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Every Amazon Seller has heard the buzzword “Amazon ACoS,” but what is ACoS? ACoS, or “Advertising Cost of Sale” is a performance metric provided by Amazon for ad campaigns in the Amazon Advertising console. In 2021, Amazon Pay-per-Click (PPC) advertising is used by over 75% of Amazon Sellers, and so knowing what all the key performance metrics mean, how to calculate them, and most important of all, knowing how to optimize them is vital.
We will tell you what Amazon ACoS is and how it can be analyzed and how you can find your own perfect target ACoS benchmark.
What is Amazon ACoS?
What is Advertising Cost of Sale, or ACoS meaning for short? Quite simply, ACoS is the ratio of your total ad expenditure to your total sales revenue. In essence it tells you for every dollar you spent on ads, how many dollars revenue you made.
ACoS can be calculated at basically every level of an ad campaign.
You can enable it by going to Amazon Seller Central -> Advertising -> Campaign Manager -> Click the “Columns” button -> Customize Columns -> Check the Advertising Cost of Sale box.
Amazon automatically calculates your ACoS on 4 levels:
- Account level – average ACoS for ALL campaigns over a specified period of time (as shown in the graph)
- Campaign level – average ACoS across all keywords and ad groups in an ad campaign over a specified period of time
- Ad group level – average ACoS for an ad group (a group of keywords) in a campaign over a specified period of time
- Keyword level – total ACoS for one individual keyword over a specified period of time
To see ACoS on ad group and keyword level simply click into the campaign and enable the column as mentioned previously.
What is MY AcoS?
Amazon ACoS calculation is simple, the formula to calculate is simply a ratio of spend to sales, like mentioned before.
For example, if you spent $1.5 on a keyword and received $5 in sales, then your ACoS is (1.5/5)*100 =30%.
You may infer from this formula that a lower percentage of ACoS is preferable. A lower ACoS means your numerator, aka your total ad spend – is lower compared to how many sales you’re getting. That inference isn’t accurate because that would make the ideal ACoS as low as 1%, which is basically impossible!
Therefore, a low ACoS is good, but it might not be the best ACoS for you. So what is a good ACoS on Amazon?
Sounds confusing doesn’t it? Think of it in terms of these scenarios:
- Scenario 1: You spent $100 in ad spend and received $250 in sales, getting you an ACoS of 40%.
- Scenario 2: Your competitor spent $10 in ad spend and received $40 in sales, getting an ACoS of 25%.
Given only the ACoS percentage as a performance metric, you may think your competitor is doing better than you… Yet, take a closer look at the sales revenue. You’re making $250 on the same product they only made $40 for in the same period of time. This is why even if you have a higher ACoS, it doesn’t mean it’s bad.
Many “Amazon Gurus” will tell you the lower ACoS is, the better, but it’s a lot more complicated than that. It’s important not to generalize what’s arguably the most important Amazon PPC performance metric. ACoS can’t be generalized across accounts! It depends on many factors including your product category, your profit margins, and your target sales. This is why every seller should calculate their own personalized Amazon ACoS, and we’ll tell you how to do it.
Step 1. Calculate your Breakeven ACoS
Before you can calculate your true target ACoS you have to find your breakeven ACoS. Your breakeven ACoS is the ACoS percentage you need to “break even” in your profits. To “break-even” means that your revenue can cover your costs, so breakeven ACoS is the percentage beyond which you will start losing money.
For example, if your total profit margin is 30%, then your breakeven ACoS will also be 30%.
Your breakeven ACoS is essentially your total profit margin before you account for ad spend. So if your breakeven ACoS is 30%, if you don’t go over that mark, you won’t be losing any money, because your ad spend was taken out of your profits.
This is a useful metric for product launches. During the first stage of your product lifecycle, you can maintain breakeven ACoS to maximize ad impressions without losing any money. Later on, you can gradually decrease ACoS so you begin making profits on those products which you pushed to the top rankings during your product launch.
Step 2. Decide Your Target Profit Margin
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\
Step 3. Find your Target ACoS
The final step is to find your target ACoS using your target profit margin and your breakeven ACoS. This is easy, it’s simply the difference between the two values. Your target ACoS is the percentage that allows you to hit your target profit margin.
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 Profit Margin
For example, your breakeven ACoS is 30%, and your target profit margin is 15% like mentioned before.
Target ACoS = 30% – 15% = 15%
Therefore, you need a target ACoS of 15% or lower to achieve your target profit margin.
What is the “Perfect” ACoS?
This is a trick question, because there are no “perfect” ACoS. ACoS depends on too many account-specific and product-specific factors for there to be an overarching target ACoS for EVERYONE.
With enough data you can calculate the average ACoS for sellers in a certain product category and use that as a benchmark. Still, we advise against doing this! Other sellers may already be established brands, and thus need to spend less on ads than you. This will skew your benchmark and make that “perfect” ACoS unachievable.
Still, if you are truly lost on what is a good target ACoS, we recommend anywhere between 30-40%.
Go for a higher target ACoS if your product is being launched and is in “Growth Mode.” You can always optimize later on, once you have enough reviews and rankings to invest less in ads.
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.
How do I reduce my ACoS?
ACoS is a complicated and finicky metric, it’s hard to pinpoint when you’re doing well especially if you have varying targets for different ad campaigns. For instance, you may have 5 ad campaigns for product launches, and another 15 that are existing products. The ACoS for the launch campaigns will be high and skew your total average ACoS for your seller account.
An OBVIOUS indicator of a bad ACoS is anything above 80%, especially if your ACoS is 100% or more. At that point, you need to start thinking of ways to reduce your ad spend.
Some strategies to reduce your ad spend include:
- Optimize your product listings with backend search terms
- Improve the quality of your product photos and videos
- Find the best times to advertise and utilize dayparting or week parting strategies
- Find better keywords, and let go of the underperforming ones
- Optimize your bids, are you bidding too high? Or too low?
- Use Amazon PPC Management Software to optimize your ACoS % for you
What metrics can lower ACoS?
Lowering your ACoS is multi-step process. But if you improve the below metrics, you are on your way lower your 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.
What is ACoS? What is TACoS?
ACoS is known as the “advertising cost of sale” and TACoS is “total advertising cost of sale.” However, TACoS is not so simple as the name suggests.
What is TACoS?
TACoS, as mentioned before stands for “total advertising cost of sale.” TACoS, like ACoS, measures ad spend over total revenue. The formula looks something like this:
If you’ve been paying attention so far, you’ll already be asking yourself the next question…
How is TACoS different from ACoS?
You may be thinking – “Hold on! Isn’t that the exact same formula?!”
It’s true the formulas are essentially the same, but there’s one key difference… ACoS only looks at your ad spend measured against PPC sales revenue. TACoS looks at ad spend measured against ALL sales revenue, including organic.
It can be confusing when all the formulas for Amazon ACoS are essentially the same as TACoS, that’s why we’ve altered them slightly to show the differences. Now you can see that TACoS and ACoS are actually very different metrics, that provide different insights.
Why is TACoS an important metric?
So why is TACoS important? It’s simple, when you look at Amazon ACoS you’re looking at how many of your ads converted into sales. When you look at TACoS, you can get a more holistic view of your ad spend.
TACoS lets you see how your ad spend impacts your TOTAL sales. You can use it to measure the impact of your ads on your overall sales velocity. It also gives you a good idea of how much your ad spend might be reducing your profit margin.
That’s why calculating your TACoS is so vital to your PPC campaign performance. Analyzing TACoS on an account level allows you to sit down and formulate long-term strategies in way ACoS simply does not. If your ads aren’t generating enough extra sales to cover their cost, then your PPC campaigns are not going well. TACoS can tell you if this is happening with one simple formula.
What determines a good TACoS?
A good TACoS is not only determined by its value but also the trend of your TACoS over time. Both these things will tell you the overall health & performance of your ads.
Low TACoS vs. High TACoS
What is a good TACoS percentage? First, let’s find out what your TACoS percentage means…
- A low TACoS below 20% – your ads are generating a good amount of sales, and your overall sales are high
- A high TaCoS above 20% – your ads are not generating enough sales, bids and/or keyword optimization is needed
A low TACoS means that your ads are doing their job. What’s the point of using Amazon PPC at the end of the day? It’s to eventually rank your keyword high enough that the consistent ratings & reviews boost your ORGANIC rankings, leading to you receiving sales organically.
Remember, the point of using Amazon PPC is to eventually be able to use it less. This is where TACoS comes in, because it tells you if you’re reaching that point, or if you’re subsisting solely on your paid ads, and spending far too much on them.
What’s the ideal TACoS?
Generally speaking, a low TACoS between 6% – 10% is ideal for sellers. It’s impossible to reach 0%, because you’ll always be spending some on ads. Actually, if your TACoS is below 2% then you’re under-utilizing your Amazon PPC resources!
Even if your organic sales are high, don’t stop using Amazon PPC altogether!
Tracking your TACoS trend over time
It’s not enough to have a low TACoS alone, you also have to maintain it. There are some key trends that you have to look out for when it comes to your TACoS.
Increasing, Decreasing or Stagnant
- Increasing TACoS – an increasing TACoS means your ad spend is increasing but your organic sales are not increasing at the same rate
- Decreasing TACoS – a decreasing TACoS means you have high sales velocity, and your organic sales are improving too
- Stagnant TACoS – a flat TACoS means you have steady sales overall, and at the moment your account health is good
Trend Relationships between ACoS and TACoS
Naturally, since they are so similar, Amazon ACoS and TACoS have some joint trend relationships that sellers should look out for:
Increasing TACoS and increasing ACoS
Both your TACoS and ACoS increasing is a bad sign on the whole. Unless of course, you just launched a product, in which case a high initial ad spend & low organic sales are expected. If you didn’t just launch a product, it means your ad spend is cutting into your profit margin, which is a bad sign.
Decreasing ACoS and increasing TACoS
Your TACoS increasing while your ACoS decreases means that your organic sales are decreasing, or are becoming a smaller part of your total revenue. This is rare, but if it happens it means your sales are too dependent on your paid ads. That is also a bad sign~
Decreasing ACoS and decreasing TACoS
Both your TACoS and ACoS decreasing is a great sign, this means your organic sales are improving and overtaking the sales you get from your paid ads. However, this is also rare, because most sellers will always have a portion of sales that solely come from their ads.
*Note there is no trend for Decreasing TACoS and increasing ACoS. A high ACoS means increase in ad spend, which will directly impact your TACoS. This trend can’t feasibly exist, so you can discard it as a possibility.
Other Performance Metrics
Other than ACoS, there are other key performance metrics that you can analyze to optimize your Amazon PPC Campaigns, these include impressions, clicks, clickthrough rate, conversion rate, and cost per click. ACoS is unique in that it provides an overall view of your ad expenditure compared to sales, but solely using ACoS to optimize campaigns is not enough.
Cost per click, clickthrough rate and conversion rate are 3 extremely valuable metrics that all sellers should be tracking for their ad campaigns on a keyword level. We recommend using Amazon PPC tools like our very own to keep track of these performance metrics.
In conclusion, advertising cost of sale is a complicated but vital Amazon PPC performance metric. All sellers should set themselves unique target ACoS for each ad campaign, and consistently analyze changes in ACoS over time. We hope you found our article helpful for your future ad campaigns!
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