As is generally known, the primary purpose of conducting a business, including, but not limited to trading on Amazon, is earning greater and greater profits. Sellers need to go through vast data and metrics to achieve this goal. However, there is a substantial number of Amazon PPC metrics to choose from. In this article, we shed the light on several crucial metrics, their use and calculation, and what goals the presented metrics help you achieve.
Conversion rate (CR)
Conversion rate (CR) — is the percentage of users inclined to perform a specific action (i.e., converted through it) after seeing a corresponding ad. However, defining what a conversion is varies depending on the pricing model. For instance, in PPC campaigns, including Amazon PPC, conversion is measured by the number of purchases.
How to calculate
Calculating your CR is simple. Just divide the number of users who performed a conversion by the number of users who got invested in the ad to the point of clicking it and multiplied by 100 to get the percentage value. The formula is as follows:
Practical use of this metric
To track conversion rates practically means measuring your different PPC campaigns’ level of success or failure. Therefore, knowing the share of your customers who fulfilled the set goals (i.e., purchased your product) enables you to define whether your campaign is a success or failure and determine how to improve your business’s state.
Higher conversion rates also result in more sales with the same viewing rate.
Let us provide you with an example: if you spend $2,000 a month on advertising to drive 1000 viewers to your site, you basically double the value of your advertising expenditures, providing your conversion rate is doubled as well. Thus, you can reduce your ad spend, get the same result as before, or reinvest additional revenue into new campaigns.
General benchmarks
But the primary question remains: what constitutes a decent conversion rate? Across major industries, the average conversion rate is around 2.35%. The top 25% tend to convert at 5.31% or higher. Ideally, your goal is to break into the top 10% — these are the pages with conversion rates higher than 11.45%.
Advertising Cost of Sale (ACoS)
ACoS is the sum of money you spend on advertising per dollar of revenue you make. Knowing your Advertising Cost of Sales is paramount in launching PPC campaigns on Amazon. It’s one of the, if not the most defining metrics of your advertising strategy on Amazon. In addition, your ACoS is a crucial factor in choosing a bidding strategy on different search terms.
How to calculate
Understanding ACoS is easy. It means the ratio of ad expenditure when compared to achieved sales. Thus, ACoS is the total ad spend divided by the total sales x 100 to get the percentage value.
What you should use this metric for
ACoS is one of those metrics you should use for your business. It allows you to track the costs of your campaigns and then estimate how much profit you will be able to make. Your ACoS will also help you increase your campaign’s chances of success.
When you first calculate your ACoS, it will be neither fancy nor optimal. It may be high when figuring out your advertising strategy or simply due to lack of experience. Our advice is that you should observe a low final ACoS campaign for a while prior to making modifications to it. ACoS can also be used for calculating your break-even point too. We will cover this topic later in the article.
General benchmarks
There is no generally accepted benchmark ACoS on Amazon. It can vary by business, product or service, and goal you set. So then, what is a “decent” ACoS for your PPC campaigns? The ideal situation would be to achieve the highest possible sales revenue, in combination with the lowest possible ACoS. Low ACoS generally translates to high profitability and vice versa. Therefore, sellers tend to strive for low ACoS unless they pursue a specific strategy.
Break-even ACoS
To guarantee the success of your Amazon business, you ought to calculate your break-even ACoS. To put it simply, it’s the amount of money you can spend on advertising campaigns while preserving the profitability of your business. However, you should regard it as more of a goal than an actual metric.
How to calculate
Essentially, your break-even ACoS is your profit margin. So, whatever the marginality of your product is, it constitutes the maximum amount you can spend on advertising and still turn a profit. In other words, it’s your break-even ACoS.
To calculate profit margin, you need three data points:
- Revenue — the income from selling your products.
- Cost of goods sold (COGS) — the amount of money it takes to source or produce your products. This includes manufacturing costs, taxes, fulfillment costs, and storage costs.
- Gross Profit — means your COGS minus your revenue.
Divide “Gross profit” by “Revenue,” and you get your profit margin. Should your ACoS exceed your pre-advertising profit margin, then congratulations — you’ve passed your break-even point.
What you should use this metric for
You should definitely calculate your break-even ACoS prior to launching any advertising campaigns on Amazon because it answers the question, “At what ACoS do you make zero profit and zero loss?” Thus, comes the word “break-even.”
You should ensure that your ACoS is less than your pre-advertising profit margin. The lesser the gap between your ACoS and your Profit, the better it is for your business.
The main issue lies in the expensiveness of starting Amazon PPC campaigns. In a competitive market, it’s rather challenging to win bids and always make the numbers you’ve so meticulously calculated work. No one wants to spend too much on advertising, especially to the point of making a loss — unless they have a specific reason as to why they do it.
TACoS
The deliciously named TACoS stands for Total Advertising Cost of Sale and measures advertising spend relative to the total revenue earned. TACoS gives you a sneak pick of the performance of your Amazon PPC, which directly impacts sales, as well as helps you to determine the most appropriate long-term strategies for developing your Amazon business.
- How to calculate
To calculate your TACoS, divide your total advertising spend by your total sales revenue and multiply it by 100.
What you should use this metric for
TACoS allows sellers to monitor the influence their advertising has on their company’s strategic growth. Over time, tracking your TACoS can show how your advertising expenditures can trigger a cumulative effect, thereby helping increase your organic sales.
A low TACoS means that a product generates substantial sales when advertised. And vice versa, a high TACoS means that the product advertisements are not performing well, which means you should shut such campaigns down. Products with high TACoS show that their advertising campaign has to be reshaped with either new keywords, bids, or both.
General benchmarks
The optimal TACoS usually relies on the product or service in question and the profit margin previously established by the owner for their business. “Decent” TACoS largely depends on your brand size and the objectives you’ve established. For example, a newly launched product will most likely have high TACoS. However, given most of your products perform well enough, your TACoS will drop.
Most sellers tend to strive for between 6% and 10%. Significant PPC Ad Spending on Amazon isn’t always bad, but overspending or spending without an appropriate return can considerably damage the profitability of your business. Therefore, we advise you to target your TACoS between 6% and 10%.
If you are near 20% or higher, that value may be way too high because it adversely affects your profit margins. Yet, you should also bear in mind other important factors, such as the product’s life cycle, for determining where your TACoS might land.
Click-Through Rate (CTR)
The definition of PPC click-through rate (CTR) is the rate at which your Amazon PPC ads are clicked or the percentage of people who view your ad (impressions) and then actually do click the ad (clicks).
How to calculate
The formula for CTR looks akin to this:
What you should use this metric for
CTRs are yet another essential way of understanding your advertising campaign’s effectiveness. Comparing the CTR of your different campaigns makes it possible to benchmark their performance. There are many ways to do so. For example, you can use CTR combined with the A/B testing to identify whether certain creative features are indeed helpful or should be removed.
You can also use CTRs to contrast the performance of the different types of advertising channels. For example, comparing CTRs for banners, interstitials, videos, and other campaign types allows an advertiser to determine the most promising means of advertisement and funnel available resources to these means.
CTRs can also be used to some extent within the broader attribution funnel to get user quality. For example, overall campaign performance enables a business owner to find out whether a high CTR does correspond to increased user value. This can help advertisers allured by high CTR channels to assess whether a campaign attracts quality customers or simply a high volume of users. Following that, advertising investments should be adjusted accordingly.
General benchmarks
What constitutes a benchmark click-through rate is a hotly debated topic. From a purely statistical standpoint, it depends. As such, the honest answer to the question is the same.
Click-through rates are obviously going to differ from campaign to campaign and even from keyword to keyword. Every part of the way your ad plays a part, from your ad copy to the ad’s ranking on the results page.
So while you would want to have a “high” click-through rate(CTR), there’s really no benchmark to it. The average click-through rate will also depend on the industry, and your expected CTR varies, among other factors, with respect to your ad’s position.
Data delivers more effective advertising
As you can see from the information above, rushing blindly into an advertisement campaign is somewhat suboptimal.
Such metrics were, in fact, created to facilitate the user experience in online advertising, however convoluted it may sound now. Without ACoS, there is no understanding of the effectiveness of your campaign. Furthermore, without calculating break-even ACoS, you can’t estimate what budget your campaigns will have and run the risk of wasting your precious funds.
Other combinations of metrics, such as CTR + CR, are a defining measure of your ads’ performance. Using the above metrics is crucial to your business’s success, as advertising is only a means to an end, with that end being high revenues. An effective advertisement makes your revenues grow, while a subpar one is but a sinkhole for your money.
Main Amazon PPC metrics: Conclusion
In conclusion, the metrics we mentioned above are crucial for the success of your advertisement campaign. They are like basics you would have to learn before heading deeper into any subject. Knowing your ABCs is paramount. Your business will benefit greatly from this knowledge allowing you to make better business decisions.
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