ACoS – What is it? How do I Calculate it?
So you did your homework, you began advertising on Amazon, and now your ads are up and running. That’s awesome…but there might be a catch.
Do you know your true ACoS? Do you even know how to calculate it? When is an ACoS a good ACoS or when is it a bad ACoS?
Let’s start with the easy part…
ACoS stands for Advertising Cost of Sales. It’s not the most common PPC jargon so don’t be surprised if you haven’t come across it.
Your ACoS percentage is how much you spend on advertising per dollar of revenue you make through PPC.
Here’s how to calculate your ACoS:
ACoS = Total Ads Spend ÷ Total Sales
Let’s break it down
- Your product sells for $50
- Your advertising campaign costs $100
- You sell 20 products with total revenue of $1000
- Your ACoS appears as 10%
Total Dollars Spent on Ads: $100
Total Sales Made Through Ads: $1000
100 divided by 1000 = 10%
So… if you spent $100 on advertising and it resulted in a single sale of $50, your Advertising Cost of Sales would be 10%
In other words, you’re spending only 10% on ads to make one dollar of sales with that ad campaign.
Is that good or bad?
I’ll talk about that in a short while.
Here’s where things start to get complicated…
#1 ACoS alone doesn’t guarantee the success of your Amazon ad campaigns.
#2 To find out whether a certain ACoS is good or bad, you’ll need to consider the entire cost structure of your product and find your breakeven ACoS – it is the point where your advertising cost is equal to your profit margin.
The reason why ACoS is so important is because it answers the question “At what ACoS do you make zero profit and zero loss?”
#3 In order to calculate your breakeven ACoS you need to find your profit margin. The profit margin is the amount you make after all costs are deducted from the selling price. Costs can be related to production, shipping, taxes, employee salaries, storage costs, Amazon fees, etc.
Are you still with me?
Great, now let’s continue.
Here’s how to calculate your profit margin:
Profit Margin = Gross Revenue – All Expenses
Let’s break it down:
- Your product sells for $50
- Your manufacturing costs $5
- You spend an additional $10 on packaging, shipping, taxes, fees, etc. You’re left with a profit margin of $35.
So far you have now understood ACoS and Breakeven ACoS.
Looking at the example above, your breakeven ACoS is 70%.
35 divided by 50 x 100 = 70%
And you have $35 as your pre-ad profit per sale.
In other words, if you spent all those $35 on getting paid traffic in order to make more sales, then you would have 70% of ACoS.
If you’re doing lower than 70%, you’ll be making profits. If you’re doing over 70%, you won’t be making profits.
Your ACoS sure does look high – but no need to panic! This is perfectly normal.
Things are now getting a lot more interesting so please give me your undivided attention!
However, you shouldn’t solely rely on your breakeven ACoS. Your goal isn’t about making zero profit with Amazon ads, unless you’re all into boosting your organic rankings by making as many sales as possible.
You need to be clear which net profit margin you would like to get after ad spend in order to determine your target ACoS.
So what should be your target ACoS?
There’s a bunch of different factors to take into account when determining your target ACoS, and that we would talk about in another email.
In general, a lower ACoS is more desirable than a higher ACoS. That means you’re spending fewer dollars to generate the same amount of revenue.
The higher your ACoS, the higher your ratio of ad cost to sales revenue. The lower your ACoS, the lower your ratio of ad cost to sales revenue. Ideally, you want a sales revenue figure as high as possible, with as low an ACoS as possible.
In a nutshell:
- The lower your ACoS, the higher your profits. This is true if you’re focus is on your profits.
- Increase your ACoS if you want to improve your product’s visibility or dominate a specific niche.
- Spend time optimizing and tweaking your ads often to stay on top of your key metrics.
Now before I end, let me lay some hard truth you on here: There’s no real definition of a good or bad ACoS because it all depends on your strategy and revenue.
Stay tuned for more ACoS content!
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