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ACoS (Ad Cost of Sales) is a metric that measures the performance efficiency of Amazon PPC advertising campaigns. Essentially, ACoS allows you to calculate the percentage of sales paid for through advertisements. By analyzing your ACoS, you can figure out whether or not there is a profit in your Amazon PPC ad campaign
What is a Good Amazon ACoS?
A good ACoS is like beauty, it is based on the eye of the beholder.
If the aim is to increase product exposure, then a high ACoS is actually a good thing. In most cases though, this is largely considered to be an intermediary step in achieving one’s main goal which would be increased profitability.
However, if the initial goal for a product is to profit, a lower ACoS is a positive thing.
Sellers calculate the profit margin of a given product and then identify the break-even ACoS in order to determine whether a specific ACoS is correct or incorrect. Sellers eventually determine the target ACoS in this manner.
ACoS is calculated using the following formula:
For example, if an Amazon seller spends $3000 on advertising, the advertising sales revenue is $6000.
ACoS = 3000 / 6000 * 100
As a result, ACoS now stands at 50%. It means that the seller receives $1 for every 50 cents spent on advertising.
The profit margin of the product
For a business to succeed, it is critical to understand the profit margin. In addition, the profit margin is an important factor in defining ACoS.
Sellers determine profit margin by adding manufacturing expenses, shipping costs, and Amazon fees. After that, the seller deducts all the costs ( manufacturing expenses, shipping costs, and Amazon fees) from the product’s price. The net result must be multiplied by 100 and divided by the product price.
The product, for example, the retail price is $25. The $12 is made up of manufacturing costs, shipping charges, and Amazon fees.
Profit Margin is 52% ➡️ [($25 – $12)/$25] * 100
What is Break Even ACoS?
One of the most important measures is break-even ACoS. It’s the point where the advertising campaign’s profit and loss meet. The break-even point ACoS aids in determining whether or not an Amazon PPC campaign is profitable.
In general, a lower ACoS is preferable. Low ACoS indicates that advertisers spent less on the ad campaign for certain sales/returns.
Then it is also important Amazon PPC practice to point out that it’s critical to advertise only one product. As it is quite difficult to assess the profit when a seller advertises a set of products.
Sellers eventually want to hold on to a certain profit margin. This is referred to as target ACoS.
The following is the formula for determining target ACoS:
Target ACoS = Break-Even ACoS – Target ROI
For example, product “X” has a profit margin of 52%, therefore, the break-even ACoS of 52%. The seller wants an ROI of 10% on each sale.
42% = 52% – 10%
To maintain target ROI, the seller cannot spend more than 42% on advertising.
Choosing the best Amazon ACoS for your Objectives
Although the general consensus on ACoS is that it must be lower than your profit margin %, there are a few exceptions that advertising should keep in mind when planning their Amazon campaigns.
An Amazon seller, for example, may need to “get rid” of excess inventory due to long-term storage fees. In this situation, it makes more sense to use an Amazon PPC campaign to get rid of the product than to pay more fees on aggregate via long term storage fees
When a new seller wants to build brand awareness and rank higher. They will also need to adjust their ACoS based on that objective.
What influences ACoS?
There are many factors that can impact the average cost of sale for a new product. One important factor is the age of the product, how long has the listing been active in the market.
If the listing is aged, Amazon PPC will have a lot more trust in this listing and will likely allow it to win a bid auction lower than its competition. The seller may even be able to bring down the ACoS on a related new product as well. But if a listing and seller is brand new it will take a lot more to win a bid auction and hence will increase its ACoS.
Other factors the influences ACoS directly or indirectly includes:
(Cost Per Click) CPC
The auction’s true price is always lower than the bid. The second-highest bid plus $0.01 is the cost-per-click.
CTR is calculated as follows: clicks divided by impressions. This measure indicates whether or not the ad is relevant.
(CVR) Conversion Rate
It is calculated by dividing orders by clicks and determining the “buyability” of the listing and offer.
The listing shows at the top of the search results page when a seller’s bid on a specific keyword is successful. If the offer was lower, the ad is moved to a new placement.
It indicates how many people saw the advertisement. The likelihood of greater sales increases in direct proportion to the number of impressions.
Customers will click on an ad if they believe it is relevant to their search.
By clicking on the ad, the customer has a high likelihood of purchasing a product.
Orders are multiplied by the Average Selling Price. The number of sales made through advertising is measured by ad revenue.
(ROAS) Return on Ad Spend
Ad revenue divided by ad spend equals ROAS. This multiplier shows how much money is made for every dollar spent on advertising.
What metrics can lower ACoS?
It’s a number that shows how many times an advertiser’s ad gets clicked when it’s displayed for a specific search phrase. CTR determines how relevant an ad is in comparison to competing ads for the same keyword.
When the CTR changes, the ACoS changes as well, but the conversion rate does not. The listing receives more visits when the Click-Through-Rate improves. At the same time, if the CVR remains unchanged, the seller will not receive any more sales.
CTR has an equal impact on ad spend and revenue. That is to say, sales increase in lockstep with ad spend.
When current ACoS is less than Break-Even ACoS, increasing CTR is important. In this situation, both sales and profit increase. ACoS does not remain constant when the change in CTR is combined with the change in conversion rate.
The most crucial aspect of CTR improvement is Amazon listing optimization. The seller has complete control over the main image, product title, bullets, and other elements that can entice a customer at first glance.
(Cost Per Click) CPC
It’s a measure that illustrates how much each click in a PPC campaign actually costs when a bid auction is won. CPC prices typically vary from $0.15 to $2.80.
A lower CPC translates into a lower ACoS, fewer clicks, and fewer sales. The ideal Cost Per Click calculation is determined by the product.
Any bid change you make heavily influences the CPC.
(CVR) Conversion Rate
Conversion Rate is one of the most essential ACoS measures. It is not only important for keyword ranking improvement, but it is also one of the most important ACoS influencers. The conversion rate metric compares the number of orders to the number of views received.
Listing optimization is used to help with CVR optimization. When customers click on the ad, they are taken to the product listing, where they must convince them that this product is exactly what they require.
That is why Amazon sellers are continuously looking for strategies to increase their CVR. A rating of five stars and a large number of reviews are also significant in this regard. Thus some sellers even risking their accounts doing so.
ACoS measures how effective a specific ad is for an Amazon Seller’s product. ACoS is influenced by a variety of parameters, and sellers must adhere to all of them in order to maintain a healthy overall profit margin.
We hope you enjoyed our article about Amazon ACOS. In the next several years, we expect there to be a lot of changes for Amazon PPC. But the fundamentals of Amazon PPC metrics will always remain the same. We hope this blog post was able to help provide some insights and strategies to help you understand and influence ACoS.
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We are SellerMetrics, our Amazon PPC Software helps Amazon sellers, brands, KDP Authors and agencies navigate Amazon Advertising PPC via bid automation, bulk manual bid changes, and analytics.