Amazon ACoS: How to Calculate Target and Break-Even ACoS
When evaluating your performance on Amazon, one of the key metrics to monitor is the Advertising Cost of Sale (ACoS). This metric is essential for assessing the success of your advertising efforts and can significantly influence your progress toward achieving business objectives.
To enhance your advertising effectiveness, it's vital to apply the appropriate ACoS formula. This understanding is crucial for calculating your return on investment and fine-tuning your bidding strategies.
In this article, learn what ACoS and its types are, as well as how you can calculate each and what does it say about your campaign on Amazon.
What is ACoS?
Amazon Advertising Cost of Sales (ACOS) is a key metric for evaluating your pay-per-click (PPC) advertising campaigns on Amazon. It compares the money you spend on PPC to the revenue you earn, helping you assess whether your campaigns are cost-effective for your brand.
How to Calculate ACoS
To calculate ACoS, use the following widely-known formula:
ACoS = (Ad Spend / Ad Revenue ) x 100%
ACoS shows how much you spend on advertising for every dollar you make from the campaign. For instance, if you spend $5 on ads and earn $100 in revenue, your ACoS would be 5%.
Generally, the lower ACoS – the better, as it indicates that your advertising costs are minimal compared to the revenue generated. A lower ACoS means more profit for your business, allowing you to reinvest in marketing or other areas to drive further growth. However, this doesn’t mean you should always aim to set the lowest bids on your ads. A favorable Advertising Cost of Sale (ACoS) on Amazon can differ significantly based on the product category, market competition and the seller’s objectives.
The average ACoS is usually between 25-35%, but this can vary based on your strategies and objectives. Generally, you should aim for an ACoS of around 20%.
How to Calculate Break-Even ACoS?
Breakeven ACoS is the percentage at which your advertising costs equal your profits. In other words, it’s the point where you’re not making any profit or loss from your ad campaigns. It’s determined after subtracting all fees and costs associated with selling on Amazon from the sale price. This calculation shows the point at which your net profit is zero, meaning you neither gain nor lose money.
Let’s say you sell a product for $100, the production cost of which is $50. After adding $5 of Amazon fees on top of that, it’s easy to count how much we have left as our Pre-Ad Profit per Sale: 45$.
If we spent all of that money on paid ads, then based on the formula we would get ACoS equal to 45% ($45 / $100). Now this very number is our breakeven ACoS, meaning that if we’re doing lower than 45% – we make a profit out of every sale.
How to Calculate Target ACoS?
Target ACoS refers to the percentage of sales revenue that you aim to spend on advertising. To calculate your Target ACoS, subtract your desired profit margin after advertising from your profit margin before advertising.
Target ACoS = Profit Margin before Advertising / Target Profit Margin after Advertising
Continuing the example above, if you want to keep your profit margin at 20%, then your target ACoS will be:
Target ACoS = 45% – 20% = 25%, meaning you will only have to dedicate 25% of your revenue to advertising to get a profit of 20% per each sale of a product.
Your Target ACoS can change based on your business objectives and advertising strategy. For instance, if you’re introducing a new product, you might set a higher Target ACoS to boost visibility and drive sales. Conversely, if your goal is to maximize profits, you may aim for a lower Target ACoS.
What is the Perfect ACoS for your Business?
There isn’t a one-size-fits-all answer for what constitutes a good ACoS, as it varies based on your business’s profit margin, industry, and other specific factors.
Generally, a lower ACoS is seen as favorable, but this can change depending on your business goals or product stage.
Stage 1: Product Launch
When launching a new product, your priority is to boost sales velocity, gather reviews, and improve your placement on Amazon’s search results. In this situation, it’s okay to exceed the break-even ACoS to gain initial traction. Even if it means incurring some losses initially, this approach can lead to better returns in the long run.
Stage 2: Product Growth
During this phase, focus on getting as many impressions as possible without incurring losses. Keeping your ACoS at break-even will help you maximize visibility while avoiding financial losses.
Stage 3: Profit Maximization
In this final stage, your goal is to achieve a sustainable profit margin. Here, you should closely monitor your ACoS and adjust your advertising strategies accordingly.
1. Set a Target ACoS: Determine a specific ACoS that aligns with your profit goals, and adjust your bids to stay within that range.
2. Analyze Performance: Regularly review key performance indicators (KPIs) such as click-through rates and conversion rates to identify areas for improvement.
3. Customer Retargeting: Use retargeting strategies to attract previous visitors and convert them into buyers, which can help lower your overall ACoS.
Final Thoughts
Amazon ACoS is a crucial metric for assessing the success of your advertising campaigns, but it should always be viewed in the context of your business objectives.
If your goal is rapid business growth, a higher ACoS may be necessary. On the other hand, if you’re focused on improving profitability, it’s important to prioritize total ACoS rather than just trying to minimize your Amazon ACoS. You can easily check your ACoS using SellerApp’s free Amazon ACoS calculator.
If you’re still concerned about your advertising performance, at Weby Corp we have a dedicated team of experts ready to develop a tailored PPC strategy that aligns with your goals. Contact Us now and discover how we can help you!
Table Of Glossary
FAQ
1. Optimize your product pages and set a competitive price.
2. Collect data prom previous campaigns and find the best time to launch your advertisement.
3. Focus on the right keywords.
