Amazon Advertising: What is ACoS and How to Calculate it?
Let’s say you began doing Amazon advertising and your ads are up and running by now. That is awesome, but there might be a catch.
You might be getting the wrong calculations of your true Advertising Cost of Sales (ACoS). Or maybe you don’t understand it at all. In this article, we will discuss what a true ACoS is, how to calculate it, and how to determine when an ACoS is a good ACoS or when it is a bad ACoS.
Let’s start with the easy part…
ACoS stands for Advertising Cost of Sales. It is not the most common PPC jargon so if you are new to Amazon advertising 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 to make it easy to understand.
- 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 your Amazon 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. Now you might be wondering if it is that good or bad?Before we talk about that, let’s first reveal some complex matters in the world of Amazon Advertising Cost of Sales.
#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, which 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.
Here’s how to calculate your profit margin:
Profit Margin = Gross Revenue – All Expenses
Again, let’s break it down to make it easy to understand:
- 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.
By now, you should have 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.
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. 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.
Amazon advertising in a nutshell
- The lower your ACoS, the higher your profits. This is true if your 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.
When it comes to Amazon advertising, there’s no real definition of a good or bad ACoS because it all depends on your strategy and revenue. Whatever strategy you play, make sure to always run a trial and error to see which one works for you best.
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