Advertising cost of sales (ACOS) is a term coined by Amazon for their sponsored ads. You may not have heard this before but it is quite similar to concept of cost per acquisition.
In simple language, ACOS is a measure of success.
By understanding Amazon’s advertising cost of sales, you can determine the effectiveness of your campaigns in relation to your advertising efforts. Let’s take look at the finer details of ACOS and how you can improve your return on ad spend.
Amazon ACOS Measures Profitability
When you’re selling on Amazon, ACOS is a key metric used to measure the profitability of your sponsored product campaigns. ACOS is a ratio of your ad spend to total sales. It can be calculated using the following formula:
ACOS = Ad Spend ÷ Sales
Here’s an example:
You have an ad campaign that generated $256 in sales with a total ad spend of $64 over a certain period of time. This means you’re spending $0.25 to make $1 in sales with Amazon ads.
To understand whether your ad campaigns are profitable, it’s important to know your break-even ACOS. This is where you advertising cost is equal to your profit margin (i.e. your net loss / net gain equals $0).
Next, let’s reexamine the ACOS formula with break-even in mind.
Calculating Break-Even ACOS
Let’s say you are selling a product for $25 on Amazon. To keep this simple, let’s assume the Amazon fees for that product is $3 per sale. Next, let’s make the cost to create that product to be $8.
That makes the pre-ad profit to be $25 minus $3 minus $8, or $14.
This is the amount of money that would be made from an organic sale. However, since we’re focused on using Amazon for advertising, this doesn’t include the cost per ad.
So, your ACOS break-even point would be whenever you use all $14 to get paid traffic for a sale. Obviously, when you use all $14 to generate a sale you get $0. This makes an advertising cost of sales of 56% to break-even.
If your ACOS is above 56%, you won’t be profitable. If your ACOS is below 56%, you will be profitable.
Determine Your Target ACOS
Your goal on Amazon is not to earn $0 (i.e. your break-even ACOS). Instead, the number you want to focus on, as a seller on Amazon, needs to be a clearly defined target.
Using the example for calculating your break-even ACOS, let’s look at how to calculate a target ACOS:
Remember, the total profit margin (before ad spend) is 56% which is the same as your break-even ACOS. If you want to make a profit margin of at least 30%, then your Amazon advertising campaigns must be at a maximum of 26%𑁋that’s your target ACOS.
According to AdBadger, they found the average cost of sale for their users to be 30.1% which fluctuates significantly by month. This fluctuation is due to consumer trends, holidays, increasing competition, and so on.
Low ACOS = High Profitability
The lower your ACOS the high your profitability. This is a general concept to follow and can impact your advertising strategy.
A low ACOS strategy may be effective for:
- Maximizing your profits
- Selling low-converting products
- Products that don’t need high-visibility.
Something to consider is that using a low ad spend can impact the overall visibility of your ads on Amazon. For example, if you a setting low bids for highly competitive keywords, you may not win the auction.
High ACOS = High Visibility
Advertising is a competitive place where you have to pay to play. This means, the more money you spend, you more visibility you’re going to gain.
You might want to use a low ACOS to improve profitability for short-term strategy. However, if you’re thinking long-term, using a higher ACOS can increase visibility, dominate your niche, and generate more profits later on.
Here’s when to use a high ACOS strategy:
- Increase brand exposure
- Sell out a product
- Dominate a niche
- High visibility on a specific product
To maximize your ad spend, you’ll want to find an ACOS strategy that meets your end goal. Setting a higher ACOS can be an effective strategy if you’re breaking into a new market or trying to eliminate stock for a product.
Alternative Strategies to Improve ACOS
Your average cost of sales does not rely entirely on the ads you create on Amazon. In fact, there are a few other factors that have an impact on your ACOS.
If you’re trying to improve your profitability with Amazon Ads, try some of these strategies:
Advertise at the Best Times
If you’re running ads when your ideal customers are sound asleep, you’re never going to enjoy a high ROI.
In general, the best time to advertise is on Mondays and Tuesdays for online sales. This article reports a 1.6 times more sales on Mondays and Tuesdays than Saturdays and Sundays.
Also, holidays like Cyber Monday and Black Friday have online shoppers busy.
You’ll want to track the trends in your niche and business to determine the best time of day and time of the year to spend your ad budget.
Optimize Your Product Pages
Your product pages have a direct influence on the effectiveness of your ads. Not only do you need incredible product photos but also product copy that can close a sale.
Optimizing your product page includes:
- Creating a compelling, yet relevant, product title
- Using bullet points for product benefits and features
- Choosing the best price and sales price for maximum conversions
- Descriptive additional product information
- High number of good reviews
- Eligible for Amazon Prime
Need Help with Amazon Advertising?
Whether you aim for a high or low ACOS will depend on your overall strategy on Amazon. In general, a lower ACOS will provide you with more return on your ad spend.
Remember to break down all costs associated with selling your product to calculate your break-even ACOS. With that, you can choose your target ACOS to find a profit margin that makes your advertising on Amazon worth the investment.
If you’re looking for the right strategy to improve your profitability on amazon, learn how we can help.