When it comes to Amazon PPC optimization, many sellers focus on optimizing for a lower Amazon ACoS for their campaign, following the assumption that less money spent on advertising= more overall profit.
However, optimizing for a low ACoS is not always the best tactic for your campaign, if your goal is to maximize the total net profit for your product.
This is because your ACoS does not give you any insight into your total profit after ad spend, and you cannot determine if you should be spending more on PPC to boost your ad visibility and corresponding higher sales potential.
If you’re running a profitable campaign, a higher ACoS can even mean higher profit.
We’ve created an example below that examines the effect of gradual CPC bid increases on a product’s total profit potential on Amazon.
Scenario: A product on Amazon is sold for $15, and the product margin before PPC is $5. This corresponds to a product margin of 33%, which is the break-even ACoS.
By increasing the CPC bid, the ad is then displayed higher in Amazon’s search results page. The impressions remain the same, however the click through rate (CTR) improves, as the ad is displayed higher in search results. Thus, increasing the CPC bid will generate more clicks for the product ad.
To simplify calculations, it is assumed that these clicks will generate sales with a conversion rate of 10%. In addition, it is also assumed that one purchase order equals to one sale.
Ad Performance Results:
Result 1: 23% ACoS
Ad rank 3: With a CPC of $0.35, 10 clicks and 1 sale is generated. The ACoS as an indicator of profitability works out to be 23% ($3.50 ad spend/ $15 total sales.)
If your goal is to achieve a low ACoS, this CPC bid offers the best profit margin per unit. However, as a result of the low ad rank, it also means your product will receive substantially less traffic, and consequently your total profit will be capped due to the low sales volume.
Result 2: 27% ACoS
Ad rank 2: If the CPC is increased from $0.35 to $0.40, then the profit margin (before ad spend) increases from $5 to $20 (increase of $15 per unit).
Your PPC costs have also risen from $3.50 to $16 (increase of $12.50), because the CPC and the CTR have both increased. However, the net profit per unit increased from $1.50 to $4.
The decisive factor here is that your total net profit boosted by the additional traffic (generated via your improved ad ranking and corresponding sales) is greater than the increased advertising costs you’ve incurred.
This illustrates that the increase in CPC has also increased the net profit per unit (with a relatively low ACoS of 27%), which means the overall profit increases. This CPC offers the highest overall profit.
Result 3: 33% ACoS
Ad rank 1: If the CPC is further increased from 0.40 to 0.50, the profit margin before ad spend will increase from $20 to $25, as more clicks and purchase orders will be achieved. However as a result of this increase, the new advertising costs incurred (increase of $9), will be greater than the profit margin before ad spend (increase of $5).
This means that the advertising costs incurred will be greater than your overall net profit. With a CPC of 0.50, the advertising costs are now so high that the profit per unit and total net profit is $0 (break-even). This is also evident from the fact that your ACoS is now at 33%, which is your break-even ACoS.
This CPC bid will generate you the most sales, however at this point you will break-even for the product, and your total net profit is $0.
As demonstrated in our example, as long as the total profit generated by the increase in CPC is greater than your total ad spend, it is worthwhile to test CPC bid increases in order to maximize your total profit potential.
If your goal is to maximize the total profit for a product, the key metric you should focus on is your total profit (after ad spend) across all units sold (margin per item x total number of sales).
This will allow you to determine if you can afford to spend more on PPC, in order to boost your ad rank and sales volume to help you achieve a higher overall profit. This cannot be viewed in the Sponsored Products Campaign Manager, and you will need to manually calculate this yourself using the below formula:
This is also automated for you in our PPC Manager. Your total net profit is automatically displayed for all your campaigns and ad groups. We automatically deduct all your costs (Amazon fees, FBA fees, Cost of Goods, shipping, and PPC costs), so you can always keep an eye on your running total profit when testing CPC bid changes.