3 Executive Tips to Determine Your Ideal Advertising Cost of Sales (ACoS) on Amazon

Your advertising campaigns drive traffic to your products and create conversions, both essential parts of the ecommerce equation that ultimately accelerate your ecommerce revenue on Amazon and other marketplaces. Your Amazon Advertising Cost of Sales (ACoS) is a key metric to understanding and measuring how well your Amazon Sponsored Products campaigns are reaching consumers and how much it costs to be a profitable seller. To get the most out of your ACoS, it’s essential you calculate what’s worth spending for your brand’s products.

At Pattern, we’ve laid out three ways to determine the ideal ACoS for your brand.

What is Amazon ACoS?

Amazon ACoS stands for Amazon Advertising Cost of Sales. A brand's ACoS is how much you spend on Amazon advertising in order to generate $1 in revenue from that spend. Your Amazon ACoS is calculated by taking your ad spend and dividing it by your number of sales.

For example, if you launch an ecommerce campaign that generates $300 in sales, costing $84 over a certain time period, you would take $84, divide it by 300, and get your ACoS of 28% cost for every dollar of sales you make. This means you spend $0.28 on Amazon for every sale generated.

What is the Ideal Amazon ACoS?

Unfortunately, there's no perfect ACoS on Amazon for all brands–it varies by company, product, and goal. So how do you determine the best ACoS for your marketplace campaigns? Ideally, you’ll want to get the highest sales revenue possible, combined with the lowest ACoS possible. We’ve outlined a few of the factors to help you understand your best Amazon ACoS:

1. Know your Profit Margins

Ideally, your sponsored product campaigns will be profitable, meaning your advertising spend is less than your profit margin (the amount left after you’ve paid for all general costs, including shipping, production, employee salaries, and any fees). Knowing your current general costs helps you make more informed decisions about how much you can spend on advertising while still maintaining a profit.

2. Determine Break-even ACoS

Your break-even ACoS is the amount you pay for Amazon advertising where you won’t lose any profit but don’t make any profit either. It’s a zero-gain, zero-loss balance that allows your business to keep running but doesn't promote growth. Your break-even ACoS isn’t necessarily the number you’ll use to determine whether your campaigns are successful, but it does help you see whether you’re netting a gain or loss.

To determine the break-even point, start with your ecommerce product and sale prices. For now, imagine your sale price is $10 and Amazon fees are $1. Then, assume the cost of production is $3. So altogether you are paying $4 before the product is ever sold. Take the $4 of cost from the $10 sale price and you’re left with $6. This is your pre-ad profit, or how much is generated each time you sell your product organically (without any ads). Your break-even ACoS is $6, because if you spend all $6 on ads to get a sale, and you continue to spend $4 in upfront cost, you’re left with none of the $10 for profit.

3. Focus on the Right Metrics

While your ACoS is important, you also need to look at other metrics to get all the information you need. ACoS is just one factor you should use to determine how successful your Amazon Advertising campaign is. Other metrics to keep in mind include:

• Impressions: High impressions can suggest your product is located in a popular category on Amazon. If your impressions are low, Amazon may be displaying your ad often but to an incorrect or ineffective audience.
• Click-through-rate (CTR): CTR is a metric many PPC marketers are familiar with. If you have a low click-through-ratio, this means Amazon users weren’t attracted to click on it and you may need new creative and copy.
• Spend: Consider how much you’re spending on your ads and your cost per click. You want to watch to make sure the cost you pay per click is worth the profit you gain from the click. If you spend too much, your profit margin will shrink. Auditing your spend can also help you ensure you aren’t overspending on advertising.
• Sales: If your conversion rates are low, you may need to work on the relevance of your ads. Having the perfect placement and targeting won’t do much for sales if your audience expects one thing from the ad and gets something completely different from the product listing. Your ad should be engaging, but also relevant.

Determine Your Target Amazon ACoS

To determine your target Amazon ACoS, you’ll want to find your ideal profit margin and work backwards. You’ll need to consider all of the above factors, including key metrics like your click-through-ratio. The average ACoS advertisers strive for is between 15%-30%, but remember every company, product offering, and marketing strategy is different, and can affect your individual ideal ACoS.

Pattern Makes the Most of Your Advertising Spend

As an ecommerce accelerator, Pattern has the resources to help you find the ideal ACoS for your brand to maximize your sales and revenue. Increasing your traffic and conversions doesn’t necessarily always mean you have to increase your ACoS. We can help you make the most of your ACoS by using our technology to determine how to make the most of your advertising spend. Want to make the most of your advertising spend? We can help. Contact us today.