PPC advertising is a critical component of Amazon and all eCommerce. The competitive nature of Amazon (and eCommerce in general) is pushing up advertising across the board. That means being smart with your advertising is critical to your success. One key benchmark to gauge your success is target ACoS (Advertising Cost of Sale). All Amazon sellers have some basis for how much of their profit they want to spend on ads – and this is represented by the target ACoS you set.
There isn’t a one-size-fits-all approach for determining target ACoS. Every company in the marketplace is different, and every brand will have its own growth objectives. However, knowing what it is, how to calculate it, and how to manipulate it to your competitive advantage are definitely worth knowing. Plus, incorporating your customer lifetime values into your target ACoS calculation will play a key role in increasing your overall profitability through focusing on your ad-spend.
What is a target ACoS?
Target ACoS is the benchmark to ensure your products are achieving their target profit margin. Your ACoS shows how much of your earnings from advertising were spent on the ad campaign in the first place.
ACoS = (Ad spend ÷ ad revenue) * 100
You can analyze target ACoS at several levels, depending on your advertising account structure:
- Macro-level (Portfolio, Campaign)
- Micro-level, (Ad Groups) of individual products (ASINs) and keywords.
If it's worth considering a Portfolio-level ACoS, it does make it easier to organize and monitor campaigns by product category, brand, or season. This then enables you to manage your total ad spend using budget caps, But for maximum control and benefit, you will need to understand your target ACoS at the Ad Group and product level.
How to set target ACoS
The starting point to setting your target ACoS is to really understand what you would like to achieve with your Amazon Advertising Ads.
Aligning target ACoS with business goals
Your target ACoS effectively comes down to your business goals, and those goals will usually depend on where your product is in its life cycle. If your goal is to drive profit margin, you would want to set a lower target ACoS. If your goal is something else (launch a product, grow market share, etc.), you would aim for a higher target ACoS. Of course, your target ACoS will also change as your brand and products mature.
Master Amazon Brand Analytics to Start Using Metrics to Your Advantage.
Download our eBook on Amazon Brand Analytics and start augmenting your data so you can make better business decisions.
A good approach to consider is the BCG Matrix below — classifying your products as ‘Stars’, ‘Problem Child’, ‘Cash Cow’, and ‘Dogs’ — can really help define what your target ACoS should be and how it should evolve.
Source: BCG Matrix
Here are a few examples of what level of target ACoS you should be looking for and when.
Higher target ACoS
You want a higher target ACoS when you have a…
- Product inventory that needs moving
- New product launch
- Key events to exploit
A high target ACoS works for product launches, key events, and for campaigns focused on key moments such as discounts, special offers, Black Friday, or Prime Day which lend themselves to sustaining higher costs over a short period.
Lower target ACoS
You want a lower target ACoS when you have a…
- Sale of particular products to exploit competitive advantages
- Brand building to promote organic growth
For brand building and also maximizing sales, your target ACoS should be as low as you can manage while still having an advertising impact – that would be impressions for brand awareness and conversions for sales,
You can move towards your target goal - either through continuous, manual tweaks and bid adjustments or with the help of data-driven analysis and execution technology services.
Using Break-even ACoS as a metric
Break-even ACoS is the starting point of your target ACoS. If your target ACoS is less than your Break-even, at least you are turning a profit. You won't lose money, nor will you earn money as a result of your ads.
Top tip: On Amazon, there is a correlation between Ad Sales and Organic Sales – so keep an eye on your Total ACoS (TACoS) because your advertising may be having more of an impact on sales than you realized.
When calculating your Break-even ACoS, the key measure to make sure you get right is the Cost of Goods Sold (COGS) — the amount of money it takes to source/produce your products.
Remember to include: manufacturing costs, taxes, fulfillment costs, and storage costs. Accuracy here will ensure you are not changing your variable advertising costs because you haven’t calculated your fixed costs correctly.
Further reading: If you want more information on calculating Break-even ACOS, we produced an article that goes into much more detail.
Using CLV as a tool to look at long-term
While it's right to concentrate on ACoS as a core metric for topline revenue, it's not the ideal lever to increase profit. That's where optimizing for Customer Lifetime Value (CLV) comes into its own.
Adding a CLV-adjusted perspective to your target Break-even ACoS calculation opens up many more tactical and strategic possibilities. To really move your profitability, you will have to make more money from existing customers — CLV gives you the best possible insight into different customer acquisition costs and where you can place your ad-spend.
CLV is a highly complex metric that is central to what we do at Nozzle. As well as providing AI-enhanced PPC services, we've developed an analytics tool that can pull product-specific information to help you understand product-specific CLV and calculate the average buying trajectories of customers.
Further reading: CLV is a powerful tool, and we have written about it numerous times – try these for more insight.
How to influence ACoS to align with your targets
There is no point in trying to squeeze out improvements in ACoS if it's already in line with your target. If ACoS is around the target ACoS (even slightly above is OK in the early stages), then focus on expanding advertising to increase revenue.
Suppose your ACoS is far too high (remember, what is defined as too high will change depending on your objectives, product lifecycle, and product profitability). In that case, the focus is on reducing wasted spend. Once the waste has been dealt with, then you can look at how to increase revenue.
Here are some ways to get ACoS nearer your target level:
- Optimize Your Product Pages: Improve your Conversion Rate (CVR) and Click-Through Rate (CTR) by ensuring your product pages are the best they can be.
- Find the Best Times to Advertise: You can look at the time of day, day of the week, or seasonal patterns. For example, with seasonal products, people buy in bulk at the start of the season but will continue to replenish.
- Make the most of an Amazon Analytics Tool: Specifically, look at how search term optimization can improve outcomes while reducing costs - making it easier to match targets and advance goals.
- Continually monitor and optimize keywords: Ensure bids are increased if you are below your Amazon ACoS target and decreased if you are above. Eradicate irrelevant keywords as negative keywords.
- Use CLV to optimize for cohorts more likely to Repeat Purchase: Look for "gateway" ASINs that lead to repeat purchases — not just of the same ASIN but also across categories. Advertise aggressively for these products so you can apply a budget to drive further sales of repeat-selling products.
- Don’t forget your TACoS: remember the top tip, your PPC strategy can drive paid ad sales but also organic search benefits. This can reduce your overall reliance on PPC
Making the right choices requires understanding your customers
We've highlighted the importance of using customer data to drive commercial outcomes on Amazon. To sell successfully, you need to understand the data. More importantly, you need to set your targets and act on them. By applying target ACoS, you can exploit your understanding of customers and tailor your advertising strategy accordingly.