Amazon ads have the potential to bring brands to higher levels of revenue generation and visibility, but knowing how to properly manage your Amazon ad spend can be confusing. You may wonder:
How do I become more efficient with my Amazon advertising dollars?
Am I spending too much on Amazon ads? Should I be spending more?
Organic To PPC Sales Ratio
The first important data point in determining how well you are spending your advertising dollars is to look at…
What is Your Organic to PPC Sales Ratio?
The Organic to PPC Ratio reveals how many sales you’ve made organically*, versus through Amazon advertising.
It is desirable for this ratio to be in the seller’s favor, ideally in the 80% organic-20% PPC range.
For example, if a seller had $207,024 in sales (79% organic / 21% PPC), that would be a good ratio.
Sellers get into trouble when the organic to PPC ratio is reversed (20% organic / 80% PPC). It indicates that those sellers are spending a lot of money overall to get sales, bleeding profits from their businesses.
When managing Amazon ad spending, use the 80% – 20% principle to guide you in figuring out if your ad spend is eating too large of a chunk of your business’ profitability.
* (Organic sales are sales from unpaid traffic – existing shoppers on Amazon that find your listings without clicking on advertisements.)
Overall Ad Spend Impact
The next important data point for consideration is…
What is Your Overall Ad Spend Margin Impact?
For example, if a seller had a TACOS** of 9.42%, this means that the overall margins of the account are being impacted by 9.42% in regards to the seller’s ad spend.
Generally speaking, this number should fall between 6% – 12%. (For those sellers with high margin accounts, these numbers could conceivably fall between 15% – 20% and be acceptable.)
If a seller’s numbers start to climb above these ranges, their advertising costs are significantly impacting their profit margins.
On the flipside, if the overall ad spend margin impact is below 6%, it could mean the seller is leaving money on the table…not taking full advantage of all of the opportunities and advertising tools available for advertising their brand and products to online shoppers on Amazon.
When considering the overall ad spend margin impact in your business, ask yourself these questions…
- Are you overspending or underspending account-wide?
- If overspending, where is the wasted ad spend coming from?
- If underspending, which SKUs should you focus upon? (Focus on the SKUs that are going to move the profitability needle.)
** (True ACoS)
Organic to PPC Sales Ratio
After identifying the overall profitability of your advertising account, you should look at…
What is Your Organic to PPC Sales Ratio for Each SKU?
Expect all of your SKUs to have different organic to PPC ratios due to a number of factors such as each SKU having a
different organic keyword placement, or some SKUs may be more mature, with higher organic visibility and a wider variety of keywords, while other may be new SKUs listed for the first time.
You want to know what your organic to PPC sales ratio is on a SKU-by-SKU basis, because you want that number to be as close to the 80 – 20 guideline as possible.
If you’re having trouble calculating the Organic to PPC sales ratio on a SKU-by-SKU basis, consider taking advantage of a free trial of Entourage Margins, which automatically calculates this for you and also provides a detailed analysis of various margin impact metrics.
The next step is to…
Review Ad Spend Margin Impact for Each SKU
This allows a seller to discover which SKUs have a high ad spend margin impact and which have low ad spend margin impact.
Ask yourself these questions…
- Are you overspending or underspending for a SKU on a percentage basis?
- If overspending, where does the wasted ad spend come from?
- If underspending, which type of ad or strategy can boost that SKU?
Continuing from there, take a look at…
Where is Your Ad Spend Budget Allocated?
The overall budget allocations for these accounts are approximately: Sponsored Products 70%, Sponsored Brands 20%, and Sponsored Display 10%.
Finally, sellers should…
Review the Overall Advertising Budget Caps
- Daily Budget Cap (Ideal for new sellers – spreads overall budget allocation over a month),
- Campaign Level Budget Cap (used to scale traffic to a campaign – for a mature campaign that’s doing well)
- Portfolio Level Budget Cap (used to cap the amount of spend on a particular SKU).
Following these guidelines will help you to be more efficient with your Amazon advertising dollars. Our Mission at PPC Entourage is to give every seller the practical tools that are needed to…
- Be More Efficient with Your Advertising
- Be More Profitable on Amazon
- Make Your Brand a Household Name
Michael Zagare is a serial entrepreneur, a recovering physical therapist, and the founder of PPC Entourage.
Mike has an unquenchable thirst for knowledge in all things Amazon, and loves sharing that knowledge with other sellers to help them take steps towards personal and financial freedom.
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