A break-even point is important to know for any business. Regarding your Amazon store, it’s important to know your break-even ACoS so you’re aware what ACoS percentage is profitable and which ACoS percentage is costing you money.
Last week, I wrote about the difference between a good and bad ACoS and this week Michael will be taking on the topic of break-even ACoS, what the break-even ACoS formula is, and how to calculate break-even ACoS.
What Break-Even ACoS Means on Amazon
What’s going on Badger Nation? It’s Mike here from Ad Badger. Today we’re going to be talking about something every Amazon seller should know about, which is what their break-even ACoS is, how it’s calculated. Let’s jump in.
As I said in other videos, ACoS is one of the most important metrics inside your Amazon PPC account. It’s the relationship between how much you are spending on Amazon on your ads and how many sales those ads are bringing in.
In general, a lower ACoS is more desirable than a higher ACoS. That means you’re spending less dollars to generate the same amount of revenue.
How to Find Your Break-Even ACoS
One of the first activities anyone should determine before they start advertising on Amazon is what their break-even ACoS is.
Really, the reason why it’s so important is because it answers the question “At what ACoS do you make zero profit and zero loss?” It’s literally break-even.
The Break-Even ACoS Formula
Let’s actually take a look at how to calculate that for your own products.
Let’s say we had one product that had a sale price of $20. In this example, I tried to draw a toy car. We have a sale price of $20. Let’s say 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.
That’s $11 Pre-Ad Profit Per Sale. This is the amount of profit that I’ve generated from an organic sale, but since we’re in the world of PPC, paying for our sales, paying for traffic, we call it Pre-APPS, which stands for Pre-Ad Profit Per Sale. Before we start factoring in anything like our ad costs, this is our Pre-Ad Profit Per Sale. In this situation, it’s $11.
If you spent all of this to get that sale in paid traffic, that would be your break-even ACoS, because if you’re generating $11 Pre-Ad Profit Per Sale, and then you spend all 11 of those dollars on paid traffic to get the sales, $11 minus $11, you’re left with nothing.
What actually is that ACoS? I want to know if I spend all those $11, what is my ACoS? What is my ad cost over sales? Ad cost is $11. Sales would be $20. That’s how much I make every time I sell a product, which would be at 55%. So 11 over 20, ad cost over sales, is 55%.
My friends, we just discovered our break-even ACoS.
If we are doing lower than 55%, we’ll be profitable. If we are doing over 55%, we will be unprofitable. Let’s actually take a look at this bottom section here to really dig in there.
Revenue is going to be the same every single one of these examples, $20 down the line. Pre-APPS, we’ve already calculated is going to be $11 all the way down the line. But let’s see what happens if we go to 54% ACoS and 56% ACoS. We already know what happens in the middle here at 55% ACoS. That’s $11 in ads, $11 in Pre-Ad Profit, leaving us with nothing. That’s our break-even.
If we move down one to 54%, now all of a sudden, we spent $10.80 ads, and we only generated 20 cents of profit. On the other end of the spectrum, if we go up one from 55% to 56% ACoS, we’ve just created a 20 cent loss. You can see that at either side of our break-even ACoS is where profit lives or where losses from ads live.
What Should Be My Target ACoS?
Now when determining what a Target ACoS should be, we have to take into a couple of different factors, which we’ll talk about in another video where we determine how to determine your target ACoS, which we’ll be posting on our YouTube channel for sure and on our blog at adbadger.com/blog.
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Lastly, here’s a close up of Mike’s toy car.