ACoS Guide 2022 (Amazon Advertising Cost of Sale)
Being one of the biggest advertising platforms, Amazon allows more than a million sellers to promote their brands and products both on and off the site. One needs to know about ACoS i.e., advertising cost of sale, if they plan to promote their brand or product on Amazon.
ACoS measures the optimum advertising cost spent by a company compared to how much it has earned from the same. It is a performance metric offered by Amazon for ad campaigns in the computation of advertising costs.
In 2021, more than 75% of the Amazon sellers used PPC, i.e., Pay-Per-Click. Therefore, it is imperative to know what performance metrics are, how we can calculate them, and, most importantly, how to optimize them.
The following Amazon Cost of Sale: ACOS Guide 2022 discusses what Amazon ACoS is, and how it can be analyzed as a viable solution to finding a perfect ACoS benchmark.
Table of Contents
- What is Amazon ACoS?
- How can we calculate ACoS?
- What should be the perfect ACoS?
- What is a break-even ACoS?
- How can we find the break-even ACoS?
- How to choose the best Amazon ACoS as per our objective?
- What factors influence ACoS?
- How can we reduce our ACoS?
What is Amazon ACoS?
Amazon ACoS or Advertising Cost of Sales measures the efficiency of your advertising campaign. It is the ratio of ad spend to ad revenue in percentage, and this can be applied directly to the Amazon advertising space. You can calculate your ACoS on Amazon with this formula:
ACoS = Ad Spend ÷ Ad Revenue X 100
In a nutshell, ACoS will tell how much of every dollar was earned with reference to advertising that was spent on an ad campaign.
With reference to this example, if an ad campaign has generated $200 of advertising sales. If the ads for this ad campaign cost is $50, then ACoS = 50 ÷ 200 X 100 = 25%.
This shows that for every dollar made, 25 cents have been spent on advertising.
At any level of an ad campaign, ACoS can be calculated. There are generally 4 levels at which Amazon calculates ACoS automatically.
- AD group level
- Campaign level
- Keyword level
AD group level
In this, an average ACoS for an ad group in a campaign is calculated for a particular period.
In this, average ACoS for all the keywords and ad groups in a campaign are calculated over some time.
In this, total ACoS for only one individual keyword is calculated for a specified period.
In this, the average ACoS for all campaigns is calculated for a particular period.
One can also enable the ACoS calculation by following the following path – Amazon Seller Central > Advertising > Campaign Manager > “Click the Columns” button > Customize Columns > Check the advertising Cost of Sale box.
How can we calculate ACoS?
ACoS can be easily calculated with the help of the following formula:
ACoS = Total Advertisement expenditure ÷ Total Sales Revenue from Ads X 100
As discussed earlier, it is simply a ratio of total advertisement spend to its sales revenue. One may think that, a lower rate of ACoS is much preferable. However, lower ACoS means the numerator, which is the total ad expenditure, is less as compared to what one has earned from the sales. This is not an accurate interpretation as having such results would mean that the ideal ACoS reaches as low as 1%, and it is nearly impossible.
Henceforth, having a low ACoS is better, but it may not be ideal. It depends on several factors such as the product category, target sales, profit margins, competition, product price, etc. Consequently, every seller on Amazon must calculate his personalized Amazon ACoS to express her campaign efficiency. The business must aim for an ACoS of around 15-20 percent. Ideally, your product cost must be higher than your ad spend to maximize profit. This is the best way to optimize revenue for your business.
What should be the perfect ACoS?
There is no such thing called perfect ACoS. Well, it depends on the account and product-specific factors to reach out to a perfect ACoS.
For a certain product category, the seller can calculate the average ACoS after having enough data and use the same as a benchmark. It is generally not advisable since many sellers already have established brands that need to spend less on advertising. So, such calculations would only make the set perfect ACoS unachievable. Benchmarking the ACoS for your Amazon ads against your peer group will allow you to see if there is potential to increase the efficiency of ad campaigns by optimizing your bids or by adding more negative keywords.
If one still wants to know about the perfect ACoS target, we generally recommend a value between 30% and 40%. Also, if your company is planning to launch your product or is under the “growth model”, then you must opt for a higher ACoS target. One can take the target to an optimized level later on when he has got enough reviews for his product.
But ascertaining which ACoS values are realistic and what is a good ACoS will depend on individual factors such as the campaign type, product, and competition and may vary for each advertiser. Just like the case of Cost Per Click Ads, to ascertain and define a pragmatic or good ACoS you must ask yourself what your budgeted cost of advertising is, as it will depend on your profit margin as against your actual spending towards advertising, which will depend on your advertising goals.
What is a Break-even ACoS?
A break-even ACoS is a point where the seller would either start earning or losing the money from the advertisement.
When ACoS registers a higher margin than the profit earned by the seller, then it shows that he is losing money from its advertising campaigns. On the other hand, if the ACoS registers lower margin than the profit earned, then it means that the seller is earning more money from his advertising campaigns. Therefore, the seller, when required to advertise on Amazon, must calculate the break-even ACoS before the launch of his campaigns.
How can we find the break-even ACoS?
Effectively, your break-even ACoS is directly proportional to your profit margin. In fact, it is your profit margin. Whatever your pre-advertising profit margin is for a given product is the maximum amount that you can spend on advertising and still turn a profit. Or, put another way, it’s your break-even ACoS.
For example: If you generate $100 in sales from $25 of ad spend, that would be a return on ad spend of 4x (or 400%). If you have $25 ad spend and revenue of $100, then your ACoS would be 25%. A RoAS of 4x is an ACoS of 25% and if your cost of goods sold was $60 — then your break-even ACoS would be 40% ($40) — because your profit margin is 40%.
The break-even ACos is calculated by the following steps:
- Calculate the profit margin of your product
- Calculate your ACoS
Calculating the profit margin of your product
The profit margin can be calculated by using the following formula:
Gross Profit margin= (Revenue- Cost of goods sold/ Revenue X 10
The cost of the item will include all the expenses that have been incurred while producing, importing, and selling the product. It should also consider the Amazon selling costs such as storage, referral, and other fees.
Calculate your ACoS
Once we calculate both the profit margin and ACoS, the next step is to compare them to find out your break-even point.
ACoS > profit margin means that the seller is losing money from the advertising.
ACoS < profit margin means that the seller is earning money from the advertising
How to choose the best Amazon ACoS as per the objective?
The general interpretation of ACoS says that it should be lower than the profit margin. However, certain exceptions must be kept in mind while planning for Amazon campaigns. The sellers need to choose the best Amazon ACoS as per the objective.
There are many effective strategies you can implement to improve your ACoS performance on Amazon. Some of the best strategies worthy of mention are using Amazon PPC tools, choosing the right keywords, setting the right bid amount, effective bid management, and advertising at the best times.
Ideally, a good ACoS on Amazon depends on your goal. If your goal is to maximize profit or sell a low-converting product, you can set a low ACoS of around 15%-30%. But if your goal is to achieve high visibility in your niche and increase brand awareness, a high ACoS of above 40% would be ideal.
A good advertising cost of sales for Amazon brands will depend on a range of factors, so there’s no one-size-fits-all ACoS that every brand should aim for. Overall, when setting your ACoS for Amazon ads, you should think about sales, profit margins, and efficiency.
For example, if a seller wants to sell the excess inventory as he has been paying long-term storage fees on the same. In such a situation, he should use an Amazon PPC campaign which will help him in the sale of the product rather than paying more storage fees.
It is also important to adjust the ACoS based on objectives when the new seller wants to create brand awareness among the customers.
What factors influence AcoS?
Certainly, several factors affect the ACoS of a new product. One of the most important factors is the product’s age. The factor that how long a product has been listed in the marketplace plays a significant role.
Amazon PPC will rely more on the listing, which is based on Age. It will also allow such a listing to win the auction rather than favoring the competition. Such cases also help the Amazon sellers to bring down the ACoS of their relevant new products. However, if both the listing and the seller are new, then it may take a lot more time to win the bid auction, and eventually, the ACoS will also increase.
A few other factors that also influence the ACoS are:
- Click-Through Rate
- Cost Per Click
- Advertisement revenue
- Return on Ad spend
The CTC (Click Through Rate) shows if the ad is relevant or not. This rate is calculated as clicks divided by impressions.
Cost Per Click
Certainly, the true price of the auction is always less than the bid. The cost per click (CPC) is the second-highest bid plus $0.01.
Advertisement revenue can be calculated when the orders are multiplied by the average selling price. Ad revenue is the number of sales earned through advertising.
Customers are likely to purchase a product when they click on the advertisement.
Return on Ad spend
Return on Ad spend (RoAS) is calculated when we divide Ad revenue by the ad spend. This ratio explains how much money is earned by the seller on every dollar that he spent on the product’s advertising.
If a customer finds an ad that is quite relevant to what he searches, then he would click on it.
The impressions show how many customers have seen the advertisement. As the number of impressions increases, the sales volume can be optimized and reach the maximum level.
How can we reduce ACoS?
ACoS is a complicated performance metric. When the seller has different targets for ad campaigns, then it becomes difficult to know when he is doing well.
For example, if the seller has 5 ad campaigns for the launches of the product and 20 more for the existing products, then the ACOS will be high for the launch campaigns, and it will also skew the total ACoS for your account.
If the ACoS is more than 80%, then it is considered a bad indicator, especially if it reaches 100% or more than that. At such a point, it becomes mandatory that the seller must start thinking about ways to reduce the spending on the ad.
The strategies that would help in reducing ad spend are listed under:
- The advertiser must focus on improving the quality of the videos and photos of the product.
- She also needs to focus on the best times when she can advertise and utilize her week parting or dayparting strategies.
- Advertisers need to find out better keywords and let go of the ones that underperform.
- It is also important that the bids are kept optimized. The bidding should not go too high or too low.
- The product listings with the search items must be kept optimized to reduce the Ad spend.
- The seller can also use Amazon PPC software to reduce the ACoS.
- The seller should optimize the ads to achieve better results.
It is not simple to achieve a good Amazon ACoS. To earn more profits and increase sales, business organizations need to launch an aggressive ad campaign. When the company is mid-sized, it becomes difficult since the business has a small team with fewer resources.
Certainly, ACoS is an important aspect of the PPC; every seller needs to have a unique ACoS target for each of his ad campaigns. He also needs to monitor the changes consistently that are likely to occur in ACoS over a period of time.
If you want to know more about the Amazon Cost of Sale: ACOS Guide 2022, you can contact us.