Amazon ACoS is Advertising Cost of Sales. Or in other words: How much we are spending on Amazon PPC advertising for each dollar of our sales generated through PPC. Not too hard to understand, right?
But then it starts to get complicated, when considering what is a good ACoS and what is a bad ACoS. Sometimes 50% is a good ACoS. And sometimes it is a bad ACoS. This is the point where most of us start to get confused, go into panic mode and make all sorts of maneuvers which are detrimental to our profits.
The purpose of this article is to remove all confusion and help you to understand and achieve the ACoS which is appropriate for your specific product at all stages of your selling. We’ll be going over how to calculate your ACoS, determining your marketing strategy and, finally, how to apply this information to your paid advertising campaigns.
The ACoS Formula
ACOS = Total Dollars Spent on Ads / Total Sales Made Through Ads
Let’s break it down:
- Your product sells for $10
- You create an advertising campaign which costs you $35
- You sell 10 products with total revenue of $100
- Your ACoS appears as 35%
Total Dollars Spent on Ads = $35
Total Sales Made Through Ads = $100
ACoS = 35 divided by 100 = 35%
It’s a common belief that a low ACoS is always a good ACoS. And that’s wrong. And we’ll explain why further on.
So now that you know what ACoS is, you need to understand how to use it to your best advantage. But first you need to calculate your Breakeven ACoS.
Breakeven ACoS is where your ad spend is equal to your gross profit margin (revenue – costs). At the Breakeven ACOS, you don’t lose money or gain money.
In order to calculate your breakeven ACoS you need to find your profit margin. Your profit margin is the actual amount left after subtracting all your expenses from your income. This includes all taxes, fees and costs of goods, transportation and so on. There may be other considerations for specific products such as waste in food items and breakage of fragile products.
The profit margin formula:
- You sell your product for $10
- Your product costs you $1 to manufacture
- You spend an additional $4 on transport, packaging, taxes, fees etc.
You are left with a profit margin of $5
Gross Revenue ($10) minus All expenses ($5) = Profit Margin ($5)
Breakeven ACOS = Profit Margin ($5) / Selling Price ($10) = 50%
Strategize Before Advertising
So far you have now acquired two very important pieces of information:
- What is ACoS
- What is Breakeven ACoS (According to our example above our breakeven ACoS is 50%)
Things are now getting a lot more interesting, so please pay close attention! This is the bit that saves you money!
Know Your Marketing Strategy: Why are you advertising?
In order to decide on your Target ACoS you must decide what you want to achieve.
Not all advertising is aimed at making a profit. Sometimes your ACoS will be high and you may even make a loss. Look at this as an investment in your business!
Strategies which will probably cost you money and have a higher ACoS in the short term include:
- Product Launch and Creating Brand Awareness
- Liquidating a product.
At this point your ACoS will probably be high – no need to panic! This is perfectly normal!
Remember the old adage – You have to spend money to make money!
ACoS for Product Launches
After many months of research, hard work and investment of time and money, your product has finally made it to Amazon.
But where are all the thousands of people you were expecting to purchase your product? Maybe they don’t know you exist. Or maybe they cannot find you among the dozens of listings selling the same or similar product.
You have to launch your product!
Let’s assume that you are already selling your product at a discount to increase interest and get reviews (according to Amazon Guidelines). And that you have a kick-ass, professionally written listing with amazing pictures.
Now is the time to use Sponsored Ads to increase sales. The aim is to improve organic rankings in the long run. So at this point, you want to sell as much as you can through ads. And ACoS may be higher than your breakeven.
This is all part of the grand plan! Why? Because at this stage, we are looking to get as much exposure as possible on Amazon.
In the launching phase, you want to appear on the first page for all the essential keywords in your category. So a high ACoS is often worth the visibility it will give your products. The benefits of this strategy far outweigh the losses you will make on the products sold.
By using PPC ads we introduce our product to the Amazon algorithm. We learn which search terms Amazon chooses to show our product for. And which terms result in sales. From this we know which keywords are essential to incorporate into our listing in order to push organic sales.
If Amazon is showing our product in irrelevant places, then we know that the Amazon algorithm has misunderstood our product. For example, if we are selling a meat mallet, we should not be showing up under searches for ‘15 1b hammers.’ In this case, something is wrong with our listing. And we have to make some changes to our listing and backend search terms.
So in the early phase of product launches, having a high ACoS is a marketing cost that usually pays off in the long-run. It gives your product visibility and provides the data to determine your best keywords.
Advertising A Product That is Already Selling Well Organically
You’ve been selling for a while. And your product is organically ranking on the first page for several keywords. Now is the time to set your ACoS to breakeven or below because now you are aiming for profit!
Liquidating A Product
So this product has not done so well. It’s just hanging around and costing you money in storage fees. Now is the time to liquidate by selling off your excess inventory.
Once again, a higher ACoS here is acceptable.
This is a question of cutting your losses. Where will it cost you more? By advertising with a high ACoS or by paying Amazon storage fees?
Amazon ACoS: In Summary
Hopefully this article has cleared up some of the confusion surrounding “how high your ACoS be?”. Accepting a loss on ACoS is often worth it during product launches and when high-storage fees are super costly and it’s better to liquidate a product. However, for a product selling well, you want your ACoS to be at or below your profit margin. Follow this general strategy for more sales & profitability.
Author: Shai Venezia, Co – Founder, PPC WINNER Expert in Online Advertising