Pay-per-click (PPC) advertising on Amazon is a great way to make sure your product listings show up in customer searches for the most desirable search terms. If you’re selling on Amazon, you already know how competitive it can be. PPC advertising is one way to compete for visibility in a crowded field.
But PPC campaigns have to be closely monitored if you want to ensure they don’t become a waste of money. Advertising Cost of Sale (ACoS) is a key metric brands pay attention to in order to understand how their ad dollars are performing. In this article we cover the basics of ACoS as well as strategies for lowering it in order to improve profitability.
Understanding Advertising Cost of Sales (ACoS)
ACoS, which stands for Advertising Cost of Sales, is a metric that measures the ratio of ad spend to sales revenue, given in percentages. ACoS measures the amount of money spent on advertising versus the sales revenue generated from that spend.
This metric allows Amazon sellers to determine how well their advertising campaigns are performing. Knowing your ACoS will empower your brand to make smart decisions about where and how ad dollars are allocated.
Now that you understand what Amazon ACoS is, let’s take a closer look at how it’s calculated.
Calculating Amazon ACoS
Amazon ACoS is calculated by dividing total ad spend by total sales, and multiplying by a factor of 100. Or, to demonstrate it as an equation, ACoS = {Ad Spending/Total Sales} x 100
Let’s say you’ve spent $100 on advertising and generated $500 of advertising sales. Your ACoS would be $100 divided by $500, multiplied by 100.
ACoS = {$100/$500} x 100 = 20%
In this example you’re spending $0.20 for every $1 you make or $20 for every $100 you make.
If your advertising cost of sales is 20% and your profit margin is 25%, it means you’re losing money. Your ACoS should be lower than your profit margin to remain profitable.
In a case where advertising costs of sales and profit margin balance each other, you have what is known as break-even ACoS. This means there’s zero profit and zero loss.
So what does a high Amazon ACoS mean?
A high Amazon ACoS means low profitability because your ratio of total ad spend to sales revenue is high. Assuming profitability is the main objective, Amazon brands should work towards a low ACoS and a high sales revenue figure to remain profitable.
However, a high ACoS is not necessarily a bad thing if visibility is the main short-term objective. In this case a high ACoS may be a function of bidding higher to achieve greater visibility with an eye toward greater profitability in the long-term.
What’s a good target ACoS on Amazon?
There’s no simple answer to this question because the truth is that what qualifies as a “good” target ACoS will differ from brand to brand. It will depend heavily on each brand’s objectives, products, niche, competition, campaign type, and so on.
On average the ACoS for Amazon brands is between 15%-30%. CPG brands whose main goal is to maximize sales will aim for an ACoS above 40%, while those looking to maximize profits will aim for an ACoS below 25%.
A low advertising cost of sales is ideal for brands looking to make as much profit as possible and those selling low-converting products.
However, keep in mind that a low ad spend may compromise the visibility of a product. The trick is to find a balance between ensuring sufficient exposure without narrowing profit margin.
A high ACoS can be a good strategy for brands looking to achieve high product visibility and dominate their specific niche. It can also be a good strategy for getting rid of under-performing products.
How do I find my ACoS on Amazon?
To find your ACoS on Amazon, log in to your Amazon Seller Central. Go to Advertising and click on Campaign Manager. You’ll be able to see your ACoS under the Campaigns tab. ACoS is displayed in the right-hand column.
Strategies to reduce ACoS
As we’ve already highlighted, a low ACoS means high profitability. If profitability is your brand’s main objective (as opposed to high visibility) you should focus on optimizing campaigns to lower ACoS.
Below we’ve outlined a few strategies that can help achieve this objective.
Find the right keywords
Identifying and using the proper keywords is one of the most important factors in improving ACoS. The keywords you use in your listings can spell the difference between attracting quality leads and wasting money on ads that don’t convert.
Keywords should be specific and relevant to the product, and they should be placed in the product title, bullet points, and product description. Consider the words and phrases consumers are likely to use when searching for your products and try to incorporate these into your campaigns.
Adding negative keywords to your campaigns is also useful as it prevents your ads from showing up in search results for terms that aren’t relevant.
Make use of Amazon PPC tools
Amazon’s own PPC tools and 3rd-party tools exist to help sellers optimize their campaigns. These tools not only automate bidding to boost operational efficiency but also allow sellers to identify top-converting keywords for their campaigns.
Ad tech tools also help users determine what’s working and what’s not to make the necessary adjustments and optimize PPC ad spend. Advanced built-in analytics tools provide visibility into campaign performance, ensuring each ad dollar can be tracked and attributed.
Pay attention to bids
A proper bid management strategy is a key factor influencing overall campaign performance.
Many brands either bid too low or too high. Bidding too low means potentially missing out on valuable placements. On the other hand, bidding too high can attract too much traffic and deplete your ad spending too fast.
Balance is key to getting the most out of your ad spend. But how do you set the right bid amount?
A handy formula to determine the answer to that question is:
Optimal Bid Amount = {Average Order Value x Conversion Rate} / {1/Target ACoS}
This formula will help you identify the bid amount that will drive the best results for your campaign and help lower overall advertising cost of sales.
You need to know when it’s ideal to bid down on keywords and when to increase the bid to drive quality traffic to your product page.
Timing matters
Even though consumers are shopping on Amazon at all hours of the day and night, some days and hours are better than others when it comes to running ad campaigns.
Data shows that the best days to run Amazon ads are Sunday to Wednesday. The best month to advertise is April, and the best times of the day to run ads are 8-10 a.m., 2-4 p.m., and 6-10 p.m.
Scale profitable campaigns
Amazon’s built-in analytics should make it easy to identify which PPC campaigns are generating the best return on investment. When campaigns are performing well it makes sense to direct more advertising spend towards them.
Running effective ad campaigns on Amazon
Creating and maintaining PPC campaigns on Amazon requires both time and skill to execute properly. Many brands assume they can turn their campaigns on and let them run themselves but the truth is all advertising needs tending to.
If you’re struggling to get the most out of your advertising spend, you’ve come to the right place. The PPC management team at Emplicit has deep experience running effective Amazon PPC campaigns and reducing ACoS for our clients.
