Is Your ACoS Too High? Your Amazon Advertising Strategy May Not Be At Fault!
As Amazon Advertising continues to get more competitive, drawing out a good PPC strategy and achieving profitable ACoS has become more challenging. More people advertising on the platform means that those high performing keywords are getting bid up leading to lower returns for everyone. Amazon loves this since they make more money per click but as a seller, this adds to the ever-increasing costs of selling on Amazon.
In our previous article, we have covered how ACoS is calculated and how to determine the ideal target based on your objectives and profit margins for your products. In this blog, we will be giving you a gist of Advanced Amazon PPC strategies and how to arrive at a sweet spot for bidding.
The Most Common Problem Faced By Sellers:
Once the campaign is set, a common situation we see is getting into a never-ending cycle of adjusting the bids and trying various ad placements to get a good ACoS. To get impressions and clicks, bids need to be increased to high levels which leads to a high ACoS. When bids are reduced back to a point where they would be profitable, they no longer get impressions and clicks. At this point, many sellers declare that “Amazon Advertising doesn’t work” and give up on the PPC strategy.
Good News! You Can Really Bid High While Keeping Your Amazon Advertising Costs Low
Determine the Maximum You Can Pay Per Click
To determine the reason for your high ACoS, we can use the following formula to determine what the issue is and how we can fix it.
This formula is best-applied product by product if you’re having issues with specific products or can be applied overall for your account (though this approach is less accurate).
Pro Tip: ACoS is inversely proportional to Conversion Rate and Average Sales per Order
If you’re advertising now, you can pull this information from an Advertised Product Report located in Seller Central’s Campaign Manager. Choosing a reporting period of 30 days should be adequate for what we need. In the report, choose a product that you’re having trouble with and copy down the 7-day conversion rate. To calculate your average sales price, you can take your 7-day total sales value divided by the 7-day orders.
If you’re not currently advertising, you can get this information from your Business Reports by selecting the “By ASIN – Detail Page Sales and Traffic” report which includes your organic listing stats.
As an example, we can use a product that had ad sales of $1000, 50 orders and a conversion rate of 10%. Our average sales per order is $1000 / 50 = $20 and we can also say that the ACoS target for this product is 20%. Using the formula above, the average price per click we could pay would be the following:
Average We Can Pay Per Click = 0.10 (10% Conversion) * $20 * 0.2 (20% ACoS) = $0.40 per click
What You Can Pay and What Amazon Says You Need to Pay
Now that we’ve calculated the average you can pay per click, we can use Amazon’s recommended bid values to get a good idea on how to plan your Amazon Advertising strategy and what the market requires to show your ads. While we could go much further into how Amazon chooses (like the relevancy weighting which is covered here), at a high-level Amazon picks which ads to show based on an auction that goes on in the background.
Since your competition sets the price of what you need to bid on certain keywords, if you don’t at least match their bid (assuming other factors such as relevancy are the same), your ads will not get shown. To get a good idea on what we’d need to bid for keywords to get impressions, we can use Amazon’s recommended bids.
If you have campaigns running, Amazon will give you a suggested bid along with a high and low range for your Adgroup default bids (typically for auto campaigns) or for your keywords in manual campaigns. If the average you can pay per click is lower than the recommended bid, then you can expect to see reduced impressions from that campaign. If the average you can pay per click is lower than the low bid range, then you may have trouble getting any impressions for your ads as others will outbid you and get their ads shown.
Amazon Conversion and Impact to ACoS
Going back to our example, we calculated that we could pay an average of $0.40 per click to maintain an ACoS of 20%. Let’s say that the recommended bid for a keyword we are targeting is listed at $0.80 with a range of $0.60 – $1.20 per click. Since we’d have to set our bid a lot lower than the recommended bids, it’s highly likely that we’ll get outbid by competitors and our ads will not be shown.
Since the bid range is set by what the competition is bidding, you may ask yourself how are they able to bid higher when you can’t. Your competitors either have higher average sales per order, a higher conversion rate or are accepting a higher ACoS to bid in the recommended range.
So to counteract this and get our ads shown, we have to figure out a way to be able to increase the average price we can pay per click. Let’s go back to the formula:
To increase the amount that we can pay per click, we have to raise one, if not multiple items on the right-hand side of the equation. Let’s go through each one by one.
Increase Your Amazon Conversion Rate
Your listing conversion rate is critical to your success on Amazon advertising. High conversion rates allow you to outbid your competition in advertising, gives you higher relevancy which helps your ads get shown more and also boosts your organic rankings. This leads to a key point:
If you have poor conversion rates for your products, even the best-run ad campaigns will lead to poor results.
To improve the conversion rates for your ads, there are two areas that you should focus on:
- Implement a comprehensive PPC strategy to drive traffic to your best performing keywords while cutting out the poor performers. Relevant keywords will convert better and we want to drive traffic through these ads to our products. See our guide for Amazon Ad optimization for more details on this.
- Optimize your listings to convert those who visit your listings into buyers. Tweaking and improving your title, pictures, bullets, descriptions and getting good reviews will all lead to higher conversion rates. You can also decrease your sales price to increase conversion rate but increases in conversion rate can be offset by the decrease in the average sales per order.
Using the example above, say we were able to get a 5% boost in our advertising conversion rate from executing a well-run PPC strategy. Also, after optimizing our listings, we were able to get another 5% conversion increase pushing the total conversion rate up to 20%. Now we can pay:
Average We Can Pay Per Click = 0.2 (20% conversion) * $20 * 0.2 (20% ACoS) = $0.80 per click
Since we can now bid the recommended bid of $0.80 per click, we can expect impressions to increase significantly for our ads while still keeping within our 20% ACoS target.
Increase Your Average Sales Price
The next strategy you can implement to increase the price you can spend per click is to increase your average sales price per order. To implement this strategy, you can either increase the price of your product or incentivize people to purchase multiple units per order. We’ll review each option:
- Increase the price of your products – This strategy will have a direct impact on increasing the average sales per order but can also cause your conversion rate to decrease which could offset any gains. If you take this strategy, make sure to monitor your conversion rate to see how much it is impacted after increasing price.
- Incentivize your customers to purchase multiple units per order – If you can get people to buy multiple items per order, you will increase your average sales per order. To do this, you can add in quantity discounts or offer promotions if multiple products are purchased at a time.
This typically has the smallest impact on how much you can pay per click but if you are able to increase your price without significantly impacting your conversion rate, this is a big win for both ads and your profit margins.
Let’s say you were able to increase your average sales per order from $20 to $22 without impacting your conversion rate. This would increase the average you could pay per click to:
Average We Can Pay Per Click = 0.2 (20% conversion) * $22 * 0.2 (20% ACoS) = $0.88 per click
Increase Your ACoS Target
After working to increase your conversion rate and average sales per order, the last knob available is to accept a higher ACoS for your products. Amazon advertising has multiple benefits for your account, so even if you’re not making profits on your ads, they could provide other outside benefits like helping organic rankings and increasing the number of reviews you get. In some instances, it actually makes sense to take a loss on your advertising due to these other benefits.
Let’s say that after reviewing, you are comfortable in increasing your ACoS target from 20% to 30%. While your profit from ads will decrease, you feel the increased sales will help to boost your organic rankings leading to more sales overall. With the increase in ACoS target, we can now pay:
Average We Can Pay Per Click = 0.2 (20% conversion) * $22 * 0.3 (30% ACoS) = $1.32 per click
Outbid your Competition To Take Advantage of Amazon Advertising Benefits
Since the original recommended bid was $0.80 with a range of $0.60 – $1.20, now that we can pay up to $1.32 we can expect to have our ads consistently shown for our target keywords. This will increase impressions, clicks, and sales for these keywords which can also help our organic rankings.
As sales increase, reviews could also increase leading to even better conversion rates. Better conversion rates mean better organic rankings and also allows us to either decrease our ACoS target back down or to increase our bids again to get even more sales through ads.
In the beginning, we went from not being able to bid within the recommended range to being able to outbid the competition. While this is an ideal scenario where we can increase all aspects, it should give you a good idea on what to focus on to improve your performance on Amazon PPC.
Phew! If you feel that is a lot of information to process and that Amazon PPC is super overwhelming, you are not alone! We are here to take it off your plate effortlessly. At Ad Advance, we analyze your business thoroughly and sketch out a winning Amazon Advertising strategy. With our proven track record of campaign optimization and robust automation software, we can beat the competitors and stay ahead in the game.
Feel free to use our Campaign Review tool to get a health report on your current campaigns and recommendations for areas of improvement.