Advertising is a big part of operating any online business, and Amazon is no different. Advertising Cost of Sales (ACoS) is a key metric to understand and measure how well your Amazon Sponsored Products campaigns are working.
Your ACoS is your ad spend divided by your number of sales. For example, if you launch a campaign that generates $300 in sales, costing $84 over a certain time period, you would take $84, divide it by 300, and our ACoS is 28% for every dollar of sales you make.
Your ACoS will give help you determine how successful your ad campaigns are. Of course, you’ll first need to define an ideal target for your ACoS so you can see just how much profit you’re making. To do this, you’ll need to look at the cost (and break-even point) of your products.
Ideally, you’ll want to get the highest sales revenue possible, combined with the lowest ACoS possible.
Here’s how you can determine the best ACoS for your campaigns:
Know Your Profit Margins
Ideally, your sponsored product campaigns will be profitable. But this means that your advertising spend needs to be less than your profit margin. Your profit margin represents the amount left after you’ve paid for all general costs, including shipping, production, employee salaries, and any fees.
Look at the Right Metrics
While your ACoS is hugely important, you also need to look at a number of other metrics at the same time to get all the information you need and determine whether your campaign is profitable. These metrics include:
High impressions can suggest that your product is located in a popular category on Amazon. If your impressions are low, Amazon may be displaying your ad often, and your product may just not be popular.
If you have a low click-through-ratio, this can mean that your ad may not be performing well, or Amazon users weren’t attracted to click on it.
Consider how much you’re spending on your ads and your cost per click. If you spend too much, your profit margin will shrink.
Look at how many clicks you had, and how many sales were a result of those clicks. If your conversion rates are low, you may need to work on your ad.
Determine Break-Even ACoS
This number is the ACoS where you’re not losing any profit, but you’re also not making any profit with your advertising on Amazon. This isn’t necessarily the number you’ll use to determine whether your campaigns are successful, but it does help you see whether you’re making a profit or a loss.
Take your product and sale prices. For now, imagine that this is $10, and Amazon fees are $2. Then, assume that the cost of production is $3. Take $5 from $10 and you’re left with $5. This is your pre-ad profit- meaning how much is generated each time you sell your product organically (without any ads). Your break-even ACoS is $5, because if you spend this on ads to get sales, you’re left with nothing.
Determine Ideal ACoS
In the example above, if you’re spending less than $5 on advertising, you’re making a profit. If you’re spending more, you’re making a loss. You’ll need to consider all of the above factors, including key metrics like your click-through-ratio, and use this information to determine your target ACoS.
Want to learn more about advertising on Amazon? Get in touch today.