Advertising Cost of Sales or ACoS basically measures how much a seller spends on ads in order to earn sales from them. It is an important metric that guides you through building a suitable advertising strategy. ACoS is a percentage that determines how much you should bid on particular search terms. You can calculate ACoS by dividing total ad spend by total sales.
ACoS = Total Ad Spend ÷ Total Sales
Does Minimizing the ACoS is an Ideal Strategy?
ACoS is proportional to your Ad Sped. So, people often think that their main goal is to minimize their ACoS, which is not true. Sellers focus on lowering their ACoS as a part of their campaign management strategy. However, having a low ACoS means that you are likely to leave profit lying across the table.
For instance, a seller has a cooler whose profit margin is 30%. He or she spends around USD 100, obtains USD 1,000 and have USD 700 in the costs. In this case, the seller has ACoS of 10% and USD 200 profit on ad sales. Similarly, there is another seller with the same cooler who has a profit margin of 30%. He/she spend around USD 2000 for ads and gain USD 10000 in sales and USD 7000 in product costs. With a 20% ACoS, this seller makes a profit of USD 1,000 on their ad sales.
Even though the second sellers have more ACoS, but still made five times more profit than the first seller. Additionally, considering the increased sales, organic rankings of seller B is likely to be higher, thereby boosting his/her sales opportunity. So, minimizing ACoS is not always an ideal strategy.
Determining the Ideal ACoS for your PPC Campaign
Focusing on lowering your ACoS can hinder your organic product rankings and sales. Similarly, sticking to higher ACos targets might impact your profitability. The one size fits all approach where marketers manage their ACoS target lower than or equal to the profit margin. This is a good strategy that ensures that you don't lose any money on your ad campaign; however, it does nothing to optimize the value of your ad campaigns. You should determine your ACoS target based on market share, profit margin, and required growth rate for your products. Following are two effective steps to determine the right ACoS for your ad campaigns:
- Set the Profit Margin for Your Product
You must first determine the break-even point of your business. In order to calculate the break-even ACoS, you must first determine your business's break-even condition. This is basically the point; you support the money and make no profit and no loss with the product. So you must calculate your profit margin and for that sum-product costs, Amazon fees, sales tax, shipping costs, and other overhead on a per-product basis and divide the result from your selling price.
If you sell products in the bundle, then you may have to add all the product cost together, determine the overhead and divide the result by total units. You can use FBA revenue calculator to get the profit margin after you have entered all the expenses. The profit margin you will get is your break-even ACoS, which means at this point or below this point, you will not lose any money on your ad campaigns.
Profit Margin = Total Expense ÷ Selling Price
- Build a Campaign Strategy
The first step here is to determine your strategic campaign objectives. For instance, if you're launching a new product, your goals might get to increase your sales. In this case, taking break-even ACoS can help you optimize sales without losing money. Similarly, if your aim is to maximize impression by generating greater brand awareness, you might want to choose break-even ACoS. You will not be losing any money while generating higher brand awareness.
However, when your goal is to make a higher profit, setting a break-even, ACoS will not help you because you want to make above zero profit. With a goal to increase your profit, you must determine your target ACoS.
- What is Target ACoS?
Target ACoS is the optimum advertising cost of sales that your campaign should target in order to remain in the target profit margin. Basically, target ACoS is the difference between the break-even ACoS and the target profit margin. For instance, if your break-even ACoS stands at 25% and the target margin is at 10%, your target ACoS will be 15% (25-10=15).
- ACoS Vs ROAS
Amazon Cost of Sales shows you how much you should spend on ads in order to obtain determined sales results. The Return on Ad Spend (ROAS) is basically the opposite of ACoS. It shows how much money you will earn for every dollar that you spend on advertising. While they both show the effectiveness of your PPC campaigns by determining the return on your investments, ACoS is considered more efficient.
This is because ACoS comprehensively translates to the profit margin of your product. If you have a profit margin of 20% and you are spending 30%, you clearly know you have made a risky decision. When you obtain 333% ROAS, it might look impressive, but you should know that this particular value is merely going to break even. In order to convert your ACoS to ROAS, you can do this by simply diving 1 by the ACoS (1 ÷ ACoS)
The ACoS target that you select becomes one of the primary indicators that influence the results of many other elements of your advertising campaign. So what works for others might not work for you. As a seller, you must understand your business goals, identify the profit margin you want to achieve, and assess your campaign in at different ACoS target in order to gauge its effectiveness and find an approach that works best for you.
If you find the whole process too stressful and overwhelming, there is a plenty of professional PPC management software available online, both paid and free, that can help to handle yourPPC campaigns and thus boost your ad sales. If you are interested, take a look here and find out how do these tools work.