Amazon ACoS is a key metric to measure the performance of an Amazon PPC campaign. If you’re new to Amazon advertising, this guide has everything you need to know about this metric – we’ll show you what ACoS is, how to calculate it, which metrics are driving ACoS and how to improve ACoS on Amazon. Let’s dive right in.
- ACoS Amazon basics (definition, benchmarks etc.)
- What is a good / bad ACoS?
- Which metrics drive ACoS on Amazon?
- How to improve and optimize ACoS on Amazon?
- Key takeaways for ACoS optimization
If you’re already using Amazon PPC ads, compare your advertising KPIs to your competitor’s by benchmarking your account.
What is Amazon ACoS? How to Calculate It?
Amazon ACoS vs. Amazon ROAS
While Amazon ACoS shows how much you spend on ads to gain a dollar from attributed sales, Amazon ROAS (Return on Ad Spend) tells you how much money you earn for every dollar you spend on advertising. ROAS is the inverse of ACoS and both indicate the efficiency of your PPC campaigns:
What is a Good ACoS on Amazon: Benchmarks Across Industries
Depending on competition, product prices and many more factors, ACoS can vary a lot. For orientation, here are the average ACoS values across different categories on Amazon:
“Is my ACoS good or bad?” In most cases that depends on profitability. I.e., is your campaign profitable (enough) with a certain ACoS – or not? However, the ACoS alone says nothing about profitability. That’s why you need to follow these steps to decide whether a certain ACoS is good or bad for your Amazon ads:
- Step A: Calculate the profit margin of your product
- Step B: Determine your break-even Amazon ACoS
- Step C: Find your target ACoS
Step A: How To Calculate Your Profit Margin
This is what the cost structure of a typical product might look like:
Typical cost blocks are:
- The cost of goods (manufacturing costs)
- Costs for shipping the product from a manufacturer or to the customer
- Amazon fees (referral fees, Amazon FBA fees, etc.)
To determine your profit margin you need to substract all these costs (per unit) from your product price.
Here’s an example: You sell your product for $200. All your costs amount to $150 per unit, so in the end you make $200 – $150 = $50 profit per unit. That means you have a $50 / $200 * 100 = 25% profit margin.
Step B: What Is The Break-Even ACoS on Amazon? (Do I Make A Profit?)
The break-even Amazon ACoS represents the tipping point between profit and loss of a campaign. If your ACoS is higher, you make a loss and if it’s lower you make a profit. Your break even Amazon ACoS corresponds to your profit margin, because – simply put – you will continue to make money as long as you don’t spend more than your profit margin on advertising.
Break-Even ACoS = Profit Margin
The break-even ACoS is a benchmark that allows you to see immediately if your campaigns are making a profit or a loss and make well-informed decisions accordingly.
In our example the profit margin – and the break-even ACoS – is 25%. As long as you don’t spend more than 25% on ads, you won’t lose money. Or, in other words, you shouldn’t exceed an ACoS of 25% to remain profitable on Amazon.
Important: The break-even ACoS is based on a product-specific profit margin. If you gather products with heavily diverging profit margins – and break-even Amazon ACoS – in an ad group, it it can be difficult to see whether your campaign is actually profitable or not. That’s why we recommend to use only one product per ad group or to only group products with similar margins. More info
Step C: What is My Target Amazon ACoS? (Do I Make Enough Profit?)
In many cases you don’t only want to break even with your campaign, but actually keep a certain profit margin. The target ACoS is the ACoS where you achieve this target profit margin. How to calculate the target ACoS on Amazon:
Target ACoS = Profit Margin (Before Advertising) – Target Profit Margin (After Advertising)
The target ACoS is a benchmark that allows you to see immediately if your campaigns are achieving your target profit margin.
Here’s an example:
In this example your profit margin (and break-even ACoS) is 25%. If you want to keep a profit margin of 10% after advertising, you can therefore only spend max 25% – 10% = 15% of your revenue on advertising – i.e. your target ACoS is 15%. If your Amazon ACoS is higher than 15%, you will miss your target profit margin.
- Tip: We’ve made it easy for you to upload target ACoS for all your products. Feel free to try.
Choosing the Right Amazon ACoS Based on Your Goals
There are different goals you can pursue with your PPC campaigns. Depending on your goals, you can either focus on break-even ACoS or target ACoS:
- Goal 1 – Maximizing sales: This goal makes sense e.g., if you’re launching a new product to get reviews as quickly as possible. In this case you might focus on getting as many sales as possible while breaking even, i.e. achieving the break-even ACoS.
- Goal 2 – Maximizing impressions: Maximizing impressions makes sense, if you want to increase your brand awareness. In this case you might focus on getting as many impressions as possible while breaking even, i.e. achieving the break-even ACoS on Amazon.
- Goal 3 – Making a profit: This should be the prefered long-term goal for established products. To achieve a certain profit margin you should focus on reaching your corresponding target Amazon ACoS.
- To recap:
- Break-Even Amazon ACoS = Profit Margin
The break-even ACoS is a benchmark that allows you to see immediately if your campaigns are making a profit or a loss. Consider focusing on break-even ACoS, if your goal is to maximize sales or impressions on Amazon.
- Target ACoS = Profit Margin (Before Advertising) – Target Profit Margin (After Advertising)
The target ACoS is a benchmark that allows you to see immediately, if you’re achieving your goal of meeting your target profit margin.
- Break-Even Amazon ACoS = Profit Margin
How do I lower my ACoS on Amazon?
So far, we covered what ACoS means, and how to define a good ACoS in terms of break-even and target ACoS. Now you’re probably wondering: “How do I improve my ACoS”?
We will answer this question in 2 steps:
- Step 1: Which metrics drive ACoS on Amazon?
- Step 2: How to optimize your ACoS using these metrics?
Before we start with these questions, however, let’s quickly take a look at this important question:
Is a Low Amazon ACoS Always Good?
Depending on your category, time of year, and your products, an increasing Amazon ACoS is not necessarily a bad thing. For example, we mentioned previously in this article that if your advertising goal is to maximize your reach by growing as many impressions as possible or maximizing sales for a product launch, efficiency or profitability may not be the priority.
Important: There is a general trade-off between ACoS and sales / impressions.
In many cases, with a lower bid and cost per click (CPC) your Amazon ACoS and profit per sold unit tends to be lower, because your cost per sold unit is lower. However, a low bid also leads to less impressions and therefore less clicks and sales.
Overall, when optimizing ACoS of your Amazon ads, you should think about both efficiency / profitability and sales / impressions volume.
Step 1: Which Metrics Drive ACoS on Amazon?
Let’s start by taking a look at the most important Amazon PPC metrics:
- Bid: If your bid wins the advertising auction, your product appears in position #1. If your bid was lower, your ad can still receive one of many other ad placements throughout Amazon.
- Impression: The more people see your ad, the higher the chances that someone buys your product.
- Click: Amazon shoppers will click your ad if they deem it relevant to their search.
- CTR (Click-Through-Rate): Calculation of (Clicks / Impressions), measures how interesting / relevant your ad is.
- CPC (Cost-per-Click): The true price of the auction. The second-highest bid + $0.01. The CPC will always be lower than the actual bid.
- Order: The shopper could purchase your product after clicking your ad.
- CVR (Conversion Rate): Calculation of (Orders / Clicks), measures the persuasion power of your offer and product (page).
- Ad Spend: Calculation of (Clicks x Cost Per Click) to understand total ad investment.
- Ad Revenue: Calculation of (Orders x Average Selling Price) to understand sales driven by ads.
- Amazon ROAS (Return on Ad Spend): Calculation of (Ad Revenue / Ad Spend), expressed as a ratio to understand how much revenue is earned for every dollar spent on advertising.
- Amazon ACoS (Advertising Cost of Sales): Calculation of (Ad Spend / Ad Revenue), expressed as a percentage to understand which part of every revenue-dollar was spent on advertising. Amazon measures and reports on ACoS
Understanding Amazon ACoS drivers
To see which metrics drive ACoS we take a look at the ACoS formula again and how it can be broken down into the different factors. In its simplest form, Amazon ACoS goes up when ad spend grows faster than ad revenue or down when ad revenue grows faster than ad spend.
Ad spend is determined by the number of clicks and cost per click (CPC). Ad revenue is determined by the number of orders and the revenue per order (ASP, Average Selling Price):
You can extend this formula even further to reveal two more key PPC metrics that govern your Amazon ACoS: CTR and CVR.
Clicks are the result of how often shoppers see an ad (Impressions) and how often they click on it when they do (click rate, CTR). Orders are the result of the number of clicks and how often one of these clicks leads to a sale (conversion):
So in the end Amazon ACoS (cost of sale) depends on quite a number of different metrics that are also dependent on each other. The most effective and actionable approach for ACoS optimization is to focus on the following metrics:
Let’s take a closer look at those:
Step 2: How to Optimize ACoS on Amazon?
Amazon ACoS driver #1: Click-Through Rate (CTR)
CTR indicates how relevant or attractive your ad or product is for a specific search query (compared to the other products appearing on the search results page).
Example: Here’s a Sponsored Product Ad that may not be relevant to the search query. If a customer is shopping for “water bottle”, he or she is probably not looking for “Nestle Pure Life Purified Water”.
How does a change in CTR affect your Amazon ACoS?
- If your CTR changes, while your conversion rate stays the same, your ACoS will not change. This is because the change in CTR impacts both ad spend and revenue (via clicks) at the same rate. Increasing CTR is a good thing if your current ACoS on Amazon is below your break-even ACoS as it will increase your overall volume in terms of sales and profit.
- However, a change in CTR can impact your ACoS if it causes a change in the rate of conversion. If you increase your CTR by attracting more clicks that are less likely to convert, your overall CVR will decrease. As a result, your ad spend will increase at a higher rate than your revenue, and thus your ACoS will also increase.
Bottom line: If you don’t want to hurt the ACoS of your Amazon ads, you should only increase your CTR with qualified (same or higher CVR) traffic.
These factors influence CTR:
|INTERNAL (easy to influence)||EXTERNAL (not so easy to influence)|
|Main image||New competitors|
|Number of reviews|
Here’s how to optimize CTR:
- Optimize your product page (main image etc.)
- Align your keyword and target lists with your products to ensure your ads appear for the most relevant audience
- Add irrelevant keywords as negative keywords to prevent your ads from appearing for irrelevant audiences
Amazon ACoS driver #2: Cost Per Click (CPC)
A lower cost per click (CPC) typically means a lower ACoS on Amazon (but also lower impressions / clicks / sales volume). However, this is not always the case:
Optimal CPC for your targets does not always mean the lowest cost. Advertising real estate on Amazon differs by placement, with ‘Top of Search’ typically incurring the highest cost. For many categories, however, ‘Top of Search’ may deliver the highest conversion rate, which leads to more sales, therefore lowering ACoS (more on Amazon bidding strategies here).
CPC is not the same as a bid. A bid is the maximum amount advertisers are willing to pay in the auction. In a real-time auction, the second price determines the final price. In other words, the winner of the auction pays the second-highest bid plus $0.01.
In the above example, Advertiser 3 wins the auction with a bid of $4.00. If their ad is clicked, the cost of the click charged to Advertiser 3 will be $3.51.
So what influences CPC change?
|INTERNAL (easy to influence)||EXTERNAL (not so easy to influence)|
|Changed bids||If bid strategy ‘Dynamic – Up & Down (or Down)’ is turned on, Amazon could be increasing your bids to reach shoppers more likely to convert, despite no change in the default bid you’ve set.|
|Change in bid strategy to ‘Dynamic – Up & Down’ or ‘Fixed’||Even if you don’t touch your bids, the Amazon CPC could change because of your competitors’ activities. With more bidding advertisers, the CPC could increase. Alternatively, the CPC could decrease with fewer bidding advertisers.|
|Change in placement adjustments||Seasonality trends could influence how many advertisers participate in the auction and at what price. For example, CPC could increase during the holidays because many people are bidding to win clicks and sales from gift shoppers.|
Here’s how to optimize CPC:
- Monitor and continually optimize keyword and target bids based on Amazon ACoS performance (i.e. increase / decrease your bid if you’re below / above your target ACoS)
- Direct funds away from high to low ACoS keywords
Optimizing ACoS Amazon: Key Takeaways
At the end of the day, PPC campaign metrics are a series of math equations. As you investigate what caused your Amazon ACoS to increase, approach each PPC metric one by one, and look for disproportionate changes. By conducting root-cause analysis on your PPC campaigns, you can focus on what’s driving your trends and determine your best course of action to achieve your ACoS goals. Distribute your ad budget with confidence and maximize your profit with Sellics.