For every seller on Amazon figuring out if you are actually making money off of your advertising campaigns is important. The ACoS or Advertising Cost of Sale is a key metric that indicates your ad spend for a certain campaign and it’s total sales volume. Understanding ACoS is a key part of your marketing strategy. From finding new words to creating new targetting in your campaigns. Without knowledge of this metric and how to use it to your benefit is going to be a huge waste of ad spend.
In this article, we want to take the guesswork out of advertising and give you a clear understanding of what ACoS is and how to use it to your advantage.
What is ACoS
Advertising Cost of Sale (ACoS) is used to measure the performance of your advertising campaigns. ACoS is the ratio of the total ad spend and total sales for that campaign or keyword. To figure out the ACoS it is simple. Divide the ad spend by the total sales and multiply it by 100 to get a percentage.
If you spend 25 on ads and make $100 your ACoS is going to be 25%.
100 X (25 / 100) = 25% meaning for every dollar that you spent on ads you made 4 dollars back.
(Amazon will already show the percentage when you are looking at your advertising campaigns but it’s important to know where the number comes from .)
But that is just making money back from your advertising campaigns. that doesn’t mean that this is profit. If your product costs $8.00 to manufacturer $1.00 to ship to FBA. $2.00 Other Fee’s $3.00 for referral fees on Amazon and you are selling that product for $20.00 how much money would you have after if your ACoS is 25%?
Cost of Goods = $14.00 Advertising per unit is going to be $5.00 at 25% ACoS meaning that you are only making $1.00 Profit. If you ACoS jumps up to 30% Then you will make $0.00. If it goes up to 35% you will be negative -$1.00 per unit.
Now I haven’t gone into figuring out you’re finding your break-even point yet but I am using this as an example to make a point on why ACoS is important. If you don’t know your break-even point or then you won’t know your profit margins.
How to Find your break-even point
The break-even point is the point you break even on your advertising campaign Zero Profit = Zero Loss. Meaning you are getting $0.00 from your advertising campaigns. Knowing this number will allow us to have more control over where we want to be with our advertising budget.
To figure out your break-even point you minus sale price from cost and good and fees. So if you’re selling a product for $20.00 and it costs $4.00 to manufacture. Shipping to FBA and storage fees per unit are another $3.00 and the Amazon referral fee is $3.00.
$20.00 -$4.00 -$3.00 – $3.00 = $10.00
So after each sale, we are left with $10.00 Dollars profit. Before any money is then spent on ads. This is the profit you will make if you made a sale without any advertising. To figure out our break-even point simply divided your profit by your selling price and times by 100.
$10.00 / $20.00 X 100 = 50%
So know we know our break-even point for our advertising campaigns which is 50%. if our ACoS for a certain campaign is 20% then our profit will be 30%. This will also work if it goes into the red. if our ACoS is 75% then we are losing 25% on every sale.
What is a Good ACoS?
ACoS isn’t the end-all of be all PPC metrics that you should be following. But it is a metric that I first look at it. If I see an ACoS of 10% and sales are coming in left and right. I am not going to worry about that campaign. I will look at the one that has 120% and see what is going wrong.
A good ACoS for most is one that you are going to be making a profit on. Anything below your break-even point is going to be considered a profit. A typical ACoS should be around 30% anything over will be considered bad and anything under will be considered good.
Depending on what you are doing with your campaign a Good ACoS can mean many different things. If you are just launching a product and trying to gain awareness then having a high ACoS is apart of your strategy to get your first couple of reviews. If you are running a campaign on a product that is highly ranked already with 1,000 reviews then having a low ACoS will be considered good.
Finding your Target ACoS
Now our goal with any marketing campaign is not to break even but turn a profit. It is good to know our break-even point to keep our campaign in perspective. But now we want to figure out what our target ACoS. This is going to be the number that we are aiming for in our campaigns. If our break-even point is 50% and we want to make a 15% profit on our product then our Target ACoS is going to be 35%. Anything more will be eating into our profits so 35% or less should be our target ACoS.
There really isn’t a formula for figuring out your target ACoS. Once you know your break-even point. you can create a realistic target on where you want to be. In the future, we can lower the ACoS from 35% to 25%. But for now, we just want to have a solid percentage that we can use to help or bidding strategy out.
Now that we have an idea of what our target ACoS is we can create a formula to help us find the perfect big amount to help us reach our target ACoS.
Calculating your target CPC
Your advertising campaigns should already be running so that we have enough data to complete this. This formula should be used to help lower your ACoS and help you meet your targets. It created so that you are never under or overbidding for your desired keywords.
To calculate your target CPC simply take the average order value times your conversion rate, divided by one over your Target ACoS, which equals your target CPC. This will be the exact bid amount that will get you your Target ACoS every single time.
Lets do a quick example:
If you Average Order Value for your campaign is $12.00 and your conversion rate is 8% and are target ACoS is 25%
12 x 0.08 over 1 x 0.25 = 0.24
Meaning that $0.24 cents per click will give us our target ACoS of 25% every time. So by setting our bid at 0.24, we should reach our target ACoS. Now if the conversion rate changes than the bid amount will change aswell. let say our conversion rate increases up to 12% then our new bid amount will look something like this.
12 x 0.12 over 1 x 0.25 = 0.36
These numbers can change on a regular basis but it is a good metric to know so you can adjust your bids accordingly.
3 Tips on How to Lower your ACoS
Optimize Product Detail Page
Optimizing your product detail page is important especially in advertising. This is where you are sending all of your traffic and if it isn’t optimized to convert you will be spending more money and missing out on crucial sales.
Not only that but the keywords that you use in product title description and bullets points. It should also be used in your advertisement campaigns. This will allow you to rank for these keywords. thus creating more sales organically.
So what makes a great product detail page?
Every product detail page has 6 main areas where you can improve in order to have a fully optimized product detail page.
- Product Title
- Product Images
- Key Product Features
- Product Listing Description
- Amazon Product Reviews
- Back End Keywords
If any of these area are not fully optimized then you are lowering your chances of a successful campaign.
Every week or two weeks you should be looking over your advertising campaigns and making bid adjustments. remember to keep track of the changes that you have made. Just get in the habit of optimizing your bidding. Raising bids, lowering bids and adding keywords to negative search terms should be done on a regular basis. Always check the search term report when making adjustments so you are making an informed decision. Even if your campaign is doing well there is always room for a little improvement.
Through this article we already went over some key metrics like Target ACoS, target CPC and ACoS break-even point. using all of these metrics will be able to help you adjust your bids and campaigns using the search term report.
Target Correct Keywords.
In order for any campaign to work, you will have to target the correct keywords in order for them to convert. These are the keywords that your potential customers are going to be using to search for your product. Not only should you be using keywords in your campaign but you should be using them within your product listing as well. Doing keyword research for Amazon isn’t the same as doing research for google but if you have experience doing it then it shouldn’t be much of a problem.