What Is the Advertising Cost of Sale on Amazon, and How Can It Be Improved?

The effectiveness of an Amazon PPC campaign may be evaluated using the primary indicator known as Amazon ACoS (Advertising Cost of Sale). This article will explain what ACoS is, how to calculate it, which metrics drive ACoS, and how to enhance ACoS on Amazon if you're new to the world of Amazon advertising. Let's begin immediately.

What Is Amazon ACoS? How to Calculate It?

The effectiveness of your advertising campaign is measured by Amazon ACoS, or advertising cost of sales. It is directly applicable to the Amazon advertising sector and measures the proportion of advertising spend to revenue (in%). Using the following formula, you may determine your ACoS on Amazon:

What does your Amazon ACoS stand for?

In other words, ACoS demonstrates how much of each dollar made from advertising was allocated to ad campaigns.Let's imagine, for instance, that a campaign brought in $400 in advertising revenue. If the campaign's advertising cost $100 each, then the ACoS would be equal to 100/400 * 100, or 25%.Consequently, advertising costs 25 cents of every dollar earned.Comparing Amazon RoAS with ACoS

Amazon ACoS vs. Amazon RoAS

RoAS must be mentioned while discussing ACoS, so we will now discuss how the two metrics are related.

What is Amazon RoAS?

Return on Ad Spend (RoAS) gauges the effectiveness of your PPC marketing initiatives. You may find out how much money you make on Amazon for every dollar you spend on advertising by dividing your ad revenue by ad spend.

What’s the difference between Amazon ACoS and Amazon RoAS?

Actually, not much. The antithesis of ACoS is RoAS. Therefore, it basically only involves viewing the same metrics from a different angle.

ACoS = Ad Spend / Ad Revenue

RoAS = Ad Revenue / Ad Spend

The relationship between your ad expenditure and revenue is what both Amazon ACoS and RoAS measure, making them both efficiency and profitability indicators.

In keeping with the previous example, if a campaign generated $400 in advertising sales and the campaign's ads cost $100, then RoAS is equal to $400 / $100, or 4.0. This implies that you will make $4 in income for every dollar you spend on advertising.

ACOS is the ratio of your advertising expenses to your advertising revenues.

RoAS is the ratio of advertising revenue to advertising expenditures.

Your own preference will determine whether you analyze your Amazon advertising campaigns using RoAS or ACoS for your own reports. However, it's crucial to be aware of both, as describing the effectiveness of your campaign as RoAS may make it easier to compare the ROI of other marketing initiatives.

How to calculate your profit margin

Typical cost blocks are:

• the cost of goods (manufacturing costs)
• costs for shipping the product from a manufacturer or to the customer
• Amazon fees (referral fees, Amazon FBA fees, etc.).

To determine your profit margin, you need to subtract all these costs (per unit) from your product price.

For example, say you sell your product for $200. All your costs amount to $150 per unit, so in the end you make $200 – $150 = $50 profit per unit. That means you have a $50 / $200 * 100 = 25% profit margin.

What is the break-even ACoS on Amazon? (Do I make a profit?)

our profit margin is equal to the break-even ACoS on Amazon. This is so because your ACoS is the percentage of revenue you spend on advertisements, and your profit margin is the percentage of revenue you keep as a profit (before ad spend).

You're breaking even when ACoS equals profit margin since you're using all of your earnings on advertising. Because of this, your profit margin serves as the deciding factor as to whether a campaign is profitable or not.

If your ACoS is larger than your profit margin, your campaign is losing money since you are spending more than it is generating. If your ACoS is less than your profit margin, you are making a profit because your revenue exceeds your expenses.

Simply expressed, this means that as long as you don't spend more on advertising than your profit margin, you will continue to make money because your break-even Amazon ACoS matches to your profit margin.

ACoS = Profit Margin at Break-Even

The break-even ACoS is a benchmark that enables you to determine whether your efforts are profitable or losing money right away.

The break-even ACoS and profit margin in our Step 1 example are both 25%. You won't lose money as long as you don't spend more than 25% on Amazon advertisements. Or, to put it another way, if you want your Amazon ad campaigns to be profitable, you shouldn't go over a 25% ACoS.

Important: A product-specific profit margin serves as the foundation for the break-even ACoS. It might be challenging to determine whether your campaign is lucrative or not if you group products with widely disparate profit margins—and break-even Amazon ACoS numbers—into one ad group. We advise either using only one product per ad group or grouping just goods with comparable margins.

What is my target Amazon ACoS? (Do I make enough profit?)

You frequently want to preserve a specific profit margin in addition to breaking even with your campaign. The main motivation behind your Amazon sales is presumably to make money. The ACoS at which you reach your target profit margin is your target ACoS. How to figure out your desired ACoS on Amazon is as follows:

Profit Margin (Before Advertising) - Target Profit Margin is the target ACoS. (After Advertising)

The goal ACoS serves as a benchmark that enables you to determine right away whether your efforts are generating the desired profit margin.

Your break-even ACoS (profit margin) in this illustration is 25%. Only 15% of your revenue can be used for advertising if you wish to maintain a 10% profit margin after advertising.

Profit margin before to advertising (25%) minus desired profit margin following advertising (10) equals target ACoS (15%).

Your desired ACoS in this instance is 15%. You will fall short of your desired profit margin if your Amazon ACoS is greater than 15%.

Selecting the Appropriate Amazon ACoS for Your Goals

You can pursue a variety of objectives with your PPC advertising. You can concentrate on break-even ACoS or a lower target ACoS depending on your objectives:

Goal 1: Increasing sales: If you're introducing a new product, this goal makes sense because you want to collect reviews and sales as soon as possible to boost your organic ranking. In this situation, your goal might be to maximize sales while maintaining a profit, which would involve aiming for your break-even Amazon ACoS. (or even higher for a certain time).

Goal 2: maximizing impressions. If you want to raise brand exposure, maximizing impressions makes logical. If you were to aim for your break-even Amazon ACoS in this scenario, you might concentrate on generating as many impressions as you could while still making a profit.

Goal 3 – making a profit: this should be the long-term goal for established products. To achieve a certain profit margin you should focus on reaching your target Amazon ACoS.

Additional advertising metric

Only sales that you generate from advertising are taken into account when calculating your ACoS for Amazon PPC. Because of this, ACoS might not be the most crucial measure to employ

if you're attempting to develop your firm,

introduce a new product, or

improve your keyword ranks.

If you are trying to achieve any of the goals listed above, it’s worthwhile to look at your total advertising cost of sale (TACoS). TACoS takes into account both your ad sales and your organic sales (sales not made through ads) to show how your ad spend fits into your overall business.

Some of the most common TACoS use cases are:

• understanding your overall profitability
• monitoring reliance on advertising for your account or specific products
• analyzing the effect of ad sales on organic sales.

Does a low Amazon ACoS always mean a good Amazon ACoS?

On Amazon, many advertisers worry that their ACoS is too high. A high ACoS approach on Amazon advertisements is not always a bad thing, though, depending on your category, the season, and your product range.

Efficiency or profitability, for instance, may not be the top priority if your advertising objective is to extend your reach by obtaining as many impressions as you can or to optimize sales for a product launch.

Your Amazon ACoS is frequently lower with a lower bid and cost per click (CPC), and profit per unit is frequently higher because your cost per unit is lower. A low bid, however, also results in fewer impressions, which in turn results in fewer clicks and revenues.

Overall, efficiency, profitability and sales as well as the quantity of impressions should be considered while optimizing ACoS for Amazon ads.

What KPIs Influence ACoS on Amazon?

Let's begin by examining the most crucial Amazon PPC metrics:

The product will appear in position #1 if your bid wins the advertising auction. Your ad may still be placed in one of many other places on Amazon if your bid is lower.

Impressions: The more people who see your advertisement, the more likely it is that they will purchase your goods.

Shoppers on Amazon will click your advertisement if they believe it to be pertinent to their search.

The click-through rate, which is calculated as (clicks impressions), gauges how compelling and pertinent your advertisement is.

Cost per click (CPC): The price per click you pay; the actual cost of the ad auction. The competitors, your quality score, and your bid all affect your CPC. Your CPC will never be higher than the actual bid since the bid auctions are second-price auctions, where you pay $0.01 more than what it would take to outbid the bidder in front of you.

Orders: The quantity of times a customer has bought your product following a click on your advertisement.

The persuasion power of your offer and product description page is measured by the conversion rate, which is calculated as (orders clicks).

Ad spend: To determine the overall cost of advertising, multiply the number of clicks by the cost per click.

To get the percentage of sales that are driven by advertisements, multiply orders by the average selling price.

To determine how much money is made for each dollar spent on advertising, Amazon RoAS (return on ad spend) is calculated by taking (ad revenue ad spend) and expressing the result as a ratio.

To determine how much of each dollar of revenue is spent on advertising, Amazon calculates their ACoS (advertising cost of sales), which is then reported as a percentage.

Amazon ACoS Strategy—How to Optimize ACoS on Amazon

We've seen that a few key parameters that are also reliant on one another determine Amazon ACoS (advertising cost of sale). The following KPIs should be your primary focus for ACoS optimization:

• Click-through rate
• Cost per click (CPC)
• Conversion rate
• Average sales price

click-through rate

Due to optimizing, you must ascertain how well your click-through rate compares to that of your competitors.

You can observe the following by comparing your click-through rate to that of your peer group:

if there is a chance to increase the customer appeal of your product advertisements (pictures, copy, reviews, etc.);

if your advertisements are effective in persuading viewers to study more about your goods by standing out from the competition;

If your keyword and ASIN/category selections are either too specific or too general in their audience targeting.

How can I optimize my click-through rate?

Improve the campaigns' targeting. Use Sonar or other keyword research tools to find the most pertinent terms for Amazon. Negative keywords can stop your adverts from appearing for pointless searches.

Make your product photographs stand out from the competition and adhere to Amazon's standards for quality, background, angle, and perspective.

By closely observing consumer feedback and making adjustments to your product and product information page in response to unfavorable customer comments, you can raise your star rating.

You can automate keyword harvesting with Perpetua to save time and effort. Alternately, if you'd want additional control, you may establish a conversion threshold to prevent the Ad Engine from harvesting a keyword before a predetermined amount of sales have been made.

Also automatically lowering bids for keyword and ASIN targets that receive clicks but no conversions is Perpetua's Ad Engine. By doing this, you can ensure that your ad dollars aren't being wasted on ineffective keywords.

Cost per click (CPC)

Across marketplaces and product categories, cost per click varies considerably.

The Benchmarker will provide you the median CPC for both your subcategory and your marketplace so you can be sure you are aiming for the proper thing.

You can be overpaying for your ads and wasting ad spend if your CPC is higher than the benchmark, in this case $0.28. But if your CPC is lower than the benchmark, your bids are probably not as aggressive as they could be, and you can be losing out on important impressions and sales.An exception would be if you were spending money on advertising to promote a new product or if you were just looking to increase impressions or sales. Having a CPC higher than the guideline in some circumstances would make sense.

Your quality score, the competition, and your bid all affect your CPC.

The bid auctions on Amazon are second-price auctions, where you pay $0.01 more than what it would cost to outbid the bidder in front of you. Your CPC will therefore always be less than the actual bid.

Keep in mind that the more expensive your bid must be to be competitive, the larger the competition. The quantity of advertisers placing bids for keywords and, consequently, the average CPC, might be impacted by seasonal fluctuations.

Consider the weeks leading up to Christmas, when a lot of people go shopping. There are more marketers bidding for keywords during this time, which raises CPCs.

Your overall CPC might be greatly impacted by the type of bidding technique you select.

How can I optimize my CPC?

Pick an ACoS target and decide what your advertising goal is. Is it to run a profitable campaign (lower target ACoS) or to increase sales or impressions (higher target ACoS or break-even ACoS)? For each campaign or ad group, specify a target ACoS to serve as a guide for CPC optimization.

Regularly improve your bids. The ideal CPC will vary for each term in your campaigns depending on the goal ACoS, competition, and conversion rates. Additionally, these circumstances are dynamic. For this reason, it's crucial to continuously modify your bids in order to obtain and maintain an ideal CPC for each term.

The general rule for the Amazon ACoS strategy is to raise your CPC if your ACoS is below your goal ACoS and lower it if it is higher.

Conversion rate (CVR)

The conversion rate, which is more reliant on your product detail page than any other PPC metric, is computed by dividing the number of orders by the number of clicks (orders clicks).

Customers that click on your advertisement agree that it is pertinent to their search term. The next step is for your product description page to persuade the customer to purchase your product. Increasing your conversion rate should always be your objective.

Examining the main internal and external elements that affect conversion rate would be helpful.

How can I optimize my conversion rate?

Optimize the content of your product with pictures, headings, bullet points, descriptions, and videos.

Organize your questions and product reviews

Price A/B testing

Seasonality

Your ACoS can be significantly impacted by seasonal variations in advertising revenue and costs.

For instance, during key shopping occasions like Prime Day, Black Friday, and Cyber Monday, businesses often experience large sales growth. Ad revenue soared by 156% on Prime Day, 104% on Black Friday, and 159% on Cyber Monday in 2019, the most recent year for which we have accurate data (2020 data is unrepresentative owing to the Coronavirus pandemic).

Even though these big deal days frequently come with higher CPCs and hence higher advertising expenses, revenue growth typically outweighs the cost rise, resulting in a superior ACoS.

As a result, many brands observe increases in ACoS related to deal days when reviewing their ACoS over the course of the year. And of course, after the deal's initial days have past, ACoS will deteriorate.

Because of this, it's critical to comprehend and take into account seasonal aspects that may be affecting your ACoS.