Spending on Amazon advertising is becoming more of a necessity for many sellers.
If you’re new to selling on Amazon, you’ll find out soon enough that you need pay-per-click (PPC) to survive the competitive environment of the Amazon marketplace. But if you’re not careful, your Amazon ad spend could eat up your profit margins. So you may successfully increase your Amazon sales without actually being profitable.
For this reason, you should learn your Amazon Advertising Cost of Sales (ACoS). In fact, your ACoS is one of the most important metrics you should be watching if you’re running sponsored products on Amazon.
What is Amazon ACoS?
Amazon ACoS is the cost you bear for all the sales you make which are a result of your ad campaign. Every Amazon PPC campaign will have an ACoS.
Once you understand ACoS, it can tell you whether or not your Amazon advertising campaigns are profitable or not. Being an open metric, you’ll have to be the one to decide which ACoS level is actually profitable for you. When you do find out the right ACoS for your Amazon products, you’ll be able to improve the efficiency of your Amazon PPC campaigns by tweaking them around your desired ACoS.
Calculating Your Amazon ACoS
Amazon ACoS is fairly easy to calculate. It’s simply the cost of the advertisement campaign (i.e. Ad Spend) divided by the revenue generated by said campaign (call it, Ad Revenue), taken as a percentage.
So the formula is:
ACoS = (Ad Spend / Ad Revenue) x 100
Example: If a campaign resulted in sales worth 300$ (Ad Revenue), and you spend 50$ on it (Ad Spend), ACoS comes out to be: (50 / 300) x 100 = 16%. So you could say that 16% of the revenue generated through the campaign was spent on the said campaign.
So the higher the ACoS, the less profitable the campaign. And vice versa. Now, if you want a profitable campaign, you’d want this number to be as low as possible. However, not all cases are the same, so your ACoS will be relative to what you are selling and how you are selling it. Therefore, you’ll need to consider a few factors that we will now discuss, when determining the profitability of your ad campaigns.
Measuring Amazon advertising profitability using ACoS
Here’s what you need to do in order to determine profitability of your campaigns:
First, measure the profit margin of your product.
Then, find out the threshold ACoS where you remain at zero profit, but zero loss (call it Break-even ACoS). Compare the two.
Now keeping both factors in mind, set a maximum ACoS that you can afford while remaining profitable. Let’s look at all of this in detail.
Profit Margin
Profit margin (also called Net Margin) tells you how much profit a product is making you, compared to its selling price. Basically, it’s the ratio of profit to the product’s price expressed as a percentage.
The formula: Net Profit / Price x 100.
So if you have a product that sells for $100 and results in a profit of $30, its profit margin would come out to be 30 / 100 x 100 = 30%. You could say that “there’s a margin for 30% profit for that product.” The higher the profit margin, the more profitable the product.
SellerLegend, by the way, lets you see Margin (i.e. profit margin) on most screens. To see any product’s Margin, you could simply go to the Products List screen, and easily find the Margin there.
You can also see ROI (Return On Investment), Break-Even price (B/E Price), and plenty more.
Now that we know the profit margin (30% for the sake of this example), let’s look at our next step.
Break-even ACoS
Break-even ACoS is what you get when you’re making zero profit. Not negative, but not positive either. This is where your product has cost you what it has generated in revenue. If your ACoS goes any higher than this, you’ll be incurring loss. So now, if your product has a profit margin of 30%, that is exactly what your break-even ACoS is going to be. That is, you can afford to have 30% of the revenue you just generated on advertisement in order to break-even.
Now before you fix how much you’re going to spend on ads, you need to set a few goals.
If your goal is to generate the most amount of sales or get the most number of views, you can use the break-even ACoS as your target and it’s perfectly fine to let the ACoS rise to that point.
However, if your goal is to make profit, you should find a target ACoS. The target should be less than the break-even.
Target ACoS
You have to come up with a number that seems suitable to you in order to set the target ACoS. If you think making $25 in profit is fine for you, instead of 40$, then you need to use that figure to set the target ACoS. However, in order to find the target ACoS, we need to figure out the Target Profit Margin. To do so, simply substitute the old profit value with the new one (i.e. $25) in the formula. 25 / 100 = 25%. So now your target margin is 25%.
The formula for Target ACoS is: Break-even ACoS minus Target Profit Margin.
Using that, our Target ACoS comes out to be 40% – 25% = 15%. This is the target that you should set for your ACoS in order to profit the way you want.
Keep Track of Your Amazon ACoS for Profitable Amazon PPC
Your Amazon ACoS has a significant impact on the profitability of your Amazon business. It’s one of the metrics you’d want to keep an eye on if you want to keep your costs low. By keeping track of your ACoS, you’re also ensuring that you’re not spending too much on Amazon PPC and that you’re getting the most out of your sponsored products. If you’re running ad campaigns on hundreds or even thousands of products, you’d save time and sanity tracking your ACoS with an Amazon seller tool like SellerLegend.
