Want to grow your profits from Amazon Advertising? Look no further. All you need to do is improve your ACoS.
Here at Titan Growth, we’re all about improving things.
Your business. Your website. Your ad revenue. The hotness of your prospecting email leads. Knowing what Google is thinking. The environment. Our skateboard moves. Luke’s right hook. The number of puppies in the office. World peace. Kale.
You know, those things that spark joy. Or could, if only they were improved.
Granted, some are easier to improve than others… But we’re working on it.
Fortunately, there is at least one thing that can be improved today.
So what are you waiting for? Let’s start making the world a better place. Or at least your business.
What is ACoS?
ACoS (Advertising Cost of Sales) is how much you spend on advertising for every dollar of revenue you make.
Or, in formulaic terms, it is the percentage of total sales spent on advertising calculated using:
ACoS = Total Ad Spend ÷ Total Sales
Example: If you generated $100 in sales and paid $20 in advertising to get it, then your Advertising Cost of Sale is 20%.
Is 20% a good ACoS?
Knowing whether it is or not is the first step to improving your own ACoS. (We’ll tell you the answer in a moment. Hint: It’s a trick question.)
ACoS is a crucial metric for succeeding at Amazon paid advertising.
Dare we say, it is the dreamiest of all Amazon Advertising metrics.
Why ACoS is so Important to Your Amazon Advertising
If you advertise on Amazon, ACoS is everything.
ACoS is the end all be all of Amazon Advertising KPIs.
We previously covered why ACoS is so awesome in our (insightfully hilarious) guide to selling better, faster on Amazon Advertising.
In short, Amazon ACoS helps increase your profit margins.
In long, ACoS will improve the profitability of your Amazon ads by helping you identify and hit your specific campaign goals, whether they are to increase brand awareness, sustain gradual growth, or generate immediate returns.
Though doesn’t every KPI help drive ad strategy?
Not like ACoS.
But really, wondering about the importance of ACoS isn’t the question you should be asking. You should be asking what is a good ACoS to shoot for.
What is a Good ACoS? There is NONE!
Yep. You just got Burnsed. It’s a trick question.
There is no such thing as a “good” or “bad” ACoS.
There’s only the perfect ACoS … for you.
A good ACoS for one brand, product, or campaign might not be so good for another.
A better way to denote the “goodness” of ACoS is by its level — i.e., high or low. But, again, a high ACoS might be stellar for one campaign, while a lower ACoS works best for another.
There is a perfect ACoS out there for everyone.
You just need to find it.
Generally speaking, sellers believe the lower your ACoS, the better.
However, lowering ACoS too far can compromise the visibility of your product and cause you to underbid for highly competitive keywords, which means your ads won’t show at all for them.
Giving any hard numbers for marketing metrics is always a tricky game, but just so we don’t leave you hanging, here are typical ranges:
- Average ACoS: Around 30%
- High ACoS: Anything above 40%
- Low ACoS: Between 15-25%
- Really Low ACoS: Anything below 15%
In the end, which level you target boils down to which ACoS is right for your goals. (A little further down, we’ll break down which goals match which levels.)
A lot of factors go into figuring out an ideal ACoS. Some main ones being your budget, marketing strategy, goals, and product categories.
More specifically, you need to do the following:
- STEP 1: Calculate Your Product’s Profit Margin.
- STEP 2: Find the Right ACoS in Amazon Seller Central.
- STEP 3: Calculate Break-Even ACoS.
- STEP 4: Hit Your Target ACoS.
- STEP 5: Dance.
No questions asked. You MUST complete each of these steps to get the most out of your Amazon Advertising. It’s the only way. (Not really. But it is a really good way.)
Find the Perfect ACoS for Your Amazon Ad Campaign in 5 Steps
Step 1: Calculate Your Product’s Profit Margin
To understand your ACoS, you first need to know your profit margin.
There are several types of profit margins, but the basic formula for each strips down to:
Profit Margin = Income ÷ Revenue
Revenue, as in the total amount of moola you receive for selling a product on Amazon. Income, as in your revenue minus the costs of doing business, which amounts to your profit per unit sold.
So an alternative, Amazon-friendly way to describe the profit margin formula would be:
Profit Margin = Profit per Unit ÷ Product Price
In case you’re wondering, some of the direct costs associated with a product’s income can include:
- Manufacturing Costs
- Shipping Costs
- Amazon Fees (referral fees, Amazon FBA fees, etc..)
So first figure those costs out.
Then subtract those costs from your product price, divide by your product price, and, VOILA!, profit margin.
Example: You sell a Nicolas Cage prayer candle for $20. (Great product. Great price.) Your costs to put Nicolas Cage’s face on that candle, ship it and pay off Amazon are $15. So your profit per Nicolas Cage-faced candle (aka your income) is $5. Math it all together and:
$5 income ÷ $20 revenue = 25% profit margin
Profit Margin: Calculated.
Step 2: Find the Right ACoS in Amazon Seller Central
Figuring out ACoS couldn’t be easier.
- Log into Amazon Seller Central.
- Look at the Campaign Manager dashboard.
- Locate the right-hand column for AcoS.
Alternatively, if your Wifi goes down and there are no accountants around, you can calculate advertising cost of sale yourself using the formula:
ACoS = Ad Spend ÷ Ad Revenue
A little more involved, but still pretty easy.
Example: You spent $500 on an ad for said Nicolas Cage prayer candle. That ad generated $2,000 in revenue. Your ACoS is 25%.
Though figuring out ACoS is one thing. Figuring out the right ACoS is another.
In Amazon Seller Central, ACoS can be segmented according to time and data levels.
So to fully grasp all the nuances of your selling strategy, take into account:
- Your Account Level: Entire account, campaign, ad group, or keyword
- Advertising Time Period: Lifetime, quarter, season, month, week, time of day, etc.
Say your Amazon Ad account’s lifetime ACoS is 30%, but last month its overall ACoS was 50% with one campaign having an ACoS of 20% and another campaign having an ACoS of 70%. Additionally, inside of that campaign, one keyword had a 10% ACoS while another had a 130% ACoS.
A little less easy to figure out.
And a lot of ACoS.
There are a lot of ways to analyze ACoS. Be sure to parse down your data to the levels and time periods in a way that benefits your strategy most. A good rule of thumb is to start small, at the keyword level, and work your way outward until you’re hitting your target ACoS on all levels.
Step 3: Calculate Break-Even ACoS
Break-even ACoS is the spot where your ACoS (aka advertising costs) equals your profit margin.
Ad Costs = Profit Margin = Break-Even ACoS
Or put another way:
Profit per Unit = Ad Spend = Break-Even Point
In other words, break-even ACoS is the tipping point between a profitable ad and one that loses money. You’ve made $0, but also lost $0. You’re basically the color beige.
But don’t bash beige. There’s always a time and place for beige.
Break-even ACoS is a handy benchmark to gauge the success of your Amazon advertising instantly. If your campaign’s ACoS is higher or lower than your break-even ACoS, then you’ll know if it’s making money (lower) or losing money (higher), and modify accordingly.
IMPORTANT: Break-even ACoS works best if you have ad groups consisting of a single product or several products with similar profit margins.
The Saint Cage prayer candle sells for $20.
Suppose we spent $5 on an ad that made one sale, our ACoS would be 25%. (Because a $5 ad spend ÷ $20 product price equals 25%.)
This means that our break-even ACoS is 25%.
(Which not so coincidentally is also our profit margin, as we found out above.)
A 25% ACoS is where the profit per unit equals our ad spend (aka our break-even point).
Break-even ACoS: Calculated.
Step 4: Hit Your Target ACoS
If you’re cool with making zero profits, this is where you sign off.
We’ve formulated profit margin, located ACoS, and calculated break-even ACoS. That’s pretty much all you’ll need if you just like fiddling around with numbers and looking at Ryan Gosling memes.
But if you’re really interested in improving ACoS and making some money from your Amazon advertising, then you’ll want to see this through to the end.
That’s because this step is where you put things in motion to realize a profitable profit margin.
So start by closing your eyes.
Go ahead, do it. No cheating. If you’re reading this, your eyes aren’t closed.
Actually, on second thought, you may need to keep them open to read the next part.
Now picture how much money you would like to make from your Amazon ads. Most likely, you came up with “infinite dollars.”
If you didn’t, there’d be something wrong with you. (Really? Who doesn’t want their business to make infinite dollars? Cynics and your competitors. That’s who.)
Unfortunately, infinite dollars won’t be of much use to us here, so we’ll need to come up with a more realistic target profit margin.
There are several ways to do this.
Your best bet is to ask your accountant again.
Ask them to figure it out while you go get some margaritas.
Then come back feeling sufficiently good about life and ready to optimize your ad game.
(For those that don’t have accountants hanging around to do your dirty work, here’s a basic way to project profit and loss. Overall, targeting profit margins involves budgeting, forecasting, CVP analysis, some fancy calculations, and a lot of guesstimating. But a quick and easy trick is to determine how much you want to make per unit sold, and apply it to the formula: Desired Profit per Unit ÷ Product Price = Target Profit Margin.)
Next, you want to come up with your Target ACoS. Also known as TACoS.
Sounds delicious, right?
Lucky for you, TACoS go great with margaritas. So you’re all set.
Target ACoS is a handy benchmark to instantly see if your Amazon ad campaigns are reaching your target profit margin.
It’s calculated by:
Target ACoS = Current Profit Margin – Target Profit Margin
Your current profit margin is the profit margin we calculated above in step 1. This is your profit margin before advertising. You reach your target profit margin after advertising.
Example: Your current profit margin (and break-even ACoS) is 25%. You want to reach a 10% profit margin with your ads. This means you can only spend 15% of your revenue on advertising.
25% current profit margin – 10% target profit margin = 15% TACoS.
Here is a visual representation of what this cost breakdown looks like using the above example.
So one way to figure out your Target ACoS is to determine how much you want to make from your ads (i.e., your target profit margin).
Another way is to come up with a Target ACoS that matches your goals.
This is why there is no such thing as a “good” or “bad” ACoS.
Only an ACoS that is right for you.
Every paid media campaign has different goals. Depending on yours, you can decide whether you want to target a higher, lower, or break-even ACoS.
For example, if you want to:
- Increase Brand Awareness (Target: High ACoS)
This goal boosts sales and visibility by sacrificing profits. Maybe you’re releasing a new product, or need to get rid of a low selling product, or want more reviews, or are looking to dominate your niche, or seek immediate gains in sales rank. Targeting a break-even ACoS, or even high ACoS will do the trick. You might lose some money in the short-term but see potential rewards in the long-term. Think of it as buying a commercial spot during the Super Bowl.
- Gradual Growth (Target: Low ACoS)
This goal continuously grows sales revenue and profits. Most consider it the preferred long-term goal for Amazon ads, especially when promoting an established product. Targeting a low ACoS, one that falls right below your break-even ACoS will get you there.
- Increase Profits (Target: Really Low ACoS)
This goal generates higher profits and a lower CPC while sacrificing sales volume. Maybe you want to sell a historically low-converting product, or you’re not concerned with brand awareness, or you just want to make money as soon as possible. Targeting a really low ACoS, one that is well below your break-even ACoS, will work nicely.
Finally, once you know your target ACoS, you can optimize your campaigns to hit that target.
A sure-fire way to do this is by optimizing your bidding on Amazon ads.
More specifically, it means finding the perfect bid to reach your TACoS.
To find your perfect bid, get that accountant of yours to nerd-conjure the following:
(Average Order Value) (Conversion Rate) ÷ (1/TACoS) = CPC (aka Perfect Bid)
That’s the amount you should pay for every click on your product’s sponsored Amazon ad.
As a result, you will reach your target profit margin.
And make some money.
Which is pretty sweet, if you ask us.
(In case you’re wondering, average order value is the average amount of money each customer spends when ordering from your online store. You can calculate it using the formula: Total Revenue ÷ Number of Orders = AOV. If you have an ad group with only one product that sells for the same price no matter what, then your product price will be your AOV.)
There are also other ways to hit your target ACoS without needing a calculator. They include:
- Optimize Your Product Page: Everything from your product title, price, photos, videos, reviews, and more impact ACoS. So make you sure you know how to ALO, and sell better with Amazon Listing Optimization.
- Keyword Pruning: Monitor ACoS at the keyword level. Remove any missing the mark of your target, and go all-in on the winners.
- Negative Keywording: List any keywords that work against your ads as negative keywords. You can also add keywords that you pruned out for not hitting your target ACoS and designate them as negative keywords.
- Find the Right Match Type: Try different match types (broad, exact, or phrase) for your keywords. Monitor their ACoS and separate out those underperforming. Usually, phrase match keywords work best.
- Optimize for Your Funnel: Some Amazon ads perform better at different stages of the sales funnel. Know when to use the right Amazon ad type.
- Find the Right Timing: A/B test and monitor which advertising time periods hit your target ACoS. Which time of day? Which day of the week? Which month of the year?
- Consult an Amazon Expert: Don’t know any? Sure you do. We’re Titan Growth. Nice to meet you!
Target ACoS: Hit.
Step 5: Dance
Bust a move and celebrate. You just improved your ACoS.
NOTE: Dancing is perhaps the most important step when improving ACoS.
Welcome to a New and Improved ACoS
Feel improved, yet?
If the answer is no, that’s not surprising. You’re still reading this article and have likely yet to apply these improvements to your Amazon advertising. No worries. Once you do, we think you’ll feel significantly improved.
If the answer is yes, and you do feel improved, that’s GREAT!
Our work here is done.
Now we can move on to improving the puppy ratio in our office. Or perhaps world peace…