Advertising on Amazon is a valuable tool to promote your products and increase sales. Amazon Sponsored Products are keyword-targeted ads for individual product listings that appear on Amazon search results and product detail pages. How much should you be willing to spend on sponsored advertisements? ACoS helps you balance a reasonable and profitable percentage.
So, welcome to yet another acronym. ACoS stands for “Advertising Cost of Sales.” For Amazon Sellers, that’s specifically defined as the “percentage of direct sales you made from Sponsored Product ads or the overall brand sales you made from Sponsored Brands that resulted from your advertising campaign.” More simply, it’s the ratio of how much you spend on advertising compared to sales achieved. Here’s the formula for figuring that out:
Total Ad Spend ➗ Total Sales from Advertising
For example, you made $300 in sales, but it cost you $50 in advertising. Your ACoS is 24%. Is that good or bad? It depends on your other expenses. ACoS is not itself a measure of profitability. It is a tool for you to figure out how much you can reasonably afford to spend on advertising and still make a profit, or at least break even. That’s because ACoS has a unique significance in the context of Amazon Pay-Per-Click (PPC) ads for Sponsored Products.
What’s nice about Amazon PPC ads is you only pay if shoppers click on the ad. What you pay for the ad, however, is directly related to where you get ranked. There’s a bidding competition among advertisers. Select the maximum you are willing to pay for the click, and that determines how you are ranked—the highest bid gets the top spot. That doesn’t necessarily mean you always pay your maximum bid, but that the highest bid pays 0.01 cents more than the second-highest bid. How high you rank, and how effective your advertising dollars are going to be, depends on the competition in a product category.
So, you can’t set a fixed advertising budget, only set a maximum you might be willing to spend. ACoS tells you what that maximum could be.
How to Calculate ACoS
To determine how much you can afford to spend on ACoS, first calculate your other costs for selling on Amazon, such as shipping or inventory, not to mention Amazon fees.
For example, your overhead for a particular product listing breaks out as follows:
Amazon Fees: 25%
Production and Shipping Costs: 40%
Carrying Costs: 10%
To break even, your ACoS cannot exceed 25%. In that case, all your expenses (advertising + overhead) equal the amount of the sale. Sometimes that could be an objective, particularly if you are trying to clear out inventory.
But let’s say you want to make a profit of 10%. In that case, your target ACoS is 15%.
With that target in mind, you can figure out how much you might want to budget for your Amazon PPC spend. From here consideration of ACoS gets a little tricky.
What If ACoS Starts Going Up?
Keep in mind that ACoS isn’t a static number, it depends on the click-throughs on your sponsored ads and your bid amounts. If Cost-Per-Click (CPC) goes up, ad spend goes up; if CPC goes down, ad spend goes down. Spending less may seem like a good thing, except if you’re not selling much, you’re not making as much money as you could.
Once again, in isolation whether ACoS goes up or down doesn’t tell you anything. It might be good that your ACoS goes up because you’re getting more impressions (views of your ad) that are clicked on, potentially resulting in more sales. The keyword here is “potentially.” Just because a shopper clicks on the ad, doesn’t mean you made a sale.
You need to consider a rising (or declining) ACoS in the context of your Conversion Rate (CR). If your ACoS is starting to go up, that’s a warning flag your CR is going down. So you’re spending more to sell less. But if CR is going up, ACoS is going down. That’s a good thing.
Calculate a Good ACoS
Simply stated, then, a good ACoS is anyone where revenue achieved through the ad exceeds what you spent on the ad. To do a more in-depth analysis of how ACoS is affected in the overall scheme of Amazon Sponsored Ads, the formula is:
(Impressions x Click Through Rate) x Cost Per Click ➗ (Clicks x Conversion Rate) x Average Selling Price
The purpose of the calculation is to isolate the factor(s) contributing to a poorly performing ACoS. For example, let’s say that your costs are going up because while your CCR (Click Through Rate) is rising, you don’t get many conversions after they click. It may be time to examine any one of a number of factors, such as whether you are using the right keywords for the ad or if your product description needs improvement.
Good Product Reviews = Good ACoS
One key consideration to improve conversions is your product reviews. Shoppers might click through your ads, but if they see a lot of negative reviews, they might be less inclined to actually make a purchase. FeedbackWhiz is a review management tool that can help you not only resolve and decrease negative reviews but increase the number of positive reviews that can improve conversions, and help you achieve a good and profitable ACoS.