The news: Amazon, ChatGPT, and Walmart are testing different approaches to advertising in AI chatbots as they try to determine how to monetize engagement without losing user trust.

• Amazon is migrating Rufus’ ad capabilities, which included sponsored ads as well as product and brand prompts, to Alexa for Shopping. While Rufus only used customers’ shopper data to inform its recommendations, Alexa for Shopping uses non-shopping data from Alexa+, such as recipe searches or music preferences, to deliver more relevant results, per AdWeek.
• ChatGPT’s latest ad format allows advertisers to create ads by sharing product information feeds with OpenAI, according to The Information.
• Walmart is being more conservative, choosing instead to prioritize delivering contextually relevant experiences over higher ad loads, chief growth officer Seth Dallaire said at this week’s Evercore Consumer & Retail Conference.

The risk: For all three companies, these AI advertising initiatives risk damaging consumer trust and reducing the chances of conversion.

• Nearly two-thirds of US adults (63%) say ads in AI search results would make them trust the output less, according to a January Ipsos survey.
• 57% say that ads in AI chatbots would reduce trust in the advertised brand, per a Partnercentric survey.

The challenge may be greater for ChatGPT because it must convince users of the objectivity of its recommendations and advertisers of the value of their spending. Just 24% of consumers say AI chatbots offer the least biased recommendations, compared with 41% for Reddit and 29% for product review websites, per Partnercentric. At the same time, the platform’s perception as a “black box” for advertising spending is making it difficult for brands to justify the high cost of participation. In response, OpenAI is enhancing measurement capabilities and partnering with LiveRamp to address advertisers’ concerns.

The opportunity: Where OpenAI, Amazon, and Walmart see opportunity is in the ability to offer ads tailored not just to consumers’ immediate needs but also taking into account information from previous chats, browsing and purchase history, and any other signals these companies can access.

Walmart’s Dallaire noted that the conversational nature of many prompts allows deeper insight into shoppers’ priorities and purchase considerations. For example, a query from a user seeking fragrance-free detergent for a child with sensitive skin forces the retailer to change how it approaches search optimization, but that nugget of information also gives Walmart the means to adjust future recommendations, which could lead to more conversions and deeper loyalty over time.

Similarly, Amazon is relying on “trillions of browsing, buying, and streaming signals” to inform Alexa’s interactions with shoppers, Charlotte Maines, VP of content and advertising for Alexa, told AdWeek. That info is allowing the retailer to make both its outputs and ads more relevant, with promising early results. Almost 20% of shoppers who interact with a sponsored prompt continue the conversation about that brand, while around 70% of those who buy a product after clicking on a sponsored prompt are new to the brand.

Implications for brands and retailers: Brands and retailers are eager to dive into chatbot ads since they can influence consumers at crucial moments of discovery and intent. However, we expect the format to account for less than $1 billion in revenues this year—and just 3% of total AI spending—due to limited availability, lower ad loads, and OpenAI’s advertising challenges.

Retailers like Amazon and Walmart could have the upper hand over standalone AI chatbots. Shoppers are already familiar with ads on those retailers’ platforms, and both have a wealth of customer data at their disposal to offer a more personalized, relevant experience that increases conversions.