolution of Retail Media. Retail Performance is not a rebrand or a marketing term. It is a fundamentally different operating model, one that integrates advertising revenue, pricing strategy, user experience, and platform economics into a single self-reinforcing system. Where Retail Media 1.0 monetizes ad space, Retail Performance monetizes the entire relationship between the platform, its sellers, and its customers.

The difference is not incremental. It is structural. And it produces dynamics that the industry has not fully grasped: a winner-takes-all market structure where the platform that masters Retail Performance first doesn't just outperform competitors — it makes competition nearly impossible.

Retail Media 1.0: The Billboard Model

To understand where Retail Performance is going, we need to be honest about where Retail Media started — and where most companies still are.

In the era of Retail Media 1.0, the advertising function operates as an isolated business unit within the e-commerce organization. It has its own sales team, its own technology stack, its own revenue targets. Its job is to sell advertising inventory — Sponsored Products, display banners, promoted listings — to brands and agencies. The metrics are familiar: impressions, clicks, conversions, ROAS.

I call this the Billboard Model, because it treats the e-commerce platform the way a highway operator treats billboards: rent out the space, collect the fee, and let the advertisers worry about whether it works.

The Billboard Model has been spectacularly profitable. Retail Media margins routinely exceed 50%, often reaching 70–80% for established platforms. At scale, it generates billions in virtually pure profit. This is why every marketplace in the world is rushing to build a Retail Media operation — the unit economics are simply too attractive to ignore.

But the Billboard Model has a fundamental limitation that its margins obscure: it treats advertising and commerce as separate activities.

The Retail Media team sells ad placements. The merchandising team manages product assortment and pricing. The fulfillment team handles logistics. The product team optimizes the user experience. Each operates with its own objectives, often pulling in different directions. The Retail Media team wants to maximize ad revenue, which can mean prioritizing high-bidding advertisers over products that would actually generate more sales. The pricing team wants to maximize margin, which can mean keeping prices high enough to discourage the volume growth that Retail Media depends on.

This organizational separation is not a minor inefficiency. It is a strategic failure — one that becomes visible only when you see what the alternative looks like.

The Shift to Retail Performance: When Advertising Meets Strategy

Retail Performance begins with a deceptively simple question: What if advertising revenue is not the product, but the fuel?

In Retail Media 1.0, ad revenue is the end goal — the number that goes on the quarterly earnings slide, the metric that justifies the department's headcount. In Retail Performance, ad revenue is an input — a strategic resource that is reinvested to make the entire platform more competitive.

This is the conceptual shift that changes everything.

Consider what happens when a platform takes a portion of its Retail Media revenue and uses it to subsidize product prices. Prices drop. Lower prices attract more customers. More customers generate more engagement — more searches, more page views, more time on site. More engagement creates more advertising inventory — more impressions to sell, at higher value, because the audience is larger and more active. More ad revenue generates more subsidy budget. Prices drop further. The cycle continues.

This is not advertising. This is not commerce. It is both, integrated into a single strategic system where each component amplifies the others. The traditional boundaries between the Retail Media department and the rest of the commercial organization dissolve — not because someone decided to reorganize, but because the economics demand it.

Retail Performance requires closer collaboration between previously separate functions than most organizations have ever attempted. Pricing, merchandising, advertising, and platform technology must operate as a unified system with shared objectives and shared metrics. The KPI is not ad revenue in isolation or sales margin in isolation. It is the total economic performance of the integrated system.

This is harder to manage than the Billboard Model. It is also vastly more powerful.

The Retail Performance Flywheel

The central mechanism of Retail Performance is what I call the Retail Performance Flywheel — a self-reinforcing cycle that, once spinning, generates accelerating competitive advantages that are extraordinarily difficult for competitors to match.

The flywheel has four interconnected gears:

Gear 1: Retail Media Revenue. Sellers invest in Sponsored Products, display advertising, and promoted placements to reach the platform's audience. This revenue is high-margin — the platform is monetizing its existing traffic, using its own data, on its own real estate. The cost of serving an additional ad impression is near zero. This generates the cash flow that powers everything else.

Gear 2: Dynamic Pricing Subsidy. A portion of Retail Media revenue is strategically reinvested into lowering product prices. Not blanket discounts — targeted, data-driven price reductions on products where elasticity analysis shows the volume response will more than compensate for the margin reduction. The platform uses its data advantage to identify exactly where a price reduction of €3 will generate €10 in additional economic value through increased volume, repeat purchases, and expanded Retail Media inventory.

Gear 3: Traffic and Engagement Growth. Lower prices attract more customers. But the effect is not merely transactional — it is behavioral. Customers who discover that a platform consistently offers the best prices begin to start their shopping journeys there by default. They browse more, search more, compare more. Session durations lengthen. Pages per visit increase. The platform becomes the first destination, not one of several.

Gear 4: Expanded Retail Media Inventory. More engaged visitors produce more impressions, more search queries, more product page views — all of which represent advertising inventory that can be monetized. And the inventory is more valuable, because the audience is larger, more active, and more likely to convert. Retail Media revenue per visitor increases even as total visitor count grows.

Each gear drives the next. Retail Media revenue funds the pricing subsidy. The subsidy attracts traffic. Traffic creates engagement. Engagement generates more Retail Media revenue. The cycle repeats, each revolution spinning faster than the last.

This is not a theoretical construct. It is the operating logic of the most successful e-commerce platforms in the world — although most of them do not describe it in these terms, and many are executing it only partially, leaving enormous value unrealized.

The Winner-Takes-All Dynamics

Here is where the analysis becomes uncomfortable for anyone who is not already the market leader.

The Retail Performance Flywheel does not just create competitive advantage. It creates compounding competitive advantage — the kind that widens the gap between the leader and everyone else with every rotation.

Consider two competitors. Platform A has twice the traffic of Platform B. Platform A's Retail Media revenue is correspondingly higher — more impressions to sell, at higher CPMs, because advertisers value larger audiences. Platform A can afford a larger pricing subsidy. Its prices are lower. Lower prices attract more customers, widening the traffic gap further. More traffic generates more Retail Media revenue. A larger subsidy. Even lower prices. The gap compounds.

Platform B faces the inverse: less traffic generates less Retail Media revenue, which means a smaller pricing subsidy (or none at all), which means higher prices, which means less traffic. The flywheel spins in reverse.

This is not a gradual competitive dynamic that plays out over decades. It is a structural force that can reshape a market in years. The platform that gets the flywheel spinning first — and spins it hardest — creates a gravitational pull that draws sellers, customers, and advertising budgets away from competitors.

The implications for strategic decision-makers are stark. Investments in technology, data infrastructure, and operational capabilities are not optional improvements — they are survival requirements. The platform that delays its Retail Performance transformation does not simply fall behind. It falls behind at an accelerating rate, because the leader's flywheel is compounding while the laggard's is stalling.

This is the strategic reality that most Retail Media executives have not yet internalized: the transition from Retail Media 1.0 to Retail Performance is not an optimization opportunity. It is a winner-takes-all race.

The Organizational Challenge

If the economics of Retail Performance are so compelling, why isn't every platform executing it?

The answer is organizational, not analytical. Most companies understand the theory. Few can execute the practice.

Retail Performance requires something that large organizations are structurally bad at: dissolving boundaries between departments that have historically operated with separate P&Ls, separate KPIs, and separate leadership. The Retail Media team must accept that its revenue will be partially redirected into pricing subsidies — effectively reducing its own reported metrics. The pricing team must accept that price points will be influenced by advertising revenue dynamics, not just margin targets. The product and engineering teams must build the data infrastructure to make real-time, integrated decisions across advertising, pricing, and merchandising.

This is not a technology problem. The algorithms exist. The data exists. It is a governance problem, a compensation problem, and ultimately a leadership problem. The CEO must redefine how the organization measures success — moving from departmental metrics to integrated platform metrics. The board must understand why Retail Media margins might temporarily compress even as total economic value accelerates.

The companies that solve this organizational challenge will define the next era of e-commerce. Those that cannot — that remain stuck in the Billboard Model, celebrating high Retail Media margins while competitors build integrated flywheels — will discover that their margins were not a sign of strength but of strategic incompleteness.

What Comes Next

This is the first article in a series of six. The Retail Performance framework I have introduced here is, I believe, the most powerful profitability mechanism available to e-commerce platforms today. The next two articles develop it further: Part 2 provides the economic analysis — a detailed scenario model showing how each stage of Retail Performance integration amplifies profitability. Part 3 examines how Retail Performance transforms e-commerce platforms into market aggregators, connecting to the broader dynamics of platform economics.

And then the series takes a turn.

In Part 4, I challenge my own framework — arguing that the foundational assumption underlying Retail Performance is about to be invalidated by AI shopping agents. Part 5 proposes a strategic playbook for what comes after. And Part 6 makes the boldest bet of all.

But first, we need to build the thesis properly. The Retail Performance Flywheel is the engine. Understanding how it works — and how powerful it is — is essential to understanding what it means when that engine faces an existential challenge.

The flywheel starts here. Let's see how fast it can spin.

Key Takeaways

• Retail Media 1.0 — the Billboard Model: Most platforms treat Retail Media as an isolated ad sales operation. This generates high margins but leaves the majority of strategic value unrealized.
• Retail Performance (Retail Media 2.0): The integration of advertising revenue, pricing strategy, and platform economics into a unified, self-reinforcing system. Not a rebrand — a fundamentally different operating model.
• The Retail Performance Flywheel: Ad revenue subsidizes pricing, lower prices attract traffic, more traffic generates engagement, more engagement creates more ad revenue. Each revolution accelerates the next.
• Winner-Takes-All Dynamics: The flywheel compounds competitive advantage. The leader's position strengthens with every rotation while competitors face a reverse spiral. This is a race, not a gradual evolution.
• The Organizational Challenge: The barrier to Retail Performance is not technology but organizational structure. Integrated execution across advertising, pricing, and merchandising requires dissolving departmental boundaries.

Frequently Asked Questions

What is the difference between Retail Media and Retail Performance?

Retail Media (1.0) is an advertising operation — a department that sells sponsored placements to brands and agencies, measured by metrics like CPM, CPC, and ROAS. Retail Performance integrates advertising revenue into the platform's broader commercial strategy — using ad revenue to subsidize pricing, drive traffic growth, and create a self-reinforcing flywheel that generates compounding competitive advantages. The distinction is between treating ad revenue as a product versus treating it as strategic fuel.

What is the Retail Performance Flywheel?

The Retail Performance Flywheel is a self-reinforcing cycle where Retail Media advertising revenue subsidizes product pricing, lower prices attract more users, more users generate more browsing engagement, and more engagement produces more Retail Media advertising revenue. This cycle accelerates with each rotation, creating compounding advantages for the platform that executes it most aggressively.

Why does Retail Performance create winner-takes-all dynamics?

Because the flywheel compounds. A platform with twice the traffic generates disproportionately more Retail Media revenue, which funds larger pricing subsidies, which attracts even more traffic. Competitors with less traffic have less Retail Media revenue, smaller subsidies, and higher prices — driving traffic away and weakening their flywheel further. The gap widens with every rotation.

Why don't all e-commerce platforms implement Retail Performance?

The primary barrier is organizational, not technological. Retail Performance requires dissolving the boundaries between advertising, pricing, merchandising, and platform technology teams — aligning them around integrated metrics rather than departmental P&Ls. Most large organizations are structurally resistant to this level of cross-functional integration, even when the strategic logic is compelling.

How does Retail Performance relate to Amazon's advertising strategy?

Amazon's advertising business, which exceeded $46 billion in 2023, operates as the most advanced implementation of the Retail Performance model. Amazon uses advertising revenue to subsidize aggressive pricing (through programs like dynamic pricing and promotional discounts), which drives traffic, which generates more advertising inventory. This flywheel is a primary driver of Amazon's marketplace dominance — though the principles apply to any e-commerce platform.

Next in this series is >> Part 2 – The Strategic Evolution of E-Commerce