What Does ACoS Mean?
Advertising Cost of Spend (ACoS) is a vital part of Amazon Pay Per Click. The metric identifies your marketing strategy. These specific Amazon marketing metrics calculate your Amazon success and spits out a ratio, which decides how you bid on search items. In short, ACoS is essential in the PPC advertising realm of Amazon.
Your ACoS is the number of how much you spend on marketing per the amount of income you produce. The ACoS Amazon formula for this computation is:
ACoS = 100% x (Total Advertising Spend / Total Sales)
For example, you spent $78 on Advertising. At the same time, it brought you a Sales of $260. Then
ACoS = 100% x (78/260) = 30%.
ACoS is a very important metric to measure the success of an Advertising Campaign. However, you must learn to determine what ACoS is optimal for you in each ad. To do this, you need to understand whether there is a good or bad ACoS, whether such advertising does not bring loss, and much more.
How to Calculate Net Profit and Why Do You Need to Do It?
Below there're the important details you must bear in mind:
- Selling price - cost when selling goods to the buyer.
- All FBA Fees - it’s important to consider absolutely all the fees you pay on Amazon.
- Cost price - the price you pay the supplier per unit of goods.
- Additional costs - here you can include, for example, shipping costs, packaging costs (if you use special packaging for the goods), etc.
Let's look at how to determine profit margin.
For instance, you are selling a Jade Roller:
- Selling Price: $25.
- All FBA Fees: $9.
- Cost price: $3.
- Additional costs: $3.
From Selling Price, minus Cost price, All FBA Fees, Additional costs. That will leave you with $10 in profit for every unit.
$25 – ($9 + $3 + $3) = $10.
Your net profit is a key benchmark for calculating further metrics that you will use to evaluate the effectiveness of an Advertising Campaign. With it, you can calculate your break-even point, target ACoS, and other parameters. But first things first.
How to Determine the Correct ACoS for Advertising Campaign
What is Break-Even ACoS
Break-even ACoS is where your Ad spend is equivalent to your profit margin. Those, your net profit, as a net loss, is then equal to $0.
Here is the formula for calculating:
Break-even ACoS = 100% x (profit margin / selling price)
In our example, the selling price is $25. The net income (profit margin) that we receive from the sale of each unit of goods is $10.
Therefore, our break-even ACoS = 100% х ($10 / $25) = 40%.
If we exceed this indicator, we will remain at a loss. If our ACoS is lower, then we will make a profit.
Thanks to the break-even ACoS calculation, you can immediately determine if your Ad Campaigns are profitable or unprofitable. Go to Advertising> Campaign Manager and look at the results that are presented here. If the ACoS that you see is lower than the break-even ACoS, everything is fine, and you will profit from the advertising campaign. If this value is higher, you lose money, and you need to rethink your advertising strategy. But for this, you must know other equally important parameters.
Let's talk about this further.
What Is Target ACoS
Let's think that our goal is not just to sell goods on Amazon with zero profit, but to generate income. Therefore, we need other metrics that would allow us more effectively to evaluate the Advertising Campaign. One such metric is Target ACoS.
TACoS means that part of your net profit that you are willing to spend on advertising on Amazon.
Target ACoS is the maximum ACoS your campaigns must obtain to get in your target profit margin. This ACoS is the difference between the maximum amount you can spend staying at the breakeven point and the amount you want to keep (Target Profit Margin).
Target ACoS = break-even ACoS - Target Profit Margin
When calculating the Target Profit Margin, you must consider absolutely all the costs that you incur. Think about how much of the income you want to keep?
Let's get back to our example. Your net profit (break-even ACoS) is 40% before Advertising. Let's say you want to keep yourself 15% after Ad Campaign. So, your Target Profit Margin will be 15%.
Let's calculate Target ACoS in our example:
Target ACoS = 40% - 15% = 25%.
Therefore, if your ACoS in the Advertising Campaign is less than Target ACoS, you will achieve the goal - you will get the desired net profit even after Advertising costs. If ACoS is higher than Target ACoS, you will not get the desired profit.
In Which Campaigns Is the Lower ACoS Better?
You will find different aspects to bear in mind when identifying your target ACoS. But generally, a lower ACoS is more preferable to a higher ACoS. That denotes you are spending less money to produce a similar amount of revenue.
The lower the ACoS, the lower the ratio of the Ad cost to sales revenue. Preferably, you wish a sale's revenue number that is as high as possible, along with as low an ACoS as possible.
Normally, a lower ACoS is connected with campaigns like optimizing under converting SKUs, maximizing profitability, or selling products you know will sell even without a great level of visibility.
In Which Campaigns Is the Higher ACoSbe Better?
You will find some scenarios where it might be good to have a higher ACoS. This might include the following:
- Boosting brand awareness, particularly if your goal is to rank on the top page for the best Amazon keywords in a particular product category. In most scenarios, having a higher ACoS is good, as the visibility establishes more value compared to the loss of the profit.
- Launching new items in a highly competitive niche, which are too ambitious to produce sales at a break-even ACoS.
- At the start of sales of a new product, it is not always possible to immediately select keywords, it needs time to search for them, and therefore, in the beginning, ACoS can be quite high.
- Selling too much inventory, as you want to clear the inventory as quickly as you could. As an FBA seller, Amazon is charging you long-term storage charges. It might be more affordable to sell those items at a loss via Sponsored Products campaigns instead of paying added storage costs.
By monitoring your ACoS, you’ll be ahead of your competition. That’s because the majority of Amazon sellers haven’t seized how to use ACoS power to its potential. Take note that ACoS could be teamed up along with other tracking metrics of Amazon. This will help you to watch your ad campaigns and be able to sell more of your products.
We hope we presented you helpful information about what ACoS is and how you can calculate it.