You’ve bitten the bullet and decided to start advertising on Amazon. You’ve read up on optimal PPC campaign structure and completed your keyword research. Your Amazon ads are up and running. That’s great… but there might be a catch.
Do you know your ACoS? Is it low enough to earn decent profits with your campaign — or are you bleeding money?
Whether you’re wondering, “What is ACos?” or want to learn more about your Amazon ACoS, you’re in the right place. In this article, we will answer the following main questions:
- What Does ACoS Mean?
- How Do I Calculate ACoS?
- What Is a Good ACoS for Amazon Ads?
- How Do I Find My Target ACoS?
- How Do I Lower My ACoS?
- Why Is My ACoS Too High?
What Does ACoS Mean?
The ACoS (meaning: Advertising Cost of Sale) is a key metric used to measure performance of your Amazon PPC campaigns. By definition, ACoS is the ratio of ad spend to ad revenue (expressed as a percentage) and is calculated with the following formula:
ACoS = Ad Spend / Ad Revenue
In short, the Advertising Cost of Sale reveals the efficiency of your campaigns: For every dollar you earn with advertising, ACoS shows how much of it was spent on advertising.
How to Calculate ACoS
- For example:
- 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%
- In other words, you’re spending a quarter on ads to make one dollar of sales with that ad campaign.
What Is a Good ACoS for Amazon Ads?
What should your ACoS be? How to use Amazon 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:
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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 ACoS 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:
- Tip: The Sellics PPC Manager automatically calculates your break-even ACoS. This Amazon Advertising feature in our tool immediately pinpoints any unprofitable campaigns, ad groups, or keywords that are losing you money.
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.
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 better: 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 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.
- 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!
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 ACoS 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, 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
- *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 at varying levels of granularity, from account level down to the individual keyword or target.
Why is my ACoS too high? How to calculate ACoS (and find 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. ACoS 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).
- Clicks are defined as how often shoppers see an ad (Impressions) and how often they click on it when they do (CTR).
- Orders 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, 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.
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 ACoS, 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.
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:
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.
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:
In the Nestle Pure Life example, 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.
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.
- Optimize 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.
It’s important to 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.
Click here to learn more about how you can use Sellics to automate your keyword bids.
At the end of the day, Amazon PPC campaign metrics are a series of math equations. When you investigate what caused your ACoS to go up, 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.
If you’re a seller or vendor interested in using Sellics to manage your Amazon Advertising performance, you can signup for a 14-day free trial below and try all our features for free.
Maximize your Amazon Advertising success with Sellics
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- See Your Bid History: Immediately see the positive or negative effect of your bid changes on your ACoS, impressions, CTR, and conversion rate.
Co-author: Zi Lin Liang
This post was co-authored by Zi Lin Liang. Zi Lin Liang is Amazon Strategy Consultant at Sellics and helps brands define and execute their strategic game plan on Amazon using Sellics’ all-in-one software solution. She previously held sales and marketing roles in the consumer goods industry, including managing a $100M vendor business on Amazon.