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Amazon ads are a crucial component to growing your Amazon business. They’re designed to help you achieve your campaign goals, such as boosting traffic, driving sales, and expanding your reach. Best of all, they’re measurable, allowing you to monitor your campaign’s performance so you can analyze and optimize each Sponsored Products campaign more efficiently.
If you're already using Amazon ads or plan to use them to bolster your business, you might wonder how to gauge their effectiveness and profitability. The answer lies in understanding your Advertising Cost of Sales (ACoS).
For Amazon sellers, being able to understand and measure the performance of each Sponsored Products campaign is vital for success. In this article, we’ll cover everything you need to know about Amazon ACoS, including how to calculate it, its importance, and what you can do to improve it.
Many businesses use sponsored ads to reach their target audience and generate leads. To optimize their ad campaigns on Amazon, monitoring ACoS is crucial.
It measures the efficiency and success of your advertising campaigns by comparing your ad spending to ad revenue. This helps determine if your campaigns are cost-efficient and profitable. Importantly, it also helps you establish your break-even point, allowing you to estimate the maximum amount you can invest in ads while maintaining profitability.
Your ACoS plays a vital role in growing your business because it allows you to monitor all your ad costs and determine how much profit you can potentially make. Understanding your target ACoS can also help you optimize your bids, leading to more efficient Amazon PPC campaigns and smarter bidding for your target search terms.
Calculating your ACoS is relatively straightforward.
Start by dividing your ad spend by ad revenue and then multiplying the quotient by 100 to get a percentage. For example, if you spent $500 on an ad campaign and managed to generate a revenue of $2,500 from it, then your ACoS would be 20%. This means that it costs you $0.20 to generate a dollar’s worth of sales. You can also look at it this way: it’ll cost you $20 to generate sales worth $100. In general, a lower number means that it’s relatively cheaper to drive a sale. On the other hand, a higher number indicates that it’s getting more expensive for you to drive a sale.
If you’ve signed up for Amazon Ads, then you can get access to a suite of reporting and measurement solutions. For example, you can view metrics, such as new-to-brand metrics, ACoS, and ROAS, to gauge the effectiveness and audience engagement of your campaigns.
While understanding this key metric is good for your Amazon business, you shouldn’t solely focus on ACoS to assess the success of your ad campaigns as it also has the following limitations:
Your break-even ACoS is linked to your profit margin. To maintain your profit, you should have a lower Amazon ACoS compared to your profit margin. If things are the other way around, this means that you’re likely spending more money on ads compared to what you’re earning.
By knowing your break-even ACoS, you’ll be in a much better position to set your target ACoS (not to be confused with TACoS or the total advertising cost of sale). To calculate your break-even ACoS, you need to factor in all the costs involved in selling your products (including Amazon fees, manufacturing costs, and shipping fees) to get your cost of goods sold (CoGS) and its total sale value. Once you have these numbers, you need to:
For example, if you’re selling your product for $50 and the total CoGS is $10, then your break-even ACoS or profit margin should be:
If your cost of advertising exceeds your break-even point, which is 80% of your product sales, then you probably won’t see much growth in profits. If it’s lower than 80%, then you’re going to be profitable.
To determine if you’re going to break even, you need to compare your profit margin and your ACoS. Using the result from the sample calculation above, let’s say that your ACoS is 20%. In this scenario, it is (20%) is lower than your profit margin (80%), which means that you’re making money from your ad campaigns.
You can use an ecommerce accounting software, like Threecolts’ FeedbackWhiz Profits, that allows you to view and analyze your financial metrics all on one dashboard. FW Profits also lets you track your profits and losses in all Amazon marketplaces so you can optimize your business both locally and internationally.
If you’re an Amazon seller, then you’ve likely encountered tons of other acronyms, especially when dealing with metrics. One example is ROAS or return on ad spend. ROAS is the inverse of ACoS. Instead of dividing your ad spend by ad revenue and multiplying the quotient by 100, you divide your ad revenue by your ad spend. In essence, ROAS gives you a glimpse of your potential earnings from an ad campaign, while ACoS provides the percentage increase. While they’re two different metrics, both ROAS and ACoS can help you get a more comprehensive view of your ad campaign’s performance.
While calculating Amazon ACoS is simple, understanding what influences it is more complex. If you don’t keep an eye out for these factors, you may end up with a higher number that eats into your bottom line. Factors that influence Amazon ACoS include:
Other factors that can potentially affect your ACoS include click-through rate (CTR), cost-per-click (CPC), volume of orders, number of impressions, and ad revenue.
TACoS (not the food), or the total advertising cost of sale, is also worth paying attention to. While this additional metric may seem like additional work, knowing your TACoS helps paint a clearer picture of your total profits because Amazon TACoS lets you measure the ratio of your ad spend within the context of your total sales. Plus, this metric helps you assess the impact of ad sales versus organic sales, track your reliance on advertising for specific products or your entire account, and gain a holistic understanding of your business’s profitability.
To calculate your TACoS, divide your ad spend by your total sales revenue (this includes figures for both your ad sales and organic sales) and multiply the quotient by 100. For example, if your monthly ad spend is $500 and your total sales amount to $5,000, then your TACoS is 10%.
It’s worth noting that there are different levels of TACoS. If you get low numbers, this likely indicates that your product is doing well and is generating steady sales. This also means that your organic sales are bringing in significant increases to your total revenue and that your ad campaigns are doing their job in helping your brand grow.
Now, if it is higher, then this could mean that your ads need to be improved and optimized because they’re not that effective at driving organic sales. To improve your TACoS, you can look at increasing your overall sales or cutting down on your ad spend. Alternatively, you can use this metric’s insights to optimize your listings and enhance your SEO to drive organic sales.
However, either strategy may not be that effective in the long run. If you want something more sustainable, then you need to focus your ad spend on your branded campaigns, particularly on your bottom-funnel marketing (bottom-of-funnel or BOF) efforts.
Focusing on your BOF campaigns can help you drive conversions by encouraging your target audience to take action and purchase your products. By zeroing in on these campaigns, you enhance your relevance, which in turn can stimulate organic sales and allow you to reduce your ad spend.
When considering both your ACoS and TACoS, it's important to monitor these metrics in tandem. Monitor any changes and take proactive measures when needed, such as if you have a decreasing ACoS or an increasing TACoS. A lower ACoS generally indicates less ad spend to generate sales, while a higher TACoS could suggest that your ad spend is contributing more significantly to your total revenue. This could, in turn, imply that your organic sales are less impactful in driving your total revenue.
On average, an Amazon seller’s total ad spend is at 22%. This figure can vary depending on changes in the CPC of Amazon ads. Your ACoS will vary depending on factors like the ad type you’re using, product prices, and the marketplace you’re in, which is why there’s no one “perfect” answer for this question. What’s considered a “good” ACoS will largely depend on two factors: your marketing strategy and your goals for your ad campaigns.
The rule of thumb here is that the lower the ACoS, the higher the profitability. However, it’s worth noting that this is only good if your strategy matches your goals and objectives, which can be generating as much profit as possible or driving sales for a low-converting product.
Amazon ACoS isn’t just about profitability. Having a higher number can potentially boost your visibility. This, in turn, can help you generate more profit over time. While aiming for a higher number may seem counterintuitive, it could potentially be a good strategy if you’re aiming to boost awareness for both your brand and your products, drive greater product visibility, and outperform competitors in your niche.
If you’re just starting with Amazon PPC, then a good ACoS would be somewhere around 29%. In general, however, Amazon ACoS can be anywhere between 25% and 36%.
In general, we all want to lower our ACoS, but how can we effectively lower this metric?
There are several options you can consider to lower your Amazon ACoS and increase your profits. You can start by identifying the metrics that negatively impact it. Look at your reports, use an advertising analytics solution from Jungle Scout, or a tool that lets you view all your metrics in one place like Helium 10’s Amazon PPC tool. If your conversion rate is low, this could result in a higher ACoS. In such a situation, consider implementing strategies to improve your conversion rate. You could optimize your content or experiment with different pricing strategies to find out what appeals most to your target audience.
Other methods you can use to optimize Amazon ACoS include:
At the end of the day, it’s best to view Amazon ACoS objectively and consider it as more of a guide rather than a definitive way to measure your campaign’s success. When measured alongside other Amazon metrics and used with complementary strategies, this metric can help you achieve long-term growth and gain more insights into assessing your campaign’s success.
Threecolts’ applications are designed to help you customize your Amazon business so you can grow faster and become more agile. From providing enhanced visibility on your profit and loss to helping you recover profit, Threecolts’ solutions allow you to prioritize your company’s growth. Discover how Threecolts can equip your Amazon business for long-term success.
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