Your Advertising Cost of Sales (ACoS) is extremely important in Amazon PPC. It’s a metric that guides your advertising strategy. Your ACoS is a measure of success, a fickle percentage that decides how you bid on search terms. In Amazon PPC advertising, ACoS is everything.
But what makes a good or bad ACoS?
There's as a good or bad ACoS!
There, I said it. No such thing, like the John Mayer song. That’s just one badger’s opinion (even though it’s the right one). Sometimes saying that blows the minds of Amazon sellers like the ending of Fight Club.
ACoS is a pretty complicated topic and a grey area for many sellers. Here’s everything we’re covering in this post:
What Is ACoS? And How Do You Calculate Amazon ACoS
The ACoS definition is simple. ACoS, Advertising Cost of Sales, is how much you spend on advertising per for dollar of revenue you make. It can also be seen as the ratio of ad spend in contrast with the target sales.
You can calculate your ACoS with this formula: ACoS = Total Ad Spend / Total Sales.
Example: If your ACoS is 25%, you paid $0.25 for every dollar you made, or $25 for every $100 you made (we’re only considering Ad Spend here, not production costs, Amazon fees, etc.).
ACoS is a critical measurement of your campaign’s success. If you’re an experienced PPC marketer, you may realize Amazon took this idea from Google Ads which uses Return on Ad Spend (ROAS). Here are some more tips on Amazon PPC vs. Google Ads.
Check out this video made by Michael to learn even more about the meaning of ACoS on Amazon:
Cool shirt right? I picked it out for him. It reminds me of my home in the Serengeti (actual footage of me in the Serengeti).
Now that you understand ACoS meaning, now we need to cover how to optimize your advertising cost of sales to improve your profit margin.
How To Use ACoS On Seller Central
Something Michael touches upon with data is that segmentation is everything. To do this, first, you need to navigate <e to Seller Central and find the ACoS column.
When looking at your ACoS in Ad Badger or Seller Central, you can segment your data at the account, campaign, or ad group level.
With that, you’ll always be able to gauge your Amazon ACoS and see if you’re on track. But how do you tell if you have a good or bad ACoS? Well that’s where break-even and target ACoS come into play.
How to Calculate Break-Even ACoS
Break-even ACoS is the point where your advertising cost is equal to your profit margin (you have a net loss / net gain of $0). It answers the question of “At what ACoS do you make zero profit and zero loss?” Clear as mud? Let’s walk through an example:
Let’s say we had a toy car that had a sale price of $20, and we’re paying Amazon fees of $3 on that product. Then let’s say to have that product be created, the cost of goods is $6.
What are we left with when 20 minus 3 minus 6? That’s $11 as our Pre-Ad Profit per Sale.
Now if we spent all of those $11 on acquiring paid traffic to generate sales, then based on our ACoS formula we would do $11/$20 which equals 55%.
So our break-even ACoS is 55%. If we’re doing lower than 55%, we’ll be profitable. If we’re doing over 55%, we’ll be unprofitable.
It’s important to know how to calculate your break-even ACoS in order to decide your Target ACoS. Remember that a good ACoS depends on several factors such as your profit margin and brand visibility before your ad campaign.
If all this sounds confusing, don’t worry. We wrote a whole post and recorded a video (the whole shebang) on break-even ACoS.
How to Hit Your Target ACoS
No one wants to make zero profit, so we need another measure called Target ACoS (TACoS). If you wanted to make a profit on Amazon, you would no longer spend all of your Pre-Ad Profit to generate sales.
What you spend is your Target ACoS and what you don’t is your profit margin, illustrated in the graph below:
So how do you set your TACoS and how does it relate to bidding?
Let’s take a look at the calculation behind what the perfect bid actually looks like. It’s average order value times your conversion rate, divided by one over your Target ACoS, equals what you should be paying every single click.
If you somehow were able to go inside your Amazon account and optimize every single keyword or ad group to this calculation, you would never be overbidding and you would never be underbidding.
To automate this process, we made a bid calculator so you can bid the perfect amount every time and hit your Target ACoS.
How To Use The Ad Badger Bid Calculator
You can find the calculator here. Simply hit the file and make a copy to edit the ACoS calculator with your own data.
Now let’s run through an example.
Let’s say our average order value is $19 at a 10% conversion rate, and your Target ACoS (TACoS) was 30%, so 0.3. Let’s plug each of these values into the calculator.
If we were to run through this calculation manually, we would get $19 times 0.10, over 1 over 0.3, giving us 57 cents. Meaning, if we were to bid 57 cents every single time, we would hit our 0.3 or our 30% Target Advertising Cost of Sale.
Or the calculator does all the work for us!
Ideally, you should have a TACoS for each Amazon PPC campaign you perform as well as an overall TACoS to stay within your ad budget.
If you want to learn even more about how to use TACoS to optimize your PPC bids, check out the video below:
If you want to hit your TACoS, you have to release your inner badger and fight for it. Don’t forget your Amazon advertising can drastically increase your sales if you optimize your campaign properly. Keep reading to find out how.
What An Average, Low, And High ACoS Mean
Average ACoS is the Perfect Benchmark
For Ad Badger, the average Sponsored Product Ad’s ACoS per user per day has been 34.42% since the beginning of 2019. This is a good point of reference and right in the middle of a high and low ACoS.
April was the best time to advertise for profitability for our users in 2019 with the highest number of sales and the lowest ACoS (~20%).
Low ACoS Means High Profitability
Generally, sellers believe you should aim to lower your ACoS. However, it depends on what your strategy is for selling a product and your profit margin. I consider 15-25% a low ACoS and a good point to start at if you decide to aim for a low ACoS.
However, you have probably been bombarded with the phrase “¡LOWER YOUR ACoS!”. It is true that lowering your Amazon ACoS can be helpful, but only if it matches your intentions.
Setting a low ACoS is also a good strategy for:
- Making as much profit as possible
- Selling a low-converting product
- You have a product that doesn’t need high visibility
Example: Let’s say your TACoS is 10% and you make sales of $200. You spent $20 on ads for a profit of $180 (before the cost of goods).
Lowering your ad spend can be negative as well. Having a low ad spend budget compromises the visibility of the product. Because you bid for keywords in Amazon PPC, setting your bids low for a highly competitive keyword runs the risk of losing the auction for it.
High ACoS Means High Visibility
The best way to explain high ACoS is to use the age-old saying “You have to spend money to make money.”
Great Amazon sellers use different TACoS for different types of products to maximize their selling potential. While having a low ACoS is great for profitability, a high ACoS can increase visibility, dominate a niche, and lead to more profit in the long run.
Setting a high ACoS is a good strategy for sellers who:
- Are trying to get rid of a low-selling product
- Trying to run a sell-out of a product
- Trying to increase brand awareness
- Dominate a niche
- Want high product visibility
You can relate a high ACoS to advertisers who buy a huge spot in Times Square or produce a Super Bowl commercial. The advertiser is spending a large amount of money, but the chance of return is very high.
Example: Let’s say your TACoS is 40% and you make sales of 1,000. You spent $400 for a profit of $600 (before cost of goods).
If you haven’t checked it out yet, we wrote the ultimate guide to Amazon PPC that goes into more detail about how ACoS impacts your campaigns.
There Are Tons Of Other Ways To Help Hit Your Target ACoS
Optimize Your Product Pages
Your product page and your price are half the equation for creating a conversion. So you did a great job in your product ranking and Amazon PPC campaign, but if your product page isn’t great, the potential customer will bounce to another related product.
A great product page has:
- An accurate and compelling product title
- A thorough product description
- High-quality product photos and videos
- A high number of good reviews
- Amazon Prime eligibility
Find the Best Times to Advertise
Using our data we’ve been collecting for the past 2 years, we found that Sunday to Wednesday are the best time to advertise and the best month was April.
Using this data is incredibly valuable to Amazon sellers when deciding their TACoS. Here is the post on April Amazon PPC stats for 2019.
Use an Amazon PPC Tool
Like I’ve been saying, there are many Amazon PPC tools out there that can automate your bidding to ensure you hit your TACoS every time (cough, cough like Ad Badger).
We take your conversion rate and TACoS into account when bidding to hit your TACoS for every campaign and reach maximum sales and reduce wasted spend.
Amazon Sales, ACoS, advertising cost of sales, sales ACoS, Amazon PPC, the ratio of ad––Save yourself from all of this lingo. Trust us when we say that an Amazon PPC tool will make your life a lot more simple.
Stay Tuned For More ACoS Content
The bottom line: there’s no real definition of a “good” or “bad” ACoS because it relates to personal strategy and revenue. Generally when someone says “good ACoS,” they typically mean low ACoS for maximum profitability.
In the coming weeks, we’ll be breaking down the sections about Amazon Advertising Cost of Sale in this post. Stay tuned for more info on the metric that decides the success of your Amazon PPC ads.