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Amazon ACoS: What is Advertising Cost of Sale and How to Improve It

Amazon ACoS (Advertising Cost of Sale) 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.

 

What is Amazon ACoS? How to Calculate It?

Amazon ACoS (Advertising Cost of Sale) measures the efficiency of your advertising campaign. It is the ratio of  ad spend to ad revenue (in %). You can calculate ACoS using this formula:

 

ACoS = Ad Spend ÷ Ad Revenue * 100

 

In short, ACoS shows how much of every dollar that was earned with advertising was spent on the ad campaign. E.g.: a campaign has generated $254 of advertising sales. The ads during this campaign cost $63. ACoS = 63 / 254 * 100 = 25%. I.e. for every dollar made, 25 cent have been spent.

Amazon ACoS vs. Amazon ROAS

Amazon ACoS shows how much you spend on ads to gain a dollar from attributed sales. 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:

roas amazon vs acos formula

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:

Average Amazon ACoS Across Verticals

“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: How To Calculate Your Profit Margin

This is what the cost structure of a typical product might look like:

Cost Structure and Profit Margin of an Amazon Private Label Product
Cost Structure and Profit Margin of an Amazon Private Label Product

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.

To calculate your profit margin, divide the profit per unit by the product price, and multiply the result by 100.

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.

Break-even Acos in the Cost Structure and Profit Margin of an Amazon Private Label Product

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

Tip: Our Amazon PPC tool automatically calculates your break-even ACoS and pinpoints any unprofitable campaigns, ad groups, or keywords that are losing you money. Feel free to sign up for a 14-day free trial and see how it works.

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:

target profit margin and target Acos in the Cost Structure and Profit Margin of an Amazon Private Label Product

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.
  • target acos amazon ppc

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:

  1. 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.
  2. 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.
  3. 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.

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.

There is a trade-off between ACoS and impressions, clicks, sales and profit per unit

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.

ACos Formula is ACoS equals ad spend divided by ad revenue

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):

ACoS equals Clicks x Cost Per Click divided by Orders x Average Selling Price

You can extend this formula even further to reveal two more key PPC metrics that govern your Amazon ACoS: CTR (Click-Through-Rate) and CVR (Conversion Rate).

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 rate, CVR):

ACoS equals Impressions x Click-Through Rate CTR x Cost Per Click CPC divided by Clicks x Conversion Rate CVR x Average Selling Price ASP

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”.

amazon ppc targeting strategy

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 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 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)
Star ratingPrice
Main imageNew competitors
Product title
Prime eligibility
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 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 one cent

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 bidsIf 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 adjustmentsSeasonality 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

Amazon ACoS driver #3: Conversion Rate (CVR)

To put it simple: If CVR goes up, ACoS Amazon goes down (and vice versa):

Inverse Relationship between conversion rate cvr and acos

CVR is calculated as Orders per Clicks and is more dependent on your PDP (Product Detail Page) than any other PPC metric – by clicking the ad, shoppers confirm that your ad is relevant to their search query. After that, your PDP needs to convince the shopper to buy your product. Your goal should always be to grow CVR. We can break this down by internal / external factors as well:

INTERNAL (easy to influence)EXTERNAL (not so easy to influence)
All content – Title, bullet points, description, all images and videos, A+ or enhanced brand contentCompetition advertising on your PDP (product detail page)
Keywords that generated a click and led a shopper to your PDP – Still relevant to your product?Competition price-promoting on a like item
Star rating
Reviews

In the “Nestle Pure Life Purified Water” example above, let’s assume a shopper does 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 Amazon ACoS.

Here’s how to optimize Amazon CVR:

  • Optimize your product page (images, copy etc.)
  • Increase bids on high CVR keywords to continue to drive CVR for the total campaign
  • Reduce bids on low CVR keywords to direct funds away from low performance keywords
  • Add zero CVR keywords as negative keywords
  • ‘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.

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.

New: Try Sellics Advertising to grow your Amazon Advertising with automation tools, world-class resources and expert support.

Zi Lin Liang leads Strategic Amazon Accounts for Sellics


Co-author: Zi Lin Liang
This post was co-authored by Zi Lin Liang. Zi Lin Liang leads Strategic Accounts for Sellics, helping 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.
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