ACoS (Advertising cost for sales)-is a fundamental parameter used to identify the efficiency of an Amazon PPC campaign. It can define a ratio of the expenditure on an ad in contrast to revenue gained by that ad.
In simple words, ACoS calculates the total money spent on an ad out of each dollar you earn from advertising that ad.
How to calculate ACoS?
You can calculate the ACoS of your advertising campaign by the formula;
ACoS= Total ad spend/ Total sales by ad * 100
Suppose you generated $500 revenue from the ad campaign. Total expenditure on that ad was $100.
ACoS = 100/500 * 100 = 20%
You are spending 20 cents on advertising out of each dollar you earn from the PPC ad campaign.
Amazon ACoS vs. RoAS:
Amazon ACoS and RoAS are two parallel matrices. Both are equally essential to measure the working efficiency of a PPC ad campaign accurately.
What is RoAS, and how to calculate it?
RoAS (Return on ad spend) also measures the performance of your PPC ad campaign. It is defined as the total ratio of total revenue generated from a PPC campaign compared to the total expenditure on the advertisement campaign. In short, it will tell how much money you will earn for a dollar that has been invested in advertising.
RoAS= Total sales by ad/ Total ad spend * 100
Let’s suppose you generated $500 revenue from the ad campaign. Total expenditure on that ad was $100.
RoAS = $500/ $100 = $5.0
It means that for every one dollar investment on an ad campaign, you will generate $5.0 revenue.
Is there any difference between ACoS and RoAS?
There is no significant difference between these two metrics. Amazon RoAS is contrary to Amazon ACoS. Both are used to measure the same thing but with different perspectives.
ACoS= Total ad spends/ Total sales by the ad.
RoAS= Total sales by ad/ Total ad spend
Both are used to measure the relationship between ad-generated sales and ad expenditure. It means both Amazon ACoS and RoAS can separately measure the proficiency of PPC campaigns.
It depends on your preferences and which metric you use to measure the performance of your PPC campaign. However, it is essential to determine both parameters better to determine your ad campaign’s ups and downs.
What are good ACoS and RoAS on Amazon?
Good Amazon ACoS:
It depends on various factors, e.g., product price, marketplace, ad type and competition in the market, etc. About 15-20% of ACoS is considered good, while the average ACoS is around 30%. However, a seller always wants to generate revenue higher than the cost he spends on ads to maximize profit.
Good Amazon RoAS:
A RoAS of about 16.6% is considered a good starting point as a rule of thumb. At the same time, it is a highly complex value influenced by different factors such as profit margins, operating expenses, etc. The typical RoAS benchmark is 4:1 means $4 revenue for each $1 spent on an ad.
Target and break-even ACoS calculation for your Amazon ads:
What is break-even ACoS?
Break-even ACoS is a point in ad campaigns where you start earning or losing money from advertising. Typically, a lower ACoS is preferable to a higher ACoS. What does it mean? It means you are spending fewer dollars and earning the same or higher amount in return.
It is necessary to analyze the ACoS for your products against your competitors to determine whether investing more in your campaign will be beneficial by optimizing bids and adding more negative keywords.
Benchmarking ACoS for different products varies greatly depending on the various factors for each advertiser. To identify a reasonable or realistic ACoS, you have to ask yourself what you can afford to pay (depends on your profit margin) and What you are willing to spend (depends on your goals).
You can analyze the good ACoS for your products by following the steps below,
Step 1: Calculate the profit margin
Step 2: Determination of break-even ACoS Amazon
Step 3: Discover the target ACoS
Step 1: How to calculate the profit margins
The profit margin for any product depends on three factors collectively. includes,
- Manufacturing cost (goods manufacturing cost)
- Amazon fee (It includes referral fees, Amazon FBA fees, storage fees, etc.)
- Shipping cost (In Amazon FBA, Amazon charges a fee for shipping your order to the customer)
Your profit margin is the money left after subtraction of charges mentioned above. For example, if you sell your product for $300 and all the costs are $150, you are earning $150 profit per unit ($300-$150=$150).
Profit margin= 150/ 300 * 100 = 50% (It means you will make 50% profit margin per unit)
Profit margin= Profit per unit/ Product price * 100
Step 2: Determination of break-even ACoS Amazon (Is it profitable?)
Break-even is a point when ACoS Amazon becomes equivalent to the profit margin. It is the bottom line when you can earn or lose money in advertising. ACoS lower than the profit margin is mainly considered good. There are three criteria to determine the profitability of your Amazon ACoS.
- Amazon ACoS equal to profit margin:
If ACoS is equal to your profit margin, you are spending all of the profit on advertising campaigns. It is the edge point when you can be profitable in advertising or may lose money.
- Amazon ACoS lower than profit margin:
In this case, your profit margin is higher than the ad cost. It is considered the most profitable condition as you earn the most out of your PPC campaign with a lower price on advertising.
- Amazon ACoS above then profit margin:
It refers to the poor performance of your Amazon PPC campaign. It is a condition when you spend more on advertising than the profit you generate from it. Hence, you are losing your money, and it is not profitable.
Consider the example from step 1, where the profit margin was 50%. Your campaign is profitable until you spend 50% or less on an advertising campaign.
Note that ACoS depends on the product’s profit margin. Collect products from different niches with different profit margins and determine their ACoS number under a single ad group. It won’t be easy to calculate the profitability of your advertising campaign.
Step 3: Discover target Amazon ACoS (do I make enough profit?)
Your purpose on the Amazon eCommerce platform is obviously to generate high revenue. Therefore, your target ACoS will be that ACoS by which you can earn enough profit margin. You can calculate the target ACoS by,
Target ACoS= Profit margin (before advertisement) – Target profit margin (after advertisement)
For example; profit margin(50%)- target profit margin (20%)= target p.m (30%)
In the example above, your break-even P.M is 50% before advertising. If you want to keep the target profit margin of 20% (after advertising), you will spend only 30% on advertising.
Hence, your target ACoS will be profitable if you spend 30% or less on your advertising campaign.
Selection of the right Amazon ACoS according to your goals:
Right Amazon ACoS is different for every advertiser based on their goals. Whether to focus on break-even ACoS or lower target ACoS depends on your goals.
Goal 1_When you want to maximize your sales:
It happens when you launch a new product and want to maximize the sales as soon as possible. In such conditions, you will focus on breaking-even Amazon ACoS or may higher ACoS for specific times.
Goal 2_When you want to maximize your product impressions:
When you want to develop your brand awareness, you need to get the impression as soon as possible. In this case, again, you will aim for the break-even ACoS.
Goal 3:_When you want to make enough profit:
On the Amazon eCommerce platform with long-term goals, you will focus on a high-profit margin. It is necessary to generate enough profit margin for running a long-term Amazon business. Here, you will aim to achieve your target ACoS.
Total ACoS (TACoS) “Additional advertising metric” :
In ACoS, what matters is the sales you make through advertising. Thus, it will be worthwhile to estimate the TACoS if you aim;
- To scale your Amazon e-business
- To launch a new product on Amazon
- Achieve new and better keywords for ranking purposes
Through TACoS, you can analyze both the ad sales and organic sales to find out the performance of your ad sale in the overall business.
In TACoS, you consider the following criteria. Includes,
- Overall profitability.
- Effect of ad sales on overall organic sales.
- Analyze the impact of dependence on advertising for your products or account.
How to improve your ACoS on Amazon?
After getting a bulk of information about ACoS, there must be arising questions in your mind about whether your Amazon ACoS is good or not. Here we will discuss whether your Amazon ACoS is good enough or not.
Step 1: Identify metrics that drives ACoS on Amazon
Step 2: How to optimize your metrics using these ACoS?
Is a low Amazon ACoS always good?
Good ACoS can’t be categorized only by its value (high or low). Amazon ACoS mainly depends on your product niche, time of year, and product portfolio. Therefore, a high ACoS may not necessarily be bad for specific product categories.
For example, if you aim to increase the reach by getting as many as possible impressions or boost your sales for a new product launch, the profitability of the ad campaign will not be your preference. However, you must focus on the profitability, efficiency, and sales by ad while optimizing your Amazon ACoS.
Step 1: Which metrics drive ACoS on Amazon?
To understand which metrics will drive ACoS on Amazon, let’s discover the important Amazon PPC metrics.
- Bid: Your product will appear in the first position when your bid wins the advertising auction. However, if your bid is lower than your ad will be placed at any other position throughout Amazon.
- Impression: Impression defines that sales will boost automatically if your product’s exposure time to customers is high.
- Click: Chances of clicking on your ad will increase if customers find your ad relevant to their search.
- Click-through rate: It is the ratio of clicks in contrast with impressions. It determines the relevancy of your ad.
- Cost-per-click (CPC): It is the amount that you pay with a single click. CPC mainly depends on the competition in the market, bids, and quality scores. Bid auctions are the second price auction where you will pay $0.01 above the money required to beat your competitor’s offer. Furthermore, your CPC is always lower than the actual bid.
- Orders: It is the number of customers’ purchases after seeing your ad.
- Conversion rate: CVR is the ratio of orders in contrast with the clicks. It determines the rate of orders placed by customers after clicking on your ad. Conversion rate tells the convincing power of your ad.
- Ad spends: It is the measure of total expenditure on advertising.
- Ad revenue: ad revenue calculates the total money you earn from a PPC campaign.
- Amazon RoAS: (Return on investment). Measurement of the total revenue you generated from each dollar spent on advertising.
- Amazon CAoS: (Advertising cost of sales). It measures the total money you spend on advertising from profit.
Understand what drives your ACoS on Amazon ads?
Considering the Amazon ACoS formula, ACoS will increase when ad spending rises faster than ad revenue. In contrast, ACoS will decrease when ad revenue rises more quickly than ad spend.
You can extend the ACoS formula to determine different PPC metrics.
ACoS = ad spend / ad revenue
- How to calculate ad spend and ad revenue?
Ad spend = Clicks * Cost per click
Ad revenue=Orders * average selling price
ACoS= Clicks * Cost per click/ Orders * average selling price
Clicks are the products of impressions (how a customer sees an ad) and click-through rate (how often the shoppers click on an ad after seeing it). Furthermore, orders are products of clicks that lead to the purchase (conversion rate).
ACoS= Clicks (impressions * click-through rate) * Cost per click /
Orders (clicks * conversion rate) * average selling price
Step 2: Strategy to optimize ACoS on Amazon
Amazon ACoS depends on different metrics that are also dependent on each other. To optimize your ACoS, you must focus on these metrics.
- Click-through rate
- Conversion rate
- Average sales price
ACoS driver # 1: Click-through-rate
For better optimization of your Amazon ACoS, you should deeply analyze the click-through rate in comparison to competitors.
During analysis, keep the following points in consideration.
- Potential of making more appealing ads
- Convincing power of your ad
- Reach of your advertising campaign in terms of keywords, ASINs, etc. (either reaching too broad or too low an audience)
Factors determine the click-through-rate:
There are the following factors that determine your click-through rate.
- Star rating
- Main image
- Product title
- Prime eligibility
- Number of reviews
- New competitors
How to optimize your click-through rate?
- Clarify the target audience of your campaign.
- Do research the keywords for optimization of your product description. Find out the relevant keywords to your product. Furthermore, add negative keywords to prevent irrelevant research.
- Optimize the images and videos in your product description. Make sure that your image quality should be high and meet the requirements of Amazon.
- Do focus on getting reviews and ratings from the audience on your product.
ACoS driver #2: Cost-per-click (CPC)
CPC mainly depends on the product category and marketplaces.
CPC above benchmark: If your CPC is above the standard, you are spending extra money on your PPC campaign. In short, you are wasting money on ad spending. It is good if you are launching a new product or just focusing on a sales boost.
CPC below benchmark: In this case, your bid is not competitive to stand out in the marketplace.
You have to pay more money to make your bid competitive to stand out in a competitor’s crowd. Your bid can also get influenced by seasonal trends.
How to optimize your CPC?
You can optimize your CPC by following the points given below.
- Determine your advertising goal
- Update the bids regularly
Driver #3: Conversion rate
The conversion rate mainly depends on the convincing power of your ad. Your ad should be persuasive enough that if a customer clicks on an ad leads to a purchase. Furthermore, CVR is in an inverse relationship with the ACoS.
How to optimize your CVR?
To optimize your CVR, adapt the factors, including,
- Optimize your product description (images, content, headings, etc.)
- Properly manage the reviews and ratings.
- Effectively answer the questions of customers.
You can use different tools such as ‘monitoring tools’ in the Content and SEO module. Using this tool, you can monitor if there are any changes to optimize content made by Amazon and third-party sellers. Be aware of such changes because they might badly affect your conversion rate.
With reviews and question tools, you can get updated about the customer’s questions and accurately manage the customer feedback.
Driver #4: Average sales price
The average sales price is the ratio of the sum of revenue in contrast with the number of products sold.
Your ACoS also depends on the average sales price. In short, your ACoS will be considered better if the average sales price for a product is high.
Factors that influence the average sales price:
The following factors mainly affect the average sales price,
- The average price that a customer wants to pay for the product
- The average price that a seller wants to accept
- Cost of product that is competitive in the market
In a nutshell, if the average sales price for your product increases, then your ads will be more profitable for you.