Amazon is dominating the ecommerce market. Choosing to advertise on Amazon allows you to get your products in front of customers when they are ready to buy—but are you doing it right? If you want your Amazon PPC campaign to be as successful as possible, you’ll need to know everything there is to know about ACoS.
Whether you’re new to the Amazon advertising scene or you’re a seasoned PPC expert, our guide on ACoS will transform your understanding of how to achieve a successful ad campaign on Amazon.
ACoS stands for Advertising Cost of Sales. Simply put, your ACoS is the fraction of each dollar in revenue you make that ends up going toward the cost of your ad campaign. ACoS is what Amazon uses to measure the success of PPC campaigns.
So how do you know what your ACoS is? You can calculate ACoS using a simple formula:
ACoS = Total Ad Spend / Total Sales
For example, let’s say you spend $50 to advertise your products. If you then make $120 in sales, your ACoS would be 50 / 120, which is approximately 0.42. This means that for every dollar that you make, you’re spending 42 cents on your ad campaign (we’re not talking about production costs here—only Ad Spend).
Without monitoring what your ACoS is, you have no way of knowing how successful (or unsuccessful) your ad campaigns are. The effectiveness of your advertising strategies will inform any adjustments that need to be made to optimize those strategies. On the list of metrics that you should keep track of within your business, ACoS is at the very top.
ACoS provides the answer to the question of whether or not you’re making a profit when advertising your products. Knowing how to calculate ACoS is the first step to determining what your break-even point is and setting up a target ACoS to strive for—among the other steps you need to take to have a well-organized and successful PPC campaign.
Let’s start by figuring out what your break-even ACoS is. This is the point where you incur no losses but gain no profits either. In other words, your break-even ACoS occurs when your advertising cost is the same as your profit margin.
Why’s it important to know what your break-even ACoS is? The answer to that is simple—it captures the boundary between profit and loss. If you don’t know where it is, you won’t know when you’ve crossed it and are losing money.
So how do you calculate your break-even ACoS? Let’s walk through an example.
Say you make $50 in sales. You spend $20 in manufacturing costs and another $5 in additional expenses (transport costs, taxes, fees from Amazon, and so on).
The profit that you’re making prior to any ad spending is $50 (your gross revenue) subtracted by $25 in expenses, which leaves you with $25.
The point at which you incur no losses but gain no profits is when you spend the entirety of that $25 in pre-ad profit on your ad campaign. Using our ACoS formula from above, you can now calculate your break-even ACoS, which is $25 divided by $50. You can then multiply by a hundred to give a percentage of 50%.
What does a break-even ACoS of 50% actually mean? It tells you where the tipping point is—if your ACoS is below 50%, you’ll be profitable. If your ACoS is above 50%, you’ll incur losses.
Knowing how to calculate your break-even ACoS will help you determine your target ACoS.
Unless you intend to make zero profit, a target profit margin, and a target ACoS (TACoS) need to be clearly defined.
Calculating your target profit margin is simple. Keep in mind that to remain profitable, you can’t go above your break-even ACoS. So your break-even ACoS tells you what your profit margin is—as long as you don’t exceed it, you’ll be profitable.
Your profit margin (remember: it’s the same as your break-even ACoS) can be split into two components: your target profit margin and your target ACoS.
If we go back to our example where your break-even ACoS was 50%, you can simply choose to keep 25% as your target profit margin and to spend 25% on advertising (that would be your TACoS).
In other words, your target profit margin is your true profit. This is how much you want to have leftover for yourself after all the costs and fees for your products (including advertising) have been deducted. TACoS tells you how much you can spend on advertising without giving up too much of your desired profit.
You might think that the lower your ACoS, the better. While it’s true that a lower ACoS leads to higher profitability, spending less on advertisements lowers the visibility of your product. Depending on what your product may be, low visibility might not be a concern. But if you’re looking to dominate a niche or promote brand awareness, a low ACoS won’t be productive.
The key is to find a balance between too little exposure and profit margins that are too narrow.
Here are a few quick advertising strategies that’ll help optimize your ACoS:
Are you looking for an easier way to drive more value out of your Amazon advertising? Do you want to better understand your ACoS?
RevenueWize is the ultimate data visualization and optimization platform for Amazon sellers. See how your campaigns are performing, identify new opportunities, and optimize your campaigns to achieve even higher profit margins.
Get in touch with a member of our team today to see how RevenueWize can improve the efficiency of your Amazon advertising.