Advertising is vital for every business, despite its size and category. If you choose to sell on Amazon, be prepared for extremely high competition. So, advertising in the marketplace is more than just necessary.
You will meet high competition in every niche, but it will pay off. If you want to stay profitable, set an appropriate Advertising Cost of Sales. What is it, how it could help you, and how to calculate ACoS — read in our big article.
Understanding Amazon PPC
All big retail businesses use Amazon PPC (pay per click) to boost their sales. It’s a cost-effective way to promote your goods in the marketplace. You won’t need to create a long sales funnel, so you have more chances to sell goods to the customer.
The selling process with the PPC campaign would look similar to this: the customer sees the ad on the marketplace, click on it, and see a product page. They see a page with A+ content (photos, instructions, videos, lot of reviews), that convince them to buy your products.
It’s a famous psychological trick: look professional even if you open a business a few days ago. It would convince users to become possible clients. And you could skip a few steps in a classic sales funnel.
The three most important things in order to achieve success are next: create good A+ content, get customer reviews, and set an appropriate ad cost of sale to pursue. Today we show you the basics of ACoS advertising, so you would get a deeper understanding of the topic.
What is Amazon ACoS?
Advertising Cost of Sale it’s the main Amazon metric that reveals how much you spend on PPC promo to earn $1. It is similar to the Google ROAS (Return of Ad Spend). If you ever set Google PPC, you already understand what stands behind the metric in the Amazon PPC audit. For others, we have this article, that will teach you something new in marketing.
How to calculate Amazon ACoS?
As we said before, it helps you better understand the performance and marginality of goods in different campaigns. It would be easy to find the advertising cost of sale. All you need is information about sales and advertisement. Or you can use the Sponsoreds tool that will calculate it and optimize campaigns to suit it.
But if you want to count it manually, use the ACoS Amazon formula:
Let’s try it on a real-life example. It will help to better understand the specifics of PPC. Imagine: you have jewelry, revenue is $5000, while you spend $1500 on ads. In this case, you get next results:
ACoS = 1500/5000 x 100% = 30%
It’s an average number. But you should aim for 15-20%. If someone promises 3-7% in ACoS, this is only loud promises.
It’s hard to maintain those numbers even during a busy season in high-margin niches. It’s unlikely for many sellers to keep the ad cost of sales lower than 10% throughout the year. Try to stick somewhere between 15% and 35%. It’s a realistic target for most businesses.
How to calculate break-even ACoS?
You should try to keep all campaigns beneficial. It means that the promotion spending should be lower than the profit margin from it. But what is it? It’s an amount of cash that is left after you paid for all general costs (manufacturing, shipping, salaries, and possible fees). It takes time to calculate margin, but it would help you make a business even more profitable.
If an ad cost of sale is higher than the margin, you will lose cash while promoting. But if it is lower than the profit, you start earning money.
Break-even ACoS — is the position where you neither lose nor earn. You spend every cent of profits on advertising. Follow these steps in calculating break-even ACoS on Amazon:
- Find the profit.
- Calculate ACoS.
- Compare it to the profit.
To better understand what’s happening, let’s come back to our jewelry store from the example. Imagine that you are selling earrings for $20. It’s the value of the sale. Let’s set the cost of production + marketplace fee around $13 combined. It’s the item cost — the amount of money you spend on a product even before selling it. Use the next formula to find the margin for pair of earrings:
Profit of the pair of earrings = (20-13)/20 = 7/20 = 0.35
Calculate ad cost of sale. Use the formula for ACoS that we show you at the beginning of the article. Just set up your numbers in there.
As you remember, our ACoS calculation shows 30%. It’s pretty close to the margin, so this store would still be making money from advertising. But the total margin is low, so the seller will work near the break-even values. It would be better to lower ad cost of sale or try to make products more beneficial.
Why is it important to keep track of your ACoS?
This metric could help to determine the level of success of different ad campaigns. You could find which products and campaigns give the most returns, and which are only wasting your time and money. There is no perfect one-for-all cost of sale. It depends on the price of the product, its marginality, the amount of competition in the niche, and other factors.
Keep track of ACoS and try to keep it as low as possible. It helps you to stay beneficial even in volatile niches. If it is above 35-40%, try to change the settings of the campaign. It could be a specific word that gains a lot of traffic, but only a few conversions or something similar. So, it’s time to change your keyword and bidding strategies.
Reaching good ad cost of sale is complicated, but achievable! All you need is to find a fine tool that helps you in setting up campaigns. Sponsoreds uses the power of artificial intelligence to keep track of all your campaigns, keywords, and bids at the same time. It has a built-in Amazon ACoS calculator that automatically counts the index in every campaign. This tool works 24/7/365, so you don’t need to hire a big team of PPC managers to track the results.
Zero to Hero tool filters tens of thousands of potential keywords and phrases to find which would give you the most payoff. Automation tools optimize existing campaigns and find opportunities for growth. It considers 15+ factors that may affect and lead to different results. Also, our tool could give you precise analytics and possible predictions in user-friendly charts and diagrams.
Try Sponsoreds tools for free! You have a 14-day trial, without pre-payments or credit card information. Try it today, and see the first results as soon as possible!