Understanding Advertising Cost of Sales (ACoS) for Amazon Sellers

If you're new to selling on Amazon, one of the key metrics you'll encounter is Advertising Cost of Sales (ACoS). This metric is crucial for managing your advertising budget effectively and maximizing your profits. Let's break it down in simple terms.

What is ACoS?

Advertising Cost of Sales (ACoS) is a metric that tells you how much you spend on advertising for every dollar of revenue generated from those ads. It's calculated using the formula:

ACoS=(Total Ad Spend/Total Sales from Ads)×100

For instance, if you spent $100 on ads and made $500 from those ads, your ACoS would be 20%.

Why is ACoS Important?

ACoS helps you understand the profitability of your ad spend. A lower ACoS means you’re spending less on ads & making more revenue, which is a good sign of effective advertising.

• Profitability: A lower ACoS indicates higher profitability. If your profit margin is 30%, an ACoS below 30% means your ads are profitable.
• Budget Allocation: Knowing your ACoS helps you allocate your advertising budget more efficiently across different campaigns.

Ideal ACoS for Amazon Sellers

There isn’t a one-size-fits-all ACoS. It depends on your product category, profit margins, Cost of Goods Sold (COGS) and profitability goals. Here are some benchmarks:

• Break-Even ACoS: This is when your ad spend equals your profit margin. For example, if your profit margin is 25%, a 25% ACoS means you're breaking even. Please note here, this is not a break-even point for your Amazon business, but only for your ad spend. You might still be incurring costs which are not included in this equation of ACoS. But still knowing your break-even ACoS is very important. We’ve created a free tool for calculating your break-even ACoS for the complete Amazon business. Feel free to use it before launching your Amazon ads. 

• Target ACoS: This is typically below your break-even ACoS, ensuring you make a profit. Many sellers aim for an ACoS between 15-20%, depending on their margins.

• Total ACoS (TACoS): Where as the formula for ACoS is Ad Spend/ Ad Sales x 100. The formula for TACoS is Ad Spend/ Total Store Sales x 100. We consider this as a better metric rather than ACoS especially for new Amazon sellers. Because rather than only looking at your ad sales, this metric also considers your non-ads sales. For new sellers all non-ads sales are typically ads sales itself mis-attributed by Amazon as non-ads sales.  

Strategies to Optimize ACoS

1. Keyword Optimization: Regularly review and optimize your keywords. Focus on high-performing (sales) keywords and eliminate those that aren’t converting.
2. Bid Management: Adjust your bids based on performance. Lower bids for high ACoS keywords and increase bids for low ACoS, high-converting keywords. As suggested in a previous video tutorial, you can go with bids from -30% of your CPC for not so good performing keywords to +30% of your CPC for good performing keywords. Anything out of this range will attract drastic results. Which may result in a drastic decrease of clicks or a drastic increase of ACoS. 
3. Negative Keywords: Use negative keywords to prevent your ads from showing on irrelevant searches, reducing wasted spend. This is especially important for automatic campaigns.
4. Ad Testing: Continuously test different ad types to see which ones yield the best results.
5. Shallow Campaigns: Don’t create large campaigns with 100s of keywords & $100s of budget. These types of campaigns usually have the highest ACoS. Try creating shallow campaigns with 3-10 keywords & $10-40 daily budgets.
6. Use-case Campaigns: Create campaigns on the basis of the purpose of the campaign. Like create automatic campaigns as discovery campaigns for locating new keyword/ search terms opportunities. Or create a focused manual campaign to only target most relevant keywords for your niche. While using such purpose-based campaigns, you can also utilize different bid & budget strategies.  

Real-Life Examples

• Case Study 1: A seller spent $250 on ads and generated $1,000 in sales. Their ACoS was 25%. AMZPro optimized their keyword strategy & were able to reduce their ACoS to 15% over three months.

• Case Study 2: Another seller with a 40% profit margin aimed for an ACoS of 30% to ensure profitability. We used negative keywords & use-case campaigns to cut down wasted spend, achieving their target ACoS within two months.

Conclusion

Understanding and optimizing your Advertising Cost of Sales (ACoS) is essential for the success of your Amazon advertising campaigns. By regularly monitoring your ACoS and implementing strategies such as keyword optimization, bid management, and the use of negative keywords, you can improve the efficiency of your ad spend and increase your profitability.

Remember, every percentage point in ACoS counts, and even small improvements can make a significant impact on your bottom line. Keep testing and refining your approach, and you'll find the balance that works best for your business. Happy selling!