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.
What Is Amazon ACoS And How Do You Calculate It
ACoS stands for Advertising Cost of Sales. Your ACoS percentage is how much you spend on advertising per for dollar of revenue you make. 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’s 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).
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 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 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.
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 ACoSNo one wants to make zero profit, so we need another measure called Target ACoS (TACoS). If you wanted to make a profit, 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 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 ACoS.
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 release your inner badger and fight for it.
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 having a low ACoS is what they should aim for. However, it depends on what your strategy is for selling a product. I consider 15-25% a low ACoS and a good point to start at if you decide to aim for a low ACoS.
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 cost of goods).
Spending a low amount on your ads can be negative as well. Having a low budget for your ads 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 PagesYour product page and your price are half the equation to 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 waste spend.
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 ACoS in this post. Stay tuned for more info on the metric that decides the success of your Amazon PPC ads.