Amazon ACoS 101: Everything You Need To Know About the Key Amazon Metric
Amazon ACoS is one of the most essential metrics that measures your Sponsored Ad campaigns’ performance. Advertising Cost of Sales is the ratio between ad spend and ad sales expressed in percentage. ACoS lets you know how much percentage of your ad sales is your ad spend. It’s one of the key metrics that should be tracked when optimizing your Sponsored Ad campaigns. Essentially, by tracking this spend to sales ratio you are measuring the profitability of your ads.
How to calculate ACoS on Amazon?
ACoS can be calculated by dividing the ad spend by the ad sales. For example, if you are spending 25 dollars to get 100 dollars in sales, your ACoS would be 25%. You can track it based on date range – daily, monthly, weekly… And you can also track ACoS on different levels – on a keyword level, ad group level, campaign level, and account level. You should be working towards maintaining the profitable ad spend-to-sales ratio on all levels, by optimizing smaller segments while always having the bigger picture in mind.
The difference between ROAS and ACoS on Amazon?
Both ACoS and RoAS are metrics that show the effectiveness of your ads in terms of profitability. RoAS or Return on Ad Spend is just the inverse advertising cost of sales, so the key difference between these two metrics is perspective. While ACoS shows how much percentage is your spend compared to sales, RoAS shows how many times the spend is your return. So if you are spending 25 dollars on ads to make 100 dollars, then your return on ad spend is 4 (or 400%), as you are gaining sales that equal to four times the spend. RoAS is usually expressed as a number and not a percentage like the ACoS.
What is TACoS?
TACoS or Total Cost of Advertising sales is also one of the fundamental metrics for tracking the success of your advertising efforts. The total cost of ad sales is the ratio between the Ad Spend and Total sales – both organic and sales that come from ads.
Eventually your goal should be to have very low TACoS (less than 10-5%, depending on category, product price, and sales velocity), as that would indicate that your organic position is high enough that your sales don’t depend on ads.
What is a break-even ACoS?
The break-even spend to sales percentage is what you can spend on your ads to achieve sales and zero profit. In order to calculate your break-even ACoS, first you should deduct all the costs from your Amazon sales price. Once you have subtracted your product costs, shipping and Amazon fees from your sales price, what you are left with is your profit margin before ads.
Let’s say your product costs 30 dollars. When you subtract the Amazon fee of (for instance) 5 dollars, and then other operating costs of 18 dollars what you are left with is 7 dollars. That means that each time you sell your product at a price of 30 dollars you get 7 dollars of profit.
Break-even ACoS illustrates how much you can spend on ads to make a sale without losing money. If you were to spend those 7 dollars on advertising, that would mean that you would be selling at a break-even. So, in order to calculate your break-even ACoS you should divide your profit margin with your sales price. In this case that would mean that the break-even ACoS is 23.3%.
What is a target ACoS?
Aiming toward your target ACoS means optimizing your ads in order to achieve your advertising goals. In most cases your goal would be profitability.
In order for your ads to be profitable, you would need to know what your break-even ACoS is, and then target to achieve a better ad spend to ad sales ratio. Please note that low advertising cost of sales does not always mean higher sales, it just means lower spend and a higher return.
What is a good ACoS on Amazon?
The average ACoS on Amazon is considered to be around 30%, however, that varies from category to category, so we can’t really say that there is universally good or bad ACoS. The advertising cost of sales that is good for your account is directly related to the goal you are trying to achieve and the strategy you are implementing.
It’s common knowledge that the lower the ACoS the more profitable your ads are, as you are gaining more sales on less spend. However, in some cases, you might even want to sacrifice profitability to achieve different goals.
For example, if you are launching your product, and you are aiming towards product visibility and brand awareness, then you will boost your ads until you reach a certain number of sales or good-enough product ranking. In most cases, when you are using the so-called “ranking” campaigns, whose purpose is to put your product at top of the search placements for the most relevant keywords, then profitable ACoS is not something you can aim for. ROaS is very low, and these campaigns are usually set to work even at a loss for some time, until you get enough reviews, or first page organic ranking for those keywords.
The same goes with campaigns whose main purpose is brand awareness and not sole sales. You are creating campaigns to broaden your reach and bring more traffic to your listings. In order to enhance your brand recognition, it is wise to have campaigns operate at a higher ACoS.
On the other hand, if you are aiming for conversions and sales then you should optimize your campaigns until you find that sweet spot between high enough conversions and low enough ACoS. When your main goal is profitability you should try and aim for an ACoS that is lower or equal to your target one.
How to optimize ACoS on Amazon?
Once you learned the basics of advertising costs of sales, it’s time to see how we can put the knowledge to practice.
The main thing to bear in mind while optimizing your ACoS is your goal. Consider your intention – do you want to reduce costs, increase sales or broaden your reach? Answers to these questions determine the mode of optimization you will be doing.
Having said that, we will move on to basic ACoS optimizations. Essentially, it all comes down to bid adjustment. When the ACoS of a certain keyword is high and non-profitable you would decrease bid. On the other hand, if you see that a certain keyword has a very low ACoS, meaning that it’s converting profitably, you should increase the bid and make sure that you get the clicks, since the clicks on that keyword will convert. Guidelines for bid adjustment should be the suggested bids that Amazon lets you know, along with the CPC.
The “gist” so to speak is simple enough, but there are a couple of factors to consider before making the bid adjustments:
- Goal – as previously mentioned, if your goal was to increase sales, your criterion for lowering/boosting the bids is different than if your goal was to decrease the spend.
- Keyword relevancy – Sometimes even if the keyword is poorly converting, or converting at a high ACoS you necessarily wouldn’t lower the bid, as that keyword is highly relevant for your product. These are so-called strategic keywords.
- Date Range – Be careful to check the keywords’ success in different timelines. Maybe the last 30-45 days overall keyword ACoS is low, but when you look at the last 7 days it seems that it stopped converting. Before adjusting the bid, try to find out why the keyword stopped bringing in sales.
- CPC – Depending on your budget, sometimes you won’t be able to increase the bids, as the keyword is too competitive, and it simply would not pay off to increase the cost per click.
- Impressions, Clicks, and CTR – Make sure you have enough relevant data before you consider changing the bids.
- Conversion Rate – This is the crucial metric, combined with a relevant number of clicks and impressions, that will help you decide how to properly adjust the bids.
To sum up, ACoS on Amazon is the key indicator of your PPC performance, but it is not the only one. While optimizing the account remember to look at other factors such as keyword relevancy, CPC, number of clicks and impressions, and click-through rate. Although there is no really bad or good ACoS in general, individually having a “good ACoS” means achieving the desired result with a minimum spend. In order to achieve your goals, you should dedicate your time to regular campaign optimization.
If all of this sounds too complicated, feel free to contact us! We typically respond in a few hours.
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