The ACoS (Advertising Cost of Sale) is a key metric used to measure performance of your Amazon PPC campaigns. ACoS indicates the ratio of ad spend to targeted sales and is calculated like this:
ACoS = ad spend ÷ sales
Here’s an example:
If a campaign has generated $254 in advertising sales with an expenditure of $63 over a certain period of time, then the ACoS = 63 / 254 = 25%. In other words, you’re spending a quarter on ads to make one dollar of sales with that ad campaign.
Use Amazon ACoS to measure profitability
Many sellers use ACoS to determine the success of their ad campaigns. The difficulty in this, however, is defining the right target value for an ACoS – because the ACoS alone doesn’t say anything about how profitable a campaign really is. In order to determine whether a certain ACoS is good or bad, you’ll need to take the entire cost structure of your product into account.
Determine your break-even ACoS
As a seller, you won’t incur a loss on Sponsored Product campaigns as long as you spend less than your profit margin on advertisement. The profit margin is the amount you make after all costs (that is, the cost of production and shipping as well as general costs such as employee salaries, storage costs, etc.) and fees (Amazon fees & possibly FBA fees) are subtracted from the selling price.
This is what the cost structure of a private label product might look like:
In the example above, the net profit margin is 22%. As long as you don’t spend more than 22% on ads to promote this product, you won’t lose money. In regard to ACoS, that means that you shouldn’t exceed an ACoS of 22% in order to remain profitable. This is the break-even ACoS.
Tip: Your break-even ACoS is calculated automatically in our PPC Manager. Immediately pinpoint the campaigns, ad groups, or keywords that are unprofitable and losing you money.
Break-even ACoS v.s. Target ACoS
Break-even ACoS isn’t necessarily the number you want to use for orientation as a seller on Amazon, because the goal isn’t to make zero profit with an ad campaign (except if you want to boost your organic rankings by generating as many sales as possible, see more below). You should therefore clearly define which net profit margin you’d like to have after ad spend in order to determine its target ACoS.
To make this easier, we’ve made another example below for you below.
How to determine Target ACoS for your ad campaign:
In this example, you have a margin of 22% before subtracting ad spend, so that your break-even ACoS is exactly 22%. If you’d like to make a profit margin of at least 10% after subtracting advertisement costs, then your campaigns should reach a maximum of 12% for a target ACoS. If you’re able to optimize your campaigns down to a target ACoS of 12% or less, then you’re making the profit margin you’ve targeted.
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.
Amazon ACoS Strategy: Why is ACoS increasing and what can I do about it?
In the first part of this article we’ve covered what a good ACoS is and how to define it in terms of break-even ACoS and target ACoS.
But you probably have another question: How do I actually get a good ACoS?
Therefore, we will now take a look at how you can improve your ACoS.
Overview of the most important Amazon Sponsored Products KPIs
To better understand the levers that impact your campaign performance, let’s quickly run through the life cycle of PPC: Bid → Impression → Click → Order. You can look at these metrics at varying levels of granularity, from account level all the way down to the individual keyword or target.
How is Amazon ACoS calculated and what is influencing it?
A common question we hear from clients is, “Why is ACoS going up? How can I reduce ACoS?”
Let’s take a second to acknowledge that depending on your category, time of year, and your products, ACoS going up 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.
Do not chase reducing ACoS in a vacuum. PPC metrics are interdependent on one another. Chasing ACoS reduction in a vacuum tends to have the inadvertent consequence of reducing ad revenue and/or ad profit. Evaluate ACoS against your advertising goals to ensure it is assessed from the context of your business needs.
Now with the 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 looking again at how ACoS is calculated:
ACoS = Ad Spend / Ad Revenue
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. We can extend the calculation to ACoS to include the campaign metrics in the life cycle of PPC advertising to identify what’s actionable.
ACoS = [ (Impressions x Click-Through Rate) x Cost Per Click ] / [ (Clicks x Conversion Rate) * Average Selling Price ]
To understand changes to ACoS, focus on CTR, CPC, and CVR. How can each of these metrics be influenced? We will be breaking down factors that can influence these three metrics by internal vs. external – as in what is within your control internally and what may not be within your control due to outside influences.
Click-Through Rate (CTR) is an indicator of how relevant your advertisement is to the search query relative to the other products appearing on the search results page. If someone clicks on your ad, your product is deemed relevant amongst the competition to be considered for purchase. 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 CTR change 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). So increasing your CTR can be 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. That means that your ad spend will be increased 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). E.g. don’t make claims in your product title that your product cannot uphold to.
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 likely not looking for “Nestle Pure Life Purified Water.” This ad will probably have a low CTR for the search term, “water bottle.”
Cost-Per-Click (CPC) influences ACoS because it is the price for the clicks advertisers generate in their campaigns. If CPCs go up, ad spend goes up. If CPCs go down, ad spend goes down. CPC is not the same as a bid. A bid is what advertisers tell the auction they are willing to pay. In a real-time auction, the price is determined by the second price. As in, the winner of the auction pays what the second highest bidder 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 CPCs 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. Yet, for many categories, Top of Search may deliver the highest conversion rate, leading to more sales, therefore lowering ACoS.
Conversion Rate (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 / Clicks) and is dependent on your Product Detail Page more so than any other PPC metric.
The assumption is that by clicking the ad, the shopper is confirming your ad is relevant to the keyword they searched. Then your Product Detail Page needs to convince the shopper to buy your product. Your goal should always be to grow CVR.
So what factors influence CVR? We can break this down by internal and external:
In the Nestle Pure Life example, let’s assume a shopper does in fact click the ad when searching for “water bottle.” Now it becomes the job of the PDP to convince that shopper that they should 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 reduce it?
Based on the internal factors that can influence CTR, CPC, and CVR, 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 title, 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 content is optimized, it does not require frequent, ongoing maintenance.
What will require frequent and ongoing maintenance is your PPC campaign management. 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 not relevant 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:
a) Increase your bid for medium to high CVR keywords. This may seem counterintuitive to increase ad spend when the goal is to reduce ACoS. However, if you identify high CVR keywords, increasing their bids means winning more auctions, therefore leading to more impressions, clicks, and orders. The idea is that additional orders will grow ad revenue and offset the increase in ad spend.
b) 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. The caution here is that you can go too far in reducing bids to reduce ACoS. Reducing bids means winning fewer auctions, therefore leading to fewer impressions, clicks, and orders.
c) Stop bidding altogether on 0 CVR keywords and pause/archive them. If people click on them, these keywords could be driving up cost while delivering no sales. Stop spending on them!
- Dynamic Bids – Down only is designed to allow Amazon to decrease your bids based on likelihood of conversion down to 0% to increase the cost efficiency of your campaign. By using this strategy, Amazon will change your bid in real-time based on the assessment as to whether the shopper who just conducted a search is likely to convert.
- Placement adjustments allow Amazon to change your bid in real time based on where the ad will appear on Amazon.com. If you learn from the placement reports that Top of Search or product page placements tend 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 appear on these placements. 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. Learn more about how you can use Sellics to automate your keyword bids.
At the end of the day, 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.