This guide has everything you need to know about Advertising Cost of Sales on Amazon.
If you’re new to Amazon Advertising, we’ll show you what ACoS is and how to calculate it.
And if you’re an Amazon PPC pro? Our tips and strategies will help you to drop your ACoS so low you’d think it was a hot potato.
The bottom line: If you want to maximize the efficiency of your Amazon PPC campaigns, you’re going to love this article.
Let’s dive right in and answer your first question:
What is Amazon ACoS?
In short, ACoS shows how much of every dollar earned with advertising was spent on the ad campaign. Have a look at the example below:
How to Calculate Your ACoS
A campaign has generated $254 through sales from advertising. The ads during this campaign cost $63.
since ACoS = Ad Spend / Ad Revenue
here ACoS = 63 / 254 = 25%
What Is a Good ACoS for Amazon Ads?
There is no one good ACoS that will guarantee a profitable efficiency for your ad campaign. Many variables come together to shape the ACoS that is best for you. Your strategic advertising goals, PPC metrics, and the cost structure of your product all play a role. You won’t get around rolling up your sleeves and getting your hands dirty. But don’t worry — we’ll help you get stuck in.
To get started, check out this overview of average ACoS values across different industries:
Average Amazon Acos Benchmarks Across Verticals in 2018
While this graph shows you how diverse ACoS can be, you should always put in the effort and find out:
What should your ACoS be? How to use ACoS to measure profitability
The ACoS is a popular metric to measure the success of Amazon PPC campaigns. ACoS alone, however, says nothing about the most important KPI of your campaign: profitability.
Should your ACoS be 40% or 10% to make a profit?
To answer that question, you need to:
- Evaluate the profit margin of your product
- Use it to define target values for your ACoS (specifically the so-called break-even ACoS and target ACoS)
Let’s look at these steps in detail.
Evaluate the Profit Margin of Your Product
This is what the cost structure and profit margin of a private label product might look like:
What Is the Profit Margin?
The profit margin is the percentage of profit remaining after deducting all costs per unit (i.e. the cost of production and shipping as well as general costs such as employee salaries, storage costs, etc.) and fees per unit (Amazon fees & possibly FBA fees) from your product price.
Expressing profit in terms of percentage instead of dollar value gives you a clearer understanding of your product’s condition.
How Do You Calculate the Profit Margin?
To calculate your profit margin, divide the profit per unit by the product price, and multiply the result by 100.
Now that you know your profit margin, you can answer the question:
How much can I spend on advertising without losing money?
The easy answer is: You will continue to make money as long as you don’t spend more than your profit margin on advertising.
This is why in terms of ACoS, the profit margin can also be referred to as break-even ACoS.
What Is Break-Even ACoS?
The break-even ACoS is your theoretical Advertising Cost of Sale if you spent your entire profit margin on advertising.
The break-even ACoS is essentially the same as the profit margin. Both benchmarks represent the fragile equilibrium where zero profit = zero loss.
In the example above, the profit margin is 25%. As long as you don’t spend more than 25% on ads to promote this product, you won’t lose money.
Regarding ACoS, this means you shouldn’t exceed an ACoS of 25% to remain profitable. In other words: Your break-even point in terms of ACoS is 25%, the so-called break-even ACoS.
Consider the break-even ACoS the tipping point at which you start incurring losses.
How Do You Calculate Break-Even ACoS?
To calculate your break-even ACoS, follow the same formula for calculating the profit margin. You can also think about it this way:
- Note the price of your product, i.e. the end price a shopper pays for it (e.g. $200).
- Calculate the gross profit from it, i.e. the product price minus all the costs for your product (e.g. $50).
- Ergo: You earn $50 for each $200 item you sell.
- Now you know: If you want to increase your sales, you can spend the $50 to promote this item without losing money.
- $50-$50 = 0. You have reached the break-even point!
- You want to compare this break-even value to your current ACoS, to see if you are over- or underspending on adverts.
- $50 is a currency, though. To compare it, you need to convert it to a benchmark value: The break-even ACoS.
- To find the break-even ACoS, divide your zero-profit advertising cost by your product price:
What’s the easiest way to calculate all your ACoS benchmarks? Click here for a free ACoS calculator.
Is Break-Even ACoS Good or Bad?
The break-even ACoS is neither good nor bad, it is simply an indicator you can use for further analysis.
Having said that, you should always know your break-even ACoS because it allows you to see immediately if your campaigns are making a profit or a loss.
Your break-even ACoS helps you to make well-informed decisions about bid adjustments and other levers that influence your profitability.
Define Your PPC Campaign Goals First
Whether or not the break-even ACoS is a good target value for your ACoS depends on your strategic campaign goals.
- Goal 1 = Max. Sales
- Maximizing sales can make sense under certain circumstances, e.g. if you’re launching a new product and want to support your organic ranking by increasing sales velocity.
- In this case, you might aim for the break-even ACoS to maximize your sales without losing money.
- Goal 2 = Max. Impressions
- Maximizing impressions makes particular sense if you want to increase brand awareness.
- If this is your goal, you might also aim for the break-even ACoS because you want to gain maximal impressions without losing money.
- Goal 3 = Make A Profit
- With this goal, break-even ACoS is not (!) the right target value because you want to make more than zero profit.
- In this case, you need to define your target ACoS.
Let’s assume you want to make a profit.
How Do You Determine Your Target Profit Margin and Target ACoS?
To move towards profitable advertising on Amazon, you need to clearly define the following two benchmark values: The target profit margin and, finally, the target ACoS.
What Is Target Profit Margin?
How much money do you want to earn with your product? Consider all the costs and fees for your product, including advertising. How much should be left over? The percentage of your sale that you consider your true, final profit is your target profit margin.
How Do You Calculate Target Profit Margin?
You can calculate or estimate your target profit margin by modifying the break-even equation for more profitability.
In our previous example, the profit margin is 25% before advertising. You could simply choose to keep 10% as your target profit margin after advertising.
You could also start with a dollar value: Your target profit per unit.
Let’s say you want to keep $20 per unit after advertising. Divide this by your product price (here $200) and multiply it by 100 to get your target product margin (here, again, 10%).
Now that you know the final percentage of the profit you’d like to keep: How can you optimize and monitor your Amazon ad campaigns to stay close to this target profit margin?
To answer this, you need to know your target ACoS.
What Is Target ACoS?
The Amazon target ACoS is the maximum Advertising Cost of Sales your campaigns should reach to remain in your target profit margin.
The target ACoS is the difference between the maximum you can spend (break-even ACoS) and what you want to keep (target profit margin).
How Do You Calculate Target ACoS?
To calculate the target ACoS, subtract your target profit margin from your break-even ACoS:
Using the values of our previous examples, that’s a target ACoS of 15%. If you stay below this threshold, you keep your target profit margin. If you are above, you don’t.
In case you missed it: here is your free ACoS calculator!
- To Recap:
- Break-even ACoS is the point at which zero profit = zero loss.
- It enables you, therefore, to immediately understand the health of your campaigns. If your ACoS is lower than your break-even ACoS you’re making a profit (and vice versa).
- You can aim to reach break-even ACoS (instead of going lower) if you want to maximize sales and impressions without losing money.
- Target ACoS indicates how much you can spend on advertising without sacrificing your desired profit.
- Tip: We’ve made it easy for you to upload your target ACoS for all your products in Sellics, so you can always see if you’re on track to hit your target ACoS.
- Did you know? We offer a comprehensive PPC course as part of our Sellics Academy. Sign up now for a deep-dive into hands-on ACoS strategy (with examples) and more — It’s FREE!
Want to know more? Here’s a sneak peek from inside the Sellics Academy: Watch Diana as she illustrates how to figure out your best ACoS strategy!
Tip: Here’s the free ACoS calculator she mentions in the video.
How Do I Lower My ACoS? (Amazon ACoS Strategy)
In the first part of this article, we covered what ACoS means, and how to define a good one in terms of break-even ACoS and target ACoS.
By now, you’re probably wondering: How do I lower my ACoS? What do I need to do to make it “good”?
To improve your ACoS on Amazon, you need to do the following:
- Understand which metrics drive your ACoS*
- Identify the levers to influence these metrics
- Optimize your ACoS using the identified levers
- *Please note: In the interest of scope and readability, we decided to focus only on Sponsored Products metrics in this article.
The Most Important Amazon Sponsored Products KPIs — An Overview
To better understand the levers that impact your campaign performance, let’s quickly run through the life cycle of Amazon PPC: Bid → Impression → Click → Order.
You can look at these metrics in PPC advertising at varying levels of granularity, from account level down to the individual keyword or target.
Amazon PPC Metrics and Why They Matter:
- 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.
- The more people see your ad, the higher the chances that someone buys your product.
- Shoppers will click your ad if they deem it relevant to their search.
- CLICK-THROUGH RATE (CTR)
- Calculation of (Clicks / Impressions). Measures how interesting / relevant your ad is.
- COST PER CLICK (CPC)
- Your bid is a good indicator, but the true price of the auction is the Cost Per Click: The second-highest bid + $0.01. The CPC will always be lower than the actual bid.
- The shopper could purchase your product after clicking your ad.
- 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 your total ad investment.
- AD REVENUE
- Calculation of (Orders x Average Selling Price) to understand sales driven by advertising.
- RETURN ON AD SPEND (ROAS)
- Calculation of (Ad Revenue / Ad Spend), expressed as a ratio to understand how much revenue is earned for every dollar spent on advertising.
- ADVERTISING COST OF SALES (ACOS)
- Calculation of (Ad Spend / Ad Revenue), expressed as a percentage to understand which part of every revenue-dollar was spent on advertising.
ROAS vs. ACoS on Amazon: What’s the difference?
The Return On Ad Spend (ROAS) is the inverse of ACoS:
ACoS shows how much you spend on ads to gain a dollar from attributed sales.
ROAS tells you how much money you earn for every dollar you spend on advertising.
Amazon measures and reports on ACoS. If you’re new to Amazon Advertising, you may be more familiar with ROAS, so getting used to setting goals with ACoS can take some time.
So why use ACoS instead of ROAS?
Truth be told, they effectively tell you the same. Both indicate the efficiency of your PPC campaigns by showing you how much you get out of your investment.
ACoS, however, translates better to the profit margin of your product: If your profit margin is 25% and you’re spending 30% of your attributed revenue, you instantly know you’re in trouble.
333% ROAS, on the other hand, sounds deceivingly impressive! As an experienced marketer, however, you know that this value probably just about breaks even.
If you really need to convert ACoS to ROAS (for example, to compare it to your other advertising channels like Google or Facebook), it’s as easy as 1/x.
In the Amazon universe, however, you’ll only deal with ACoS, so we recommend you stick to that.
Advertising on Amazon thrives on efficiency, which usually means a low ACoS (or a high ROAS).
Consequently, it’s reasonable for marketers to ask:
Why Is My ACoS Too High? How to Find the Best ACoS (And Its the Influencing Factors)
The most common ACoS questions we hear from clients are:
- “Why is my ACoS too high?”
- “How can I lower my ACoS?”
We hope you find the answers in this article, but at this point, we’d like to address a surprisingly rare question:
Is a low ACoS always good?
Let’s take a second to acknowledge a counterintuitive truth: depending on your category, time of year, and your products, an increasing ACoS is not necessarily a bad thing.
If your advertising goal is to maximize your reach by growing as many impressions as possible, sales efficiency may not be the priority. If your campaigns are already optimized, perhaps your ACoS reflects the true cost of competing in the advertising marketplace.
Don’t chase a lower ACoS without context. Amazon PPC metrics are interdependent. Getting caught up in finding ways how to reduce ACoS on Amazon tends to have the inadvertent consequence of reducing ad revenue or ad profit.
Evaluate ACoS against your advertising goals to ensure you assess it from the context of your business needs.
Understanding What Drives Your ACoS
With this public service announcement out of the way, let’s dive right in. To understand what influences ACoS to go up or down, we can start by reviewing how to calculate ACoS:
In its simplest form, ACoS goes up when ad spend grows faster than ad revenue or goes down when ad revenue grows faster than ad spend.
For a more detailed understanding of the metrics that drive your ACoS, let’s break down ad spend and ad revenue into their determinants.
- Your ad spend is determined by the number of clicks and how much each one costs:
Ad Spend = Clicks x Cost-Per-Click (CPC).
- Your ad revenue is determined by the number of orders and how much each one costs:
Ad Revenue = Orders x Average Selling Price (ASP).
You can extend this formula even further to reveal two more key PPC metrics that govern your ACoS: The Click-Through Rate (CTR) and Conversion Rate (CVR).
- are defined as how often shoppers see an ad (Impressions) and how often they click on it when they do (CTR).
- are defined as how often one of these clicks leads to a sale (Clicks x CVR).
This extended formula clearly shows that ACoS is determined by an ample range of distinct and interdependent PPC metrics.
Each of these metrics is highly variable and can depend on a myriad of factors, many of which are outside of your control.
For a more actionable understanding of what is driving (and impeding) your ACoS on Amazon, focus on CTR, CPC, and CVR.
What are the factors that influence these three metrics? Which are under your control and which are forces that are out of your hands?
In the following section, we will break down the internal and external factors that influence these three key metrics that govern your ACoS.
- By the way: Sellics has in-built historical data tracking and changelog, which helps you to track and monitor your campaign performance for any given period as well as understand which optimization efforts impacted your performance. An intuitive chart gives you a clear overview of the performance trends and changes.
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).
If someone clicks on your ad, the shopper deems your product relevant enough amongst the competition to consider buying it. If someone does not click your ad, your product may not be compelling enough versus the competition.
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 at the same rate.
An increase in CTR will, however, increase your overall volume in terms of sales and profit (or loss, if your current ACoS is above your break-even ACoS).
Increasing your CTR is a good thing if your current ACoS is below your break-even ACoS.
A change in CTR can also impact your ACoS if it causes a change in CVR.
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 increase.
So if you don’t want to hurt your Advertising Cost of Sale, you should only increase your CTR with qualified traffic (same or higher CVR traffic).
False or exaggerated claims in your product title attract non-converting clicks.
Finally, let’s look at what factors influence CTR. Below, we break it down by internal and external factors to identify what is within your control.
Number of reviews
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”.
This ad is likely to have a low CTR for the search term “water bottle”.
CPC influences ACoS because it is the price for the clicks advertisers generate in their campaigns. If CPC goes up, ad spend goes up. If CPC goes down, ad spend goes down.
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 why might CPC change? Again, we break it down as internal and external factors to assess what is within your control:
|Change in Bid Strategy to Dynamic – Up & Down or Fixed|
|Change in Placement Adjustments|
|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.|
|Even if you don’t touch your bids, the 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.|
|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.|
You want to find the optimal CPC for your targets. This does not 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.
- Did You Know? Sellics has an in-built bid history, allowing you to immediately see the positive or negative effect of your bid changes on your ACoS, impressions, CTR, and conversion rate.
Conversion Rate (CVR)
CVR influences ACoS because, ultimately, the purpose of advertising is to drive conversion or sales. CVR has an inverse relationship to ACoS. If CVR goes up, ACoS goes down. If CVR goes down, ACoS goes up.
CVR is calculated as Orders per Clicks and is more dependent on your Product Detail Page than any other PPC metric.
The assumption is that by clicking the ad, the shopper confirms that your ad is relevant to the keyword they searched.
After that, your Product Detail Page needs to convince the shopper to buy your product. Your goal should always be to grow CVR.
Which factors influence CVR?
We can break this down by internal and external factors as well:
|All content — Title, bullet points, description, all images and videos, A+ or enhanced brand content|
|Keywords that generated a click and led a shopper to your PDP — Still relevant to your product?|
|Competition advertising on your PDP|
|Competition price-promoting on a like item|
In the Nestle Pure Life example (see above), let’s assume a shopper does, in fact, click the ad when searching for “water bottle”. It is now the PDPs job to convince the shopper to purchase the product.
If the shopper does not purchase after clicking the ad, Nestle’s CVR would be negatively impacted for that keyword, driving up ACoS.
- To Recap:
- Click-Through-Rate will only impact your ACoS on Amazon if your conversion rate changes.
- To avoid a higher ACoS, only increase CTR with quality traffic that is likely to convert
- Cost Per Click and ad spend have a proportional relationship. If CPC increases, ad spend increases (and vice versa).
- You can influence CPC by changing your bid value or bidding strategy, but often it’s out of your control. Keep an eye on CPC in case you need to take action.
- Conversion Rate and ACoS have an inversely proportional relationship. If CVR increases, ACoS decreases, and vice versa.
- Bring your PDP into the best shape possible to maximize your CVR.
Now that you have an overview of how PPC metrics ultimately impact ACoS and what could drive it up, let’s answer the second question.
My Acos Is Too High – How Do I Lower It?
Based on the internal factors that can influence CTR, CPC, and CVR, if your ACoS is too high, the first thing you should do is ensure your product detail pages are optimized to showcase the product in the best light.
This means helpful titles, bullet points, and descriptions that contain strong keywords. Photos and videos visualize the product’s benefits. Reviews and ratings reflect positive customer experiences and advocate in favor of your product.
Optimized content on the PDP can improve CTR and CVR, which could increase sales and reduce ACoS.
Once the content is optimized, it does not require frequent, ongoing maintenance.
Your PPC campaign management DOES require frequent and ongoing maintenance. What this entails:
- Tailor your keywords and targets
- to focus your ad spend towards audiences that are most relevant to your product and, therefore, more likely to purchase your product.
- Leverage negative keywords
- to prevent wasting ad spend on audiences that are irrelevant to your product. In the Nestle bottled water example, the campaign would benefit from adding “water bottle” to the negative keyword list.
- your keyword or target bids by CVR:
- Increase your bid for medium to high CVR keywords. It may seem counterintuitive to increase ad spend when the goal is to reduce ACoS.
- If you identify high CVR keywords, however, increasing their bids means winning more auctions, which leads to more impressions, clicks, and orders. The idea is that additional orders will grow ad revenue and offset the increase in ad spend.
- Decrease your bid on low CVR keywords. By reducing bids and, therefore, CPCs, you spend less money on keywords that deliver a lower return on ad spend.
- Be careful not to get carried away with reducing bids to lower your ACoS. Reducing bids means winning fewer auctions, which leads to fewer impressions, clicks, and orders.
- Stop bidding on 0 CVR keywords and pause/archive them. If people click on them, these keywords could be driving up costs while delivering no sales.
- Stop spending on them!
- Increase your bid for medium to high CVR keywords. It may seem counterintuitive to increase ad spend when the goal is to reduce ACoS.
- Dynamic Bids – Down Only
- allows Amazon to decrease your bids down to 0% (based on the likelihood of conversion) to increase the cost-efficiency of your campaign.
By using this strategy, Amazon will assess if a shopper who just conducted a search is likely to convert and change your bid in real-time based on the assessment.
- Placement adjustments
- allow Amazon to change your bid in real-time based on where the ad will appear on Amazon.
If you learn from the placement reports that Top of Search or product page placements tends to warrant you a significantly higher CVR or better ACoS, you can use placement adjustments to indicate you are willing to increase your bid by a percentage (up to 900%) to be placed on these positions.
You may need to recalculate the right bid for your campaigns to account for Amazon potentially increasing your bids.
Important: Continue to refine campaigns through targeting and bid optimizations. Optimizing bids can be lucrative and is necessary to ensure your advertising is efficiently driving your business.
Make sure you wait at least 2 weeks between bid optimizations to gather enough data to assess their performance. Note that bid optimizations at the keyword level can only be made in manual campaigns.
Learn more about how you can use Sellics to automate your keyword bids.
You’ve learned what ACoS is and how you can use it to improve your Amazon Advertising efficiency. Don’t stop here! Start identifying ad campaigns that are bleeding money.
At the end of the day, Amazon PPC campaign metrics are a series of math equations. As you investigate what caused your 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.
Once you have a good understanding of your PPC performance, save yourself some time and use an integrated tool like Sellics to automate your keyword bids.
Forget spreadsheets: Use our Smart Filters to quickly sort through high and low performing keywords. Then change your campaign status, keywords, bids, and budgets directly in the software.
You can even turn off your ads for specific time slots where you know sales probabilities are low.
Throughout all of this, your net profit for all your Amazon products and ads appears in a single, elegant profit dashboard — your Amazon fees, taxes, Cost of Goods, shipping, and PPC costs automatically deducted.
Understand your Amazon business. Distribute your ad budget with confidence — and maximize your profit.
Sign up now for a 14-day free trial.