Amazon ACoS- Understanding Your True Costs

Amazon ACoS

Question…

Are you creating and operating your Amazon Sponsored Products campaigns in the “Guess Zone”?

Like a lot of you over the years, through self-education combined with a period of trial and sometimes painful errors, I’ve learned the “playbook” – what works and what doesn’t work when using Sponsored Products Ads as part of my arsenal in building a successful Amazon business.

I realized early on that I needed to know the answers to two vital questions if I was going to be successful and have any type of longevity as an Amazon seller.

I first needed to know if I was actually making a profit.

Like a lot of Amazon sellers in the early days of their businesses, I was making sales, but I had no real idea if I was gaining or losing in terms of profitability.

The second question I needed to find an answer to arose with the realization that I didn’t know exactly what the term ACoS (advertising cost of sale) that I’d come across in my readings and in listening to various podcasts, meant in terms of its impact upon my Amazon business.

I realized that I was operating my SP campaigns in a “Guess Zone” – not knowing what my true ACoS and profit margins were; I was in danger of actually spending more money than what I was making on the sale.

I knew I had to figure things out quickly.

So I rolled up my sleeves and got to work.

Here’s what I learned…

ACoSWhat it means and its importance to the success of your SP campaigns
(cost of sales definition)

ACoS or Advertising Cost of Sale is a metric used to measure the performance of an Amazon Sponsored Products campaign.

ACoS indicates the ratio of ad spend to targeted sales and is calculated by this formula:

ACoS = ad spend ÷ sales.

 

Profit Margin

The profit margin is the amount you make after all costs are subtracted from the selling price. Costs can be related to production, shipping, employee salaries, storage costs, Amazon fees, etc.

amazon acos true costs

In order to determine whether a certain ACoS is good or bad, you’ll need to take the entire cost structure of your product into account.

ACoS percentage – Let’s say you spent $20 on ad spend to make $100 in sales. Your ACoS percentage would be, in this example, 20%.

Once you determine your product’s profit margin as a percentage, you would then deduct the ACoS percentage to get your final margin.

As long as you spend less than your profit margin on advertisement, you won’t incur a loss on your SP campaigns. “But what if my Amazon ACoS is really high?” The higher your ACoS, the higher your ratio of ad cost to sales revenue.

The lower your ACoS, the lower your ratio of ad cost to sales revenue. Ideally you want as high a sales revenue figure as possible, with as low an ACoS as possible. So, what is a good ACoS in Amazon?

 

Factors to Consider in Determining the Right Target Value for an ACoS

Without these metrics, the ACoS will not give you all the information you need to determine how profitable your SP campaign is or not.

Impressions: How popular is the item that you are selling? Are the impressions high, which would mean the product is in a popular category, or are they low, meaning Amazon is displaying the ad often, but that product is not popular?

Total clicks: What is your click-through rate? If that number is low, then the positioning of the ad may not have been good, or potential customers were not drawn to the ad enough to click it.

Overall Sales: How many clicks were there and how many sales resulted from those clicks? A lot of clicks and very few sales means your ad may need to be changed.

At PPC Entourage, the rule of thumb that we use is the ACoS percentage should be somewhat close to your profit margin percentage. So if you’re selling something that has 30 or 40% profit margins your SP campaign should be near break even, if your ACOS percentage is between 30 or 40%.

You should calculate your target margin for each product and campaign.

Your target margin is whatever you want your final gross margin to be, adjusted for ACoS. Determining your target margin allows you to determine your target ACoS and make decisions about your campaigns. For example, if your adjusted gross margin is 30% and your target margin is 10%, then any ACoS at or below 20% is on target.

Break even ACoS isn’t always the number you want to use for driving your success as an Amazon seller. Remember, there are varying strategies depending on how aggressive you are and the goals of your particular campaigns. The goal may not be to make zero profit with an SP campaign (except if you want to boost your organic rankings by generating as many sales as possible).

There are some situations where it may be acceptable to have an ACoS that is higher than your break-even ACoS.

They include:

  • Launching new products in highly competitive niches that are too competitive to generate sales at a break even ACoS.
  • Selling excess inventory because you need or want to clear inventory as fast as possible (for example), due to the fact that as an FBA seller, Amazon is charging you long term storage fees (if you keep units in stock for more than 6 months). It could be cheaper to sell those products at a loss through Sponsored Products campaigns, than to pay the additional storage fee. It would make sense to accept a higher ACoS.
  • Raising brand awareness, especially when your main goal may be to rank on the first page for the best Amazon keywords in a specific product category. In those cases, accepting a higher ACoS makes sense, because the visibility alone creates more value than the loss on the products sold.

amazon seller strategy

Be sure to check out our Amazon Seller Consultation service!

 

The Right ACoS Also Depends on Your Marketing Strategy

Whether a certain ACoS is good or bad depends on the marketing strategy behind it.

An ACoS of 20% may be good if your main goal is to maximize sales velocity. (Sponsored Products campaigns are used to increase sales velocity, which in turn will improve organic rankings).

The goal of this strategy is to sell as many units through SP ads as possible, while not incurring any losses. Amazon sellers usually use this strategy for new products without a track-record on Amazon, but this strategy may be bad if your aim is to maximize profits.

The other strategy is to use Sponsored Products campaigns to generate as much profit as possible. This strategy is typically used in a later stage of a product when it already has good organic rankings.

Thus, you first need to decide on the strategy for each campaign.

Depending on the strategy you are utilizing, you then need to calculate either the “break even ACoS” or the “target ACoS” in order to assess whether a certain ACoS is good or bad.

advertising cost of sale amazon

Be Patient with ACoS

ACoS (Advertising Cost of Sales) is one of the most important metrics for evaluating your Sponsored Product campaigns on Amazon.

It is a useful tool for judging profitability, but you need to know exactly how to interpret it.

Remember that the most successful Amazon sellers have learned to exercise patience with it.

During the first week of most Sponsored Products campaigns, the ACoS will almost always look horrible.

Any judgment of your Sponsored Product campaign’s performance should be delayed until at least two weeks (preferably a month) of data have been collected.

This applies doubly for ACoS.

When you launch a SP campaign, the metrics will be all over the place, simply because of the natural variability of advertising campaigns.

Data doesn’t start to get reliable until about 100–200 clicks have been gathered, but even then, you should let your SP campaign run without touching it for several weeks. (Waiting this long is also important because Amazon attributes a sale to a click if that sale happened a week or less after the initial click.)

For a tutorial on ACoS, please watch the video posted above.