In brief, ACoS, which stands for Amazon advertising cost of sale, is a key metric to measure your advertising efforts’ profitability. It looks at how much you spend on ads vs. how much you make to see if the ads are worth it.
Understanding ACoS on Amazon and how to apply it is the best way to stay above your break-even point.
In this guide, I’ll explain what ACoS means and why it’s crucial so you can manage your advertising campaigns like a pro.
Let’s dive in.
What Does Advertising Cost of Sale (ACoS) Mean? How Is It Calculated?
ACoS shows how well a Pay-Per-Click (PPC) advertising campaign works for you.
The ACoS definition is easy – for every dollar you make from a sale, ACoS will tell you how much was the ad spend (costs to advertise that product).
In other words, it is a percentage ratio of ad spend versus ad sales.
Amazon Pay-Per-Click
Amazon PPC is a way for amazon sellers to get the word out about their products. When creating an ad campaign for their products, sellers use specific keywords that make the product show up in Amazon’s search results.
So, sellers can show relevant products to Amazon buyers who are prepared to purchase.
When a potential buyer clicks on an ad and looks at the product, the seller pays a fee. That way, a seller can measure the performance of their advertisement and determine which ad gives a good conversion rate.
Let’s say that you’re looking for something on Google. When you type a specific keyword, you will see ads at the top. Similar to Amazon PPC, advertisers on Google can show their product, service, or page by selecting relevant keywords that you have typed.
That’s an example of PPC, and various amazon PPC tools can help run successful PPC campaigns.
Calculating Amazon ACoS
Calculate Amazon ACoS by dividing the total advertising costs by the ad revenue generated and then converting it into a percentage.
To put it into perspective, here’s an example of ACoS calculation.
Your total ad spend is $100
And generated $500 in advertising revenue
Your ACoS will be $100 divided by $500, which gives 0.2. In percentage, it will be 20%.
This means that for every dollar earned, you paid 20 cents (0.2 of a dollar) in advertising to generate that sale.
Why Is Amazon ACoS Important
1 – ACoS measures the effectiveness of your advertising activities. If you overspend on your advertising, you will not generate substantial profit. Remember all your costs: you have to consider production costs, shipping, and Amazon fees on top of the advertising cost of sales.
These aspects must be carefully considered if you want a profitable business and your cost of sales ACoS to improve.
2 – ACoS tells you whether or not you’ve selected the appropriate advertising approach. If you achieved your target Amazon ACoS, then the plan was successful. If this is not the case, you will either need to modify and reorganize it or eliminate the ad campaign that isn’t producing the target sales.
3 – ACoS determines your break-even point, which is the point at which you will cease raising your total ad spend to maximize profit. In order to push yourself past the break-even point, you must first identify it.
When sellers start advertising on Amazon, their average ACoS is likely to be high until they figure out how to optimize their Amazon marketing strategy.
As a result, it’s necessary for sellers to systematically and patiently implement techniques that will bring down their Amazon ACoS.
What Is a Good ACoS on Amazon
There is no ideal ACoS on Amazon for which you should aspire to achieve. The reality is that it differs depending on the business, product, and objective.
While some sellers’ primary objective may be to maximize profits, others may set their sights on expanding their customer base through Amazon advertising.
Specialized categories, like the automobile, will have a lower Amazon ACoS because they spend less on advertising to convince you to buy their goods.
Mercedes owners will buy Mercedes car parts, not Volkswagen car parts. So the advertising cost of sale can exceed 30% In an industry as cutthroat as electronics, where phone casings are nearly identical.
Here are three factors that define the optimal Amazon Advertising cost of sale for your business
Breakeven ACoS
Your break-even Amazon ACoS is the point at which you either make profit from advertising or loss from it.
Your business loses money on advertisement if the ACoS exceeds your profit margin. However, if your ACoS is lower than your profit margin, advertising makes money for your business.
Before starting any Amazon advertising campaigns, it is crucial to determine the ACoS at which you will break even.
How to Calculate Breakeven Amazon Advertising Cost of Sales
Follow these steps to calculate break-even ACoS
(i). Calculate your profit margin
Sale price – item cost / Sale price. Multiply the total by 100 to convert it into a percentage. The cost of your item will include everything from manufacturing up until Amazon costs.
Here’s an example:
Sale price : $100, Item cost : $50
$100 – $50 divide by $100 (the sale price)
Profit margin = 50/100 * 100 = 50%
In this case, you have a 50% profit margin. If you want your advertising on Amazon to break even, your ACoS can’t be more than 50%. Your ideal profit margin represents the pivot point that determines whether a campaign is profitable or not.
In the example above profit margin is 50%. If you spend more than 50% on Amazon ads, you will lose money. Or, in short – for your Amazon ad campaigns to remain profitable, don’t surpass an ACoS of 50%.
(ii). Calculate your ACoS
ACoS is advertising cost/advertising sales * 100
Let’s put this information into practice with an example.
Total amount spent advertising: $1,000
Revenue generated: $ 2,500
ACoS will be $1,000 / $2,500 * 100 = 40%
(iii). Compare the two figures – ACoS and profit margin
When you have both the profit margin and the ACoS data, it is clear what your break even ACoS is.
For example, the profit margin is 50%, and ACoS is 40%. This means you are generating a profit on advertising since the ACoS is less than the profit margin. If it was the reverse, advertising would be a loss for your business.
Target ACoS
A Seller’s goal would be to maintain a predetermined profit margin – nobody wants to end up with zero profit. This aspect is referred to as Target ACoS.
The percentage of your Target ACoS is the one that will allow you to achieve your desired profit margins.
The formula for calculating the Target ACoS is as follows:
Target ACoS = Break-Even ACoS – Target Profit Margin
Now let’s apply this in the real world
Break-even ACoS is 40%
Target profit margin is 25%
Target ACoS = 40% – 25% = 15%
You are only allowed to spend 15% of your earnings on advertising if you wish to maintain a profit margin of 25% after accounting for the cost of advertising.
Consider Other Additional Indicators
While your Amazon ACoS is undoubtedly crucial, it is only one metric among several that you should consider. Other several factors might influence the success of your Amazon advertising campaign.
Additional units of measurement include the following:
(i) Advertising Spend
When you delve into the Amazon Acos formula, you will not fail to determine which parameters influence ACoS for Amazon ads. Amazon ACoS increases when the ad spending is higher than the sale of products sold as a direct result of that ad.
Consider the amount of money invested in individual ads within the larger scope of the given campaign. Cost per click shows your pay every time someone clicks on your ad. You should monitor how much you pay for each click to ensure the money you make from the click is worth it. It’s possible that your profit margin could decrease if you overspend.
(ii) Click-through rate(CTR)
If your click-through ratio is poor, it could indicate that your ad is not doing well or that Amazon shoppers are not drawn to click on it. It’s possible that improving your copy and approach will enhance your click-through rate.
More specifically, you should look to improve your Amazon title, main image, and price. These are the first things people will see on the search results before clicking on your listing.
When you use the right keywords, your ads will generate more leads and attract more people to view your items. This means your conversion rate increases, and you spend less to attract leads. That’s why it is crucial to conduct amazon keyword research to lower ACoS and maximize sales
(iii) Conversion Rate
Even if your advertisement is perfectly tailored to your business, the only way it will drive sales is if the individuals who click on it are interested in what you are offering. It is the seller’s task to convince shoppers that their product is worthy of purchase.
If your conversion rate is low, it most likely means that you have to optimize your product listing. Luckily, we have a service to help you with just that.
(iv) Impressions
Many people might look at your product if it is listed in a popular category on Amazon. Amazon will continue to display the same ad for the product for some time, even though it’s not popular, resulting in fewer impressions.
Selecting the Amazon ACoS Best Suited for Your Needs
You can use Amazon PPC ads to achieve different goals. Amazon ACoS strategy should meet your goals, which you can determine by examining how you sell your products.
(i) Do you need to make money while running successful advertising campaigns? Lower Amazon ACoS is for you.
Choose a lower target ACoS goal in order to put more of your attention on ad effectiveness if your products are popular and receive significant amount of traffic and reviews. This is very helpful for the products that are already popular with customers and in high demand.
(ii) Do you need more sales and exposure? High Amazon ACoS is for you.
You’ll have to compromise efficiency in favor of reach if you’re after maximum clickthroughs and pageviews. This is extremely useful for newly released products, products in need of reviews, or products that require sales velocity to rise in Amazon’s organic ranking.
What is a good ACoS for Amazon PPC?
it varies because it is dependent on your advertising strategy and objective.
Does a High Amazon ACoS Spell Doom?
Sellers prefer a low Amazon ACoS for profitability sake.
However, having a high ACoS is a fantastic approach for sellers who want to:
- Completely sell out a product
- Discard an item that isn’t selling well
- Sell a product to the very last unit
- Make their brand known
A high Amazon ACoS is similar to when advertisers make a television commercial. The advertiser is taking a significant financial risk, but there is a good chance it will pay off.
Final Thoughts
You must understand and keep track of your ACoS to make money selling on Amazon. It is affected by several variables, and you need to be aware of them.
It’s essential to monitor your cost of advertising versus ad revenue to determine what to further optimize, and once things go well, to slowly increase the advertising budget.
If you’re not hitting your target ACoS, ensure that your product listings and metrics are optimized and that you are trying out new methods.
