Advertising is a big part of operating any online business, and Amazon is no different. Your Amazon Advertising Cost of Sales (ACoS) is a key metric to understand and measure how well your Amazon Sponsored Products campaigns are working.
Simply put, Amazon ACoS is how much you spend on Amazon advertising in order to generate $1 in revenue from that spend. Similar to Google’s Return on Ad Spend (ROAS), ACoS is a great metric for PPC marketers to see if advertising campaigns are profitable.
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 Advertising for every $1.00 of revenue from that advertising.
Your ACoS will help you determine how successful your ad campaigns are on Amazon and how much it costs to be a profitable seller. 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.
There is no perfect ACoS on Amazon that you should strive for, it can vary by company, product, and goal! So then how do you determine the best ACoS for your ecommerce campaigns? Ideally, you’ll want to get the highest sales revenue possible, combined with the lowest ACoS possible. Because low ACoS means high profitability and high ACoS means low profitability, sellers tend to push for low ACoS unless they are working on a specific awareness or sell-out strategy. We’ve outlined a few of the factors that can help you understand your best Amazon ACoS below:
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. Knowing your current general costs helps you make more informed decisions about how much you can spend on advertising while still maintaining a profit. Knowing your costs is also vital for determining your break-even ACoS.
Your break-even ACoS is the amount you can pay for Amazon advertising where you won’t lose any profit, but you also don’t make any profit either. It’s a zero-gain, zero-loss balance that allows your business to keep running, but doesn’t let pave the way for 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 that the cost of production is $3. So altogether you are paying $4 before the product is ever sold. Take that $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.
While your ACoS is hugely important, you also need to look at a number of other metrics to get all the information you need. ACoS is just one factor to determine how successful your Amazon Advertising campaign is. Other metrics to keep in mind include the following:
Impressions 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, but your product may not be popular.
Click-through-rate (CTR) CTR is a metric many PPC marketers are familiar with. 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. Updating creative, copy, and strategy might help improve your CTR.
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 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 the relevance of your ad to your product. 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.
In the earlier example, if you’re spending less than $6 on Amazon ads, 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 for Amazon.
To determine your ideal Amazon ACoS, you’ll want to find your ideal profit margin and work backwards. The average ACoS that advertisers strive for is between 15%-30%, but remember that every company, product offering, and marketing strategy is different, and can affect the ideal ACoS.
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