What is ACoS in Amazon Advertising?
ACoS (Advertising Cost of Sale) measures how much you spend on ads to earn in sales from ads. It is calculated by dividing Ad Spend by Ad Sales. When ACoS is low, you are earning a greater return on your ad spend.
What is a Good ACoS?
From the above formula, it is evident that ACoS is directly proportional to the Ad Spend. So the primary goal of your campaigns should be to minimize ACoS then, right? Wrong!
- Seller A sells a cooler with a 30% profit margin. They spend $100 on ads, achieve $1,000 in ad sales and have $700 in product costs. Seller A has a 10% ACoS ($100 spend/$1,000 sales) and profits $200 on their ad sales ($1,000 revenue – $700 COGS – $100 ad spend).
- Seller B sells a similar cooler with the same 30% profit margin. They spend $2,000 in ads, achieve $10,000 in sales and $7,000 in product costs. Seller B has a 20% ACoS ($2,000 spend/$10,000 sales) and profits $1,000 on their ad sales ($10,000 revenue – $7,000 COGS – $2,000 ad spend)
Seller B has double the ACoS of Seller A but earns 5x more profit! Also, with the increased sales, Seller B’s organic rankings are likely boosted which leads to further benefits. Minimizing ACoS isn’t always the best strategy.
How Do I Determine The Right ACoS?
Adopting too low of an ACoS target can hinder growth, organic product rankings and sales. Conversely, adopting too high of an ACoS target can hinder your profitability. We often see campaign managers take a one-size-fits-all strategy in which they manage campaigns strictly to a static ACoS target equal to or lower than the product profit margin. While this strategy ensures no money is lost on ad campaigns, it doesn’t maximize the value added from your ad campaigns. We recommend adopting ACoS targets based on the profit margin, market share, and desired growth rates for your products. Determining your target ACoS is a two-step process.
Step 1: Determine Product Profit Margins
To calculate profit margin, add product costs, shipping costs, Amazon fees, sales tax, and any relevant overhead on a per-product basis and divide it by your selling price. If you buy products in large lots, you may need to add all the product costs together, allocate overhead, and divide by total units.
If you use third-party tools like Sellics or Fetcher, you will be able to see your profit margin after entering in the costs of goods and the shipping costs to get them to Amazon’s warehouses. In Sellics, your product’s margins are found in the “Profit” section and will be accurate after you add in your product costs in the “My Costs” tab.
Pro Tip: The product profit margin is your break-even ACoS – meaning you won’t lose money on your ad campaigns if you maintain ACoS at or below this level.
Step 2: Determine Campaign Strategy
If you want to maximize profit, then you can determine your required return and subtract it from the profit margin you calculated in Step 1. For example, if you want to earn a 10% return on ad sales on a product with a 30% profit margin, you would set your target ACoS to 20%. We recommend testing the market at different ACoS rates, as small adjustments to ACoS can have a big impact on sales. Even mature products benefit from sales velocity, so it is worth analyzing sales sensitivity to changes in ACoS. We have optimized campaigns where a 5% increase in ACoS has resulted in a 100% increase in sales!
If you want to maximize sales velocity and increase organic rankings, then we recommend setting an ACoS target at or near your profit margin. If you are launching a new product in a competitive market that has similar margins, it may be worthwhile to set your ACoS target above your profit margin in order to aggressively grow your brand. Doing so also quickly generates useful customer search term data that will allow you to optimize bids faster and find the best converting keywords.
Your ACoS target is one key performance indicator which impacts the results of many other metrics in Amazon Advertising. Hence, there is no one-size-fits-all approach. You need to understand your business objectives, determine your profit margin and then test your campaigns at different ACoS targets to measure the impact on your ad sales.
If you are stuck with a pretty high ACoS that is eating up all your budget, learn how to troubleshoot it and bring down the ad spend from our previous post.
Want a second opinion on the right ACoS target, budget, and bids for your campaigns? We will be glad to guide you and discuss your pain points. Schedule a free consultation with us and we can talk through it.