Advertising is one of Amazon's biggest profit earners, and Amazon’s advertising platform has become increasingly sophisticated. Brands can now target shoppers at all stages of their journey, from awareness to consideration, and purchase to re-purchase.
Suggested further reading:
- How To Master Amazon Sponsored Product Ads
- 4 Amazon Sponsored Brand Ads Strategy Tips
- New Amazon Sponsored Display Ads: 2020 Update
Amazon’s ad revenue was up 51% to $5.4 billion in Q3 of 2020. Amazon offering RoAS as a metric seems to be a small part of a more significant move for Amazon to become an even more significant Advertising Platform — reaching well-beyond its buying and selling marketplace.
RoAS or ACoS?
Amazon has recently announced it will provide RoAS (Return on Ad Spend) in its reports. Traditionally it has only offered ACoS (Advertising Cost of Sale). Amazon will also continue to publish ACoS. So, RoAS should be seen as an addition rather than a substitution for ACoS.
- ACoS (Advertising Cost of Sale): shows how much you spent on ads to gain a dollar from attributed sales.
- ROAS (Return on Ad Spend): tells you how much money you earn for every dollar you spend on advertising.
Pro tip: It’s worth noting that ACoS is the inverse of RoAS — so no mathematical gymnastics on Amazon’s part there.
Ad Spend/Ad Revenue = ACoS
Ad Revenue/Ad Spend = RoAS
Why different terms? The answer comes down to the point of view of the reader.
Marketing professionals like RoAS as a metric because it shows the effectiveness of ad spend. It also makes it easier to compare these results to other marketing activities.
ACoS, however, provides a straightforward way to gauge the profitability of a campaign — making it great for understanding your break-even point.
ACoS can be thought of as a more tactical metric, and RoAS more strategic. There is also a slight psychological shift when viewing ads as an investment rather than a cost. As an example, which would you prefer to pitch to a client if you were an agency?
“We’ve decreased our advertising cost of sale to 20%.”
“We are returning 5x on advertising spend.”
Both show that for each dollar you spent on advertising, you earn $5. But the emotional impact is different.
If you're curious about benchmarking and RoAS on Amazon, check out our article — What’s a Good RoAS On Amazon?
Why has Amazon made the switch?
RoAS is the standard metric in PPC and other forms of digital advertising. ACoS is really an Amazon-specific metric. So, the real question might be, why did Amazon choose ACoS in the first place?
Fundamentally, there aren’t straightforward answers. ACoS aligns with Amazon’s campaign-orientated approach. But, very speculatively, it might have simply been a move to differentiate the platform. And the current switch might be about joining the herd.
Make benchmarking easier
Although it’s still smaller than Facebook and Google, Amazon is a fast-growing player in digital advertising. Its digital ad revenues increased 23.5% this year to $12.75 billion, bringing its US market share from 7.8% to 9.5%.
As Amazon becomes a bigger part of broader digital advertising, they will be looking to appeal to brands on and off the platform. With Amazon DSP, you can already advertise to Amazon customers (both on and off Amazon) without actually selling anything on Amazon yourself.
Fundamentally, providing a RoAS metric makes it far easier for brands selling across many different platforms to benchmark the success of Amazon campaigns compared to their other advertising channels. This also allows Amazon to provide a like-for-like comparison of its ad’s performance against competitor platforms. Lastly, it makes it easier for brands and agencies that are used to justifying ad spend in terms of returns apply this calculation to advertising on Amazon.
Growth aside, there’s another element to Amazon’s potential to dominate the future digital ad market: its voice offerings. As Alexa-powered devices become more common, Amazon is uniquely placed to deliver voice ads. Again, RoAS helps benchmark the success of these ads compared to traditional offerings.
Amazon Advertising has done a fine job delivering on PPC product advertising. But they have to be known for more than that to attract the big advertising dollars. They need to convince advertisers on “full-funnel solutions” that drive connections with customers.
Amazon needs to convince CMOs that Amazon Advertising will help them deliver successful campaigns with a proven ROI. They also need to improve their measurement and attribution tools to help advertisers better understand the performance of a full digital media portfolio.
When is ACoS still worth using?
PPC ads can be expensive. In a competitive market, it’s hard to win search term bids and always make the numbers work. On a basic level, Amazon ACoS is the quick check that your ad campaign spend is less than your pre-advertising profit margin.
RoAS can deliver the same perspective. But because ACoS is presented as a percentage (rather than a return multiplier) it makes it very easy to compare it against pre-advertising profit margin. And the ACoS focus on cost is helpful for tactically understanding how changes impact the effectiveness of your advertising.
With that said, both ACoS and ROaS provide very similar information. So, the real answer is to just use the metric that you’re most comfortable interpreting. For long-term Amazon Sellers and Vendors, that’s likely ACoS. For brands new to Amazon, that’s likely RoAS. But, as we’ve said, the slight shift in perspective is worth experimenting with to see if it changes your perspective.
Our suggestion: use both metrics.
Break-even points and CLV (customer lifetime value)
Something to remember about both ACoS and RoAS is benchmarking that figure against your breakeven point — the total amount you can spend and still turn a profit. But it’s also important to remember that not all revenue is created equal.
It’s easier (and less expensive) to retain a customer than acquire a new one. If you can figure out a way to accurately calculate CLV (on a product-specific level), it will change the ACoS break-even point for selling that product— changing how much you can commit to winning bids and still turn a profit long-term.
A change to your break-even point allows you to push competitive bidding while still making sure that you make a profit. For example, a single ad connects with a single customer. If you know that customer will buy your product three more times on average, your break-even ACoS now triples. So you could spend 3x upfront on the same ad, and still be at your CLV-adjusted break-even ACoS.
CLV provides a longer-term context for your ACoS and RoAS planning and strategy. It gives you the best possible insight into different customer acquisition costs and where you can place your ad spend. However, keeping track of all this data can become extremely complicated, very quickly.
Amazon data provides some great insights into customer behavior and buying trajectories. But the data is siloed across multiple reporting functions — and the pieces are hard to put together. Get in touch if you want to learn more about CLV calculations, or check out our blog — Can CLV Calculations Ever Be Accurate?
A maturing platform
As its platform matures, Amazon is focused on offering more options to marketers. Video ads and enhancement to Stores are evidence of this. Offering RoAS as a metric is also a sign of the platform maturing and of Amazon’s broader strategy to gain revenue from Facebook and Google.
There are a lot of opportunities for brands on Amazon, and understanding your data and advertising types is key to making the most of them. For more advice on how to succeed as a Vendor or Seller, check out our two free eBook: