Setting up and running Amazon PPC Ads is easy if you’re an expert or you have a hired Amazon PPC Agency who will do it for you. It is also easier to throw money down on your Amazon PPC campaign and not making enough sales or money out of it. Just like in setting up your own business, it is easier to get all the resources and do some marketing for your business, however, the challenge would be how to make enough profit out of your investments. This guide is all about empowering you on how to make a profit with Amazon PPC Ads. To know that, we’ll start to get to know about ACoS and why it matters to your Amazon PPC campaigns.
Advertising Cost of Sales (ACoS) is an important E-commerce marketing metric in Amazon. It is the amount you’ve spent on a campaign divided by total sales during the campaign. This tells you the percentage of your sales you’ve spent on advertising. The standard formula used by Amazon is:
ACoS = (Ad Spend / Sales) x 100; The lower the percentage, the better it is.
Here’s an example:
If a campaign has generated $500 in sales with an ad spend of $125 over a certain period of time, then the ACoS = (125 / 500) x 100 = 25%.
In other words, if your ACoS is 25%, you paid $0.25 for every dollar you made or $25 for every $100 you made.
What Makes a Good or Bad Amazon ACoS?
There’s no such thing as a good or bad ACoS. There is no good ACoS that will guarantee profitability for your ad campaign. Knowing what ACoS is good for your Amazon PPC campaigns is vital as you would know whether you are making money off these ads, breaking even or simply incurring a loss. In the example above, a 25% ACoS may look good, but it doesn’t exactly tell you if you are making a profit, breaking even or incurring a loss.
This is because whether you are making money or not depends on your profit margin. What if your profit margin is only 20%? In that case, you are making a loss of 5% if at 25% ACoS.
Profit margin is the amount you make after all the costs are subtracted from the selling price. These costs can be related to production, shipping, employee salaries, storage costs, Amazon fees, and etc. If your ACoS is lower than your profit margin and you will be making money off these ads on Amazon.
Here is how to identify your profit margin and ideal ACoS:
Assuming your product costs 30% of the sale price, Amazon fee is 25% and taxes are 8%, you are left with a net profit margin of 37%. Therefore, your ACoS at 37% is your break-even point, anything higher than this would be in loss and anything lower would be in profit:
What Can Cause Your Amazon ACoS to Go High?
Many factors can cause ACoS to go higher above your target, resulting in a loss with Amazon PPC advertising. Listed below are the contributing factors:
- Bidding high to get most clicks
- Targeting broad or unrelated keywords
- Targeting unrelated products or categories
- Targeting interests that do not precisely match your target audience
- Poorly structured campaigns
- Running only automatic campaigns
- Not optimizing your campaigns to refine targeting
- Not optimizing your product listings
- Promoting product listings with poor ratings and reviews
- Not using negative keywords
- Using only broad match keywords
Make sure you are not making these mistakes if you run campaigns yourself. However, there are some cases where it may seem to be acceptable to have an ACoS that is higher than your break-even ACoS.
These scenarios include:
Launched a New Product / Brand
When you launch a new product, your target customers usually take time to learn about your brand and product before making a switch. Therefore you may see a lower conversion rate and higher than target ACoS, to begin with. However, as awareness increases, things should begin to settle down and conversion rate may begin to increase and therefore ACoS may begin to decrease as well.
High Ticket Size / Order Value
Usually when your products are priced $100 and above, the decision making phase is longer among your target customers. This may result in higher ACoS in the short run, however, if you know the customer’s decision making length, you may rather continue running at higher ACoS in the short run and look at lower overall ACoS in the long run.
High Repeat Order Rate
When you know that your customers usually place multiple repeat orders, then it would make sense to convert them into customers at first, even if the campaign is running at higher ACoS. You know you are going to make money out of these customers from their repeat orders and their overall customer lifecycle.
Whether an ACoS is good or bad depends on your marketing strategy. ACoS is the most useful metric Amazon provides for sellers running ads. It is a useful tool in knowing the profitability of your campaign. You have to be patient with your ACoS. In the first week of launching it, you would most likely see horrible ACoS. It will take time and effort before you reach ideal/profitable ACoS which requires regular testing and optimization.