ACoS – What Is It and How Do I Calculate It?
Editor’s note: This is a guest post by Shai Venezia, co-founder of PPC Winner
For most of us, understanding the concept of advertising cost of sales (ACoS), i.e., the amount of money spent on advertising for each dollar of sales generated through PPC, isn’t too hard to understand, right?
Then it starts to get complicated! When is an ACoS good and when is it bad? Why is 50% sometimes a good ACoS and sometimes it isn’t??? This where most of us start to get confused, go into panic mode and make all sorts of decisions that can be detrimental to our profits.
The purpose of this article is to remove the confusion surrounding ACoS and help you achieve the correct advertising cost of sales for your specific product throughout your selling cycle. We’ll be going over how to calculate your ACoS, determine your marketing strategy and, finally, how this information can be applied to your paid advertising campaigns.
The ACoS Formula
Let’s break down the ACoS formula using an example:
- Your product sells for $10
- You create an advertising campaign costing $35
- You sell 10 products for total revenue of $100
To calculate your ACoS, divide the total amount you spend on ads ($35) by the total sales made through these ads ($100). This will give you an ACoS of 35%.
Before you can take advantage of this data, you’ll need to calculate your breakeven ACoS — the percentage at which you are spending the same amount on advertising as your profit margin.
Your profit margin is the actual amount left after subtracting all your expenses from your income. This includes all taxes, fees, production costs, transportation and so on. There may be other considerations for specific products, such as damage to fragile items.
Let’s break down the profit margin formula with an example:
- You sell your product for $10
- Your product costs you $1 to manufacture
- You spend an additional $4 on transport, packaging, taxes and fees.
To calculate your profit margin, subtract your expenses ($5) from your gross revenue ($10). This will give you a profit margin of $5.
To calculate your breakeven ACoS, divide your profit margin ($5) by 10 and multiply by 100. In our example, this would give you a breakeven ACoS of 50%.
Things are now getting a lot more interesting so please pay close attention! This is the bit that saves you money!
Step #1: Know Your Marketing Strategy!
Before your product launch, it’s important to determine your target ACoS. Doing so means outlining your advertising objectives. Surprisingly enough, not all advertising is aimed at making a profit and sometimes you ACoS will be high and you may even take a loss.
This is particularly true when your business is first getting started and you’re focusing on product launches and brand awareness. Just know that in these cases, it’s perfectly normal to have a high ACoS. Remember the adage – you have to spend money to make money.
Step #2: Getting Noticed with Sponsored Ads
After many months of research, hard work and investment of time and money, your product has finally made it to Amazon. So where are the thousands of customers you were expecting? Could it be that they just don’t know you exist? Or they cannot find you among the other dozens of pages selling the same or similar product?
Now is the time to use sponsored ads to increase sales. While your long-term goal should be to improve organic rankings, now you’ll want to sell as much as you can through PPC ads while promoting your brand.
At this stage, you want to appear on the first page for all the essential keywords in your category. It will cost you in terms of your ACoS but it is worth the visibility it will give your products. The benefits of this strategy far outweigh the losses.
By using PPC ads, you’ll introduce your product to the Amazon algorithm, allowing you to learn which keywords or phrases Amazon chooses to show your product. This tells you which keywords are needed to promote organic sales.
If Amazon is showing your product in irrelevant places, e.g., the meat mallet you are selling is appearing in searches for hammers, you know that that there is something wrong with the listing, in which case it’s time to go back adjust your backend search terms.
You’ll push sales and your ACoS may be higher than your breakeven! Why? Because it’s important to get as much exposure on Amazon as possible. Should you be worried? Absolutely not! This is all part of the grand plan!
Step #3: Adjusting Your Strategy According to Your Product
So when should your ACoS come in at the breakeven point or below? We’ve already established that when you first get started, it should be high, but what about when you have an existing store?
Let’s say that you’ve been selling for a while and your product is doing well under certain keywords organically and even appearing on page one for those keywords. Now is the time to set your ACoS to breakeven or below because now you are aiming for profit!
On the other hand, if you have a product that you need to liquidate, a high ACoS may become unavoidable, and even beneficial. After all, if your products are just taking up storage space, it’ll likely be more beneficial to cut your losses and invest in unloading inventory.
READY TO GET STARTED?
PPC Winner is here to help! We’re here to help you create the ultimate target ACoS, ensuring that you don’t overbid or underbid on keywords and waste your hard-earned advertising dollars.
Shai Venezia is both the co-founder of PPC Winner and an expert in online advertising.