Did you know that you can’t always tell based upon ACoS alone whether you’re actually making a profit or a loss with your Amazon Sponsored Products? In this article we’ll explain why that is and how you can correctly read ACoS as well as the cost of sales of keywords, ad groups and campaigns.
If you’re new to Amazon Sponsored Products, then you might want to fill yourself in on all the essentials by checking out our Complete Guide to Amazon PPC.
The Core of Amazon Sponsored Products is Break-Even ACoS
Break-Even ACoS is one of the most important figures for Amazon Sponsored Products campaigns that every seller should know about. Based upon this figure, you can determine whether you’re making a loss or a profit with an Amazon ad campaign. If the ACoS is higher than your break-even ACoS, then you’re making a loss; And if it’s below the break-even ACoS, then you are making a profit.
There is one small catch here, however: Break-even ACoS is always calculated at the level of a single product. This is because break-even ACoS is based upon a product-specific margin. Unfortunately, Amazon doesn’t provide ACoS per product, but only per campaign or ad group respectively. Now, if there is more than one product in the same ad group, you could be making a loss on running Sponsored Products ads on the one product, but making a profit on the other.
How can that be? Because the ACoS is given on too broad a level, and averaged. If each product in the Amazon ad campaign or ad group has a vastly different break-even ACoS, it could be that the average ACoS of the entire ad group is above the break-even ACoS of some products, but under that of other products.
In this case, the question is whether your Amazon Sponsored Products ad group on the whole is profitable. That’s why we’ll cover three different examples in this article about how you should interpret Amazon ACoS and when it’s significant.
Example 1: ACoS (Cost of Sale) is Not Significant When Products Within the Same Ad Group Have Very Different Break-Even ACoS
Let’s look at one ad group for this example:
If there are products in one ad group that have very different break-even ACoS, then the problem arises of determining whether profit is being made: Because looking at the keyword ACoS alone won’t determine this. With a certain ACoS for Keyword X, which lies between the break-even ACoS of Product A and B, it could well be, that profit is made as well as a loss at the same. How much profit is made overall depends on how ad spend and sales are distributed among individual products – that is, how much profit or loss, respectively, one makes with each individual product.
This can be seen by comparing the results of the following two scenarios for Amazon Sponsored Products campaigns in Example 1 below:
In this example, the ACoS of Keyword X with 15% is exactly in the middle of the break-even ACoS of Product A and B (10% and 20%). The difference between scenarios I and II lies only in how ad spend and sales of Product A and B are distributed. Even though the ACoS in both scenarios is 15%, there’s profit made in scenario I and a loss in scenario II. The same situation can be seen, for example, with an ACoS of 12% or 17%.
If the products in an ad group are very different from one another, therefore, then you can’t estimate whether a keyword ACoS fulfills profit requirements or not. Furthermore, the same logic also applies to the levels of the entire ad group or campaign in an Amazon PPC account. It’s not easy to see right away from the ACoS and cost of sale for an ad group or campaign, respectively, whether it’s profitable or not on the whole.
The key to knowing when an Amazon ad campaign is profitable: Group by profit margin
The key to knowing if a keyword, an ad group or an Amazon ad campaign is profitable is to know how much profit you’re targeting with your own individual products and whether this corresponds overall to the targeted margin. This can only be understood with much difficulty, if at all, in the Seller Central interface. In order to look up the figures of individual products and keywords for your Amazon Sponsored Products, you have to export the campaign reports from Seller Central and work with them in a program like Excel to evaluate them.
That’s why – in order to simplify evaluation and optimization – it’s recommended to put together only products with the same or very similar margins and break-even ACoS into the same ad groups (and campaigns, respectively). This way, ACoS values are much more significant and allow one to estimate whether the targeted profit was reached.
This is clear when you take a look at the second example.
Example 2: ACoS (Cost of sale) is Significant When Products Within an Amazon Sponsored Products Ad Group Have Comparable Break-Even ACoS
The following is true for the ad group in this example:
In comparison to example 1, both Product A and B have the same break-even ACoS this time. Otherwise, the distribution of ad spend and revenue generated from ads is the same in comparison to example 1. One can see how this affects profit in the following calculation.
Results in example 2: ACoS is significant for profitability of Amazon Sponsored Products
Because both products have the same break-even ACoS (15%) this time, you can estimate based upon the ACoS of keyword X whether you’re making a profit or loss. In both scenario I and II in this example as well, different profits are targeted for the different products. When summed up, however, the profits equate to zero – because the exact break-even point was reached and then replaced by the break-even ACoS.
In contrast, if the ACoS were to lie over the break-even ACoS, then you would make a loss and if it were to lie under, then you would make a profit. Here, the ACoS of keyword X can be directly compared to the break-even ACoS in order to estimate whether you’re making a profit or loss.
Example 3: Ad Group Is Definitely Profitable When ACoS Is Lower Than the Smallest Break-Even ACoS
Is a keyword absolutely profitable if the ACoS or cost of sales, respectively, is low enough? (That is, independent of whether the break-even ACoS of the Amazon Sponsored Products are similar or different.) We’ll take a look at this question in this last example.
In this last example, we have the following data for an ad group:
In this example, Product A and B again – as in Example 1 – have different break-even ACoS. This time, the current ACoS of keyword X (9%) lies under the break-even ACoS of both Product A as well as Product B. In the following table, one can see how this affects profit.
Results in Example 3: ACoS is significant for profitability of Amazon Sponsored Products
In both scenario I and II, this time, profit is made because the ACoS and the cost of sales, respectively, of keyword X lies under the break-even ACoS (10% and 20%) in both scenarios. In this case, you can be certain that you will make a profit overall (at the same time, however, one can see that although the ACoS of keyword X is 9% in both scenarios, profit is still distributed differently.)
Summary: How You Should Read the ACoS of Your Amazon Sponsored Products Campaigns
The right estimate for an ACoS isn’t always simple from situation to situation, as we’ve just shown in this article. That’s why we’ve made a short summary of how you can interpret the ACoS of a keyword / ad group / campaign in order to find out whether you’re making a profit or a loss (see the table below).
In situations 2 and 3 one can see from the ACoS of keywords, ad groups and campaigns, respectively, whether you’re making a profit or a loss. In situation 1 (if the break-even ACoS of products in an ad group are different), then that rule of thumb won’t work. In order to simplify the analysis of Amazon sponsored products campaigns and to estimate profitability based upon ACoS, it’s therefore recommended to put only the products with similar margins and break-even ACoS into the same ad group (or campaign, respectively).