Advertising your products on Amazon is becoming more complex and important. When consumers go to Google, they are doing research — Amazon is where purchases get made. If you don’t appear in the right search queries on Amazon, your eCommerce strategy is never going to get off the ground.
If you want to short-cut your way to the top of an Amazon listing, paid advertising is the fastest route. 73% of online shoppers click on Amazon product ads while browsing. But to get this right takes planning. If you don’t use the best keyword and bidding strategies, you either won’t be included in relevant searches, or you’ll pay too much for clicks on irrelevant queries — both of which waste money.
Your Advertising Cost of Sales (ACoS) percentage is a valuable indicator of the performance of your Amazon Pay Per Click (PPC) advertising. It’s a metric that guides your advertising strategy. It can tell you how your campaigns are doing over a given time and at a granularity level of brand, campaign or individual product.
The great thing about Amazon PPC is its impact on organic listings. Unlike Google Adwords, Amazon PPC sales have a direct influence on your organic rankings. If you get your PPC strategy right, you will boost your organic visibility at the same time. A quality ACoS strategy is central to this — so, let’s get started.
So, let’s look at what makes up ACoS and see why it is important. By understanding whether you can ever have a “good” or “bad” ACoS, we can then look at what is beneath this simple percentage and what you can do to optimize it.
ACoS is simply ad spend divided by ad revenue (expressed as a percentage). Mathematically, that is:
ACoS = Ad Spend / Ad Revenue
For every dollar you earn with advertising, ACoS shows how much of it was spent on advertising. Basically, ACoS increases when spend grows faster than revenue and goes down when revenue grows faster than spend. Another way to think about this is that ACoS is the inverse of the more commonly understood metric ROAS (return on ad spend). The higher the ACoS, the less profitable your ads, the lower the ACoS, the more profitable your ads.
Ad spend is made up of a combination of cost per click (CPC) and the number of clicks, and revenue is made up from the number of orders and Average Selling Price (ASP).
When you consider that orders can be broken down into “clicks x conversion rate” (CVR) and clicks as “the number of impressions x Click Through Rate” (CTS) — you begin to see that ACoS is calculated based on a range of interdependent and distinct metrics. To put it another way, there are a number of levers at your disposal that will have an effect on ACoS. There are also external factors that you will have to react to but will be out of your control.
For example, below we have two terms, each with their ACoS variably impacted by two different factors. Term A’s ACoS is dramatically reduced by an increase in conversion rate. Term B’s ACoS is similarly reduced by a CPC change, even while retaining a healthy conversion rate of 20%.
Many variables come into play to determine what the ACoS percentage is, but the key to determining a good or bad ACoS is profitability. In the end, your ACoS strategy will be led by what profitability targets you have set.
Can you use ACoS to measure profitability?
Many factors shape your ideal ACoS. For example, depending on the category you’re advertising in, ACoS can range from 10% to 40%. When launching a new product, your ACoS will start very high. Ultimately, what a “good” ACoS figure looks like depends on your product, its maturity on Amazon, and the competitive nature of your industry.
- ACoS is dependant on a number of factors and thus it is not always the only KPI to focus on with your ad strategies. Some KPIs that can be effect ACoS are:
AOV (Average Order Value) — If you sell a very low price point product let's say $5, you don’t have very much room for ad spend before your ACoS becomes high, even with a high conversion rate!
- CPC (Cost Per Clicks) — If you are in a competitive category you will expect to need high bids in order to get ad impressions. High CPCs can cause you to have a high ACoS even if you have a high conversion rate!
- Relevancy to a search term — If you are a product that has a low relevancy score compared to a search term on Amazon you may need to bid higher than a competitor due to a low relevancy score. However if you convert well against the term you will build your relevancy and thus decrease your CPCs over time. Therefore, your Conversion-rate (CVR) has a direct impact on your ACoS.
If you want to think about how all of these KPIs interact with each other — it’s captured in this equation:
While ACoS a popular metric to measure the success of Amazon PPC campaigns, alone gives no indication of the most important KPI of your campaign: profitability.
Should your ACoS be 40% or 10% to make a profit? Many retailers would be tempted to focus on a lower ACoS, based on the assumption that less spend on advertising means bigger profit.
Pursuing a low ACoS is not necessarily the ideal approach. Depending on your product age and features, which category it’s in, and the season, increasing ACoS is not necessarily a bad thing. If you wanted to maximize the total net profit for your product, ACoS wouldn’t help you figure out if you should be spending more on PPC to increase visibility and generate larger potential sales. Some strategy is needed.
ACoS strategy options
The first step in defining an ACoS strategy is to work out the profit margin of your product. You can then use this figure to define target values for your ACoS. If you spent your whole profit margin on advertising your product, you reach Break-Even ACoS.
Sales vs impressions vs profit
When addressing ACoS strategies, there are three main areas to consider: maximizing sales, maximizing impressions, or maximizing profit. These variables are not set in stone for a product or brand, and will change based on circumstances. For example, maximizing sales would make sense if you’re launching a new product and want to support your organic ranking by increasing sales velocity. In this case, you might aim for the break-even ACoS.
Maximizing impressions makes sense if you want to increase brand awareness. Depending on your product portfolio, you might also aim for the break-even ACoS, or even suffer a loss in the short-term. Knowing the average lifetime customer value that particular products generate can let you get even more aggressive when it comes to taking short-term losses for long-term gains.
To maximize profit, you need to define your target ACoS. Different products could even have a different target ACoS to maximize their selling potential. While having a low ACoS is great for profitability, a high ACoS can increase visibility, dominate a niche, and lead to more profit in the long run.
As we said earlier, don’t look for a lower ACoS without context. As we have already shown in the calculation of ACoS, PPC metrics are interdependent. Getting caught up in finding ways to reduce ACoS can have unintended consequences in reducing ad revenue or profit.
Implement your ACoS strategy
To understand what is driving (and impeding) ACoS, focus on CVR, CTR and CPC. (Conversion-Rate, Click-Through-Rate, Cost-Per-Click). Your AOV (Average Order Value) is also central. However, changing that is a larger business decision, and not something we will discuss here. But, just so we are clear — these are how all of these different factors relate:
Click-Through-Rate will only impact your ACoS if your conversion rate changes. Increase CTR with quality traffic that is likely to convert to avoid a higher ACoS.
Cost Per Click and ad spend have a proportional association. If CPC increases, ad spend increases (and vice versa). You can affect CPC by changing your bid value or bidding strategy, but it’s often not in your control.
Conversion Rate and ACoS are inversely proportional. If CVR increases, ACoS decreases, and vice versa.
To deliver your ACoS strategy, your PPC campaign management will require frequent and ongoing attention. This will include reviewing negative keywords, bids, ad placement, campaign types, what your target ACoS should be, keywords and search terms — moving as many levers as possible to maximum effect.
Three tips that will really help you maximize your ACoS strategy:
1. Auto-bidding tools
Work with an auto-bidding tool to manage bids and avoid missing impressions for your best keywords. This technology can help you optimize your ACoS and refine your keyword approach. You need to make sure that you feed in as many parameters as possible, and take manual control when needed. But when it comes to day-to-day dynamic changes, auto-bid tools can make a big difference.
2. Search term isolation
Amazon bidding will let you choose “broad match”, “phrase match” and “exact match” keywords. This allows you to tailor how specific your bid terms are, allowing you to bid on whole categories (e.g. shirts), all the way down to very specific terms (e.g. button down collar shirt with one front pocket) — and everything in between.
Broad match and phrase match bidding is easier. However, the cost is appearing for irrelevant search terms, which wastes spend. Imagine that you sell a “button down collar shirt”. If you simply bid on “shirt”, your ad could end up appearing for “t-shirt”, “clown shirt”, “Hawaiian shirt”, etc.
By isolating keywords, pulling data on results over time, and using that information to guide “exact matching” bidding strategies, you can increase relevance and lower costs while maximizing conversions. This can be done manually, or using automated analytics tools.
3. Customer lifetime value
Understanding customer lifetime value (CLV) allows you to provide longer-term context to your ACoS planning and strategy. CLV gives you the best possible insight on the value of different customer acquisition costs, and how that then impacts best practice for ACoS.
For example, if you’re a pet-supplier, and have been able to track that purchase orders of dog food lead to high-repeat purchases and up-selling of other products, you know that investing close to ‘break-even” ACoS on that product is far more aligned with long-term goals than another product that seems to draw one-off purchases. However, this is an area where keeping track of all the data can become very complicated.
Using technology to optimize ACoS
The best ACoS strategies are directed by data-driven insights and rely on granular control. Both of these can be time-consuming to deliver. Technology can help automate some tasks, and free up time to manually deliver others.
Investing in Amazon analytics tools is a critical step that can take your ACoS strategy to the next level. Rather than sifting through the different customer-data reports supplied by Amazon, analytics software will do the heavy lifting for you — presenting customer personas, ‘buying trajectories’, customer-lifetime value estimations and keyword gap analysis. This will give you a shortcut to the insights required to manually craft an ACoS strategy tailored to maximize short-term and long-term profit.
Analytics technology can also help you create persona tailored bundles, gain geo-location insights around purchase trends in specific cities or regions, and craft hyper-targeted ads that convert and keep costs down.
Planning for the future
Most brands are up against at least one competitor that can afford to outbid them. The key to outmaneuvering a business with deeper pockets is to focus your investments on the things that count.
In the end, Amazon PPC metrics are a series of math equations. You are taking each PPC metric and looking for indicators that will affect your sales outcomes. Without an Amazon ACoS strategy, making best use of automation and analysis techniques such as search term isolation, the trend will be for less-well-targeted campaigns and lost conversions.
Amazon will continue to enhance the data it makes available to retailers, which means learning to adapt and thrive based on new, algorithm-driven, rules of the game. The more information you have about your own product and customers, the more effectively you’ll be able to shape your ACoS strategy and win.