One of the most important things to understand when you are a seller on Amazon is the advertising cost of sales; shortly, ACoS. ACoS Amazon can give you a clear insight on your Amazon PPC performance.
This metric shows you how well your advertising is doing. But a high ACoS can mean much more than poor advertising.
In this article, we are going to investigate the advertising cost of sales on Amazon, why it’s important, how to calculate it, and how to lower it. Stay tuned to learn all there is to know about this matter.
Part 2: Why is ACoS important?
Part 3: How to Calculate ACoS Amazon?
Part 4: What is a Good ACoS on Amazon?
Part 5: How to Lower Your ACoS Amazon?
ACoS Amazon means the advertising cost of sale on Amazon. In other words, it tells you how much you spend to make your products available to the shoppers and turn your advertising into sales.
When calculating your profit, though, remember that the ACoS is not only one of the factors that influence it.Your profit is determined by many other variables, including production and shipping fees, handling fees, customer service, and more.
Nevertheless, by simply reducing your ACoS through organic positioning and higher BSR, you can certainly increase your overall profit.
ACoS is important because it tells you how much you are spending to advertise your products and make a sale. In other words, it tells you exactly what shares of your revenue is spent on advertising.
A high advertising cost of sale typically means you are doing something wrong. For instance, if you have an ACoS of 30% or higher, you are most likely running an unprofitable business.
To measure your business success score, you have to have an advertising cost of sale as low as possible.
There are many ways to cut off this number, but before you learn how to do it, you might want to learn how to calculate it in the first place.
Calculating the advertising cost of sale on Amazon is very easy. According to Amazon Seller Central, all you have to do is to divide the total advertising spend by the total sales made as a result of advertising and multiply the result by 100 to figure out the percentage, according to the following formula:
Total ads spend / total sales made from ads * 100%
If the formula seems confusing, let us take this practical example.
Let’s suppose that you are spending $10 on advertising, and as a result of this advertising, you are selling goods in the value of $50.
According to the formula above, your ACoS is $10/$50 x 100 = 20%. This means that you are spending $0.2 for each dollar you make. In other words, the actual profit for each dollar is only $0.8.
This might not seem as much, but do you remember when we said that ACoS refers only to the advertising costs?
That means that from those $0.8, you will still have to pay other costs for each dollar. These costs are manufacturing costs, product delivery from the manufacturer to warehouse, handling costs, shipping costs, and even the returns.
It quickly shows off that spending 20% on advertising is not such a good idea after all.
If you want to be profitable, you have to reduce your costs.
Indeed, let’s imagine that instead of $10, you would only spend $1 for every $50 you make.
This would cut off the costs to only 2%, which means you would only spend $0.02 for each dollar. Your revenue after paying the advertising costs would be $0.98, undoubtedly a better profit margin than before.
As such, it is easy to understand that the lower the advertising cost of sale, the better.
With all this in mind, you are probably now wondering what is a good advertising cost of sale when making business on Amazon.
Like with anything else, though, there isn’t a unique answer. A good ACoS on Amazon depends on your business goals and purpose. The first thing to ask yourself is what is your purpose.
Would you like to maximize sales or to maximize profits? The answer to this question varies based on your purpose.
If you want to maximize sales, for instance, if you want to raise brand awareness or build a seller reputation, a good ACoS is one that doesn’t make you lose money, even if that means that you have no profits.
If you want to maximize profits, a good ACoS is the lowest possible.
In case you are wondering what is a “fair” advertising cost of sale, know that typically, sellers are spending 30% on average. As a general golden rule, you should aim for an advertising cost of sale of 20% or below.
However, this is hard to achieve when you’re a starter. Another rule of thumb is to invest more in advertising at the beginning of your business; this is a simple strategy to increase sales when you’re new, gain reviews, and increase your ranking.
Once you’ve positioned yourself on the marketplace, you should do everything possible to maintain your ranking and sales organically, cutting off the advertising costs as much as possible.
To understand what is a good ACoS for you, you will have to work out your profit margins and try to maintain your costs within those limits.
However, there are still situations when it is acceptable to lose money due to a higher ACoS, provided that you can afford it. These situations include:
Clearing out excess inventory
Whether you want to change your product range due to an unprofitable product or need to clear the Amazon warehouse, so you don’t incur long-term storage fees, it is acceptable to lose some money on advertising if your purpose is to clear out excess inventory.
Launching a new product
Especially if you’re launching it in a very competitive category. The only way to make your product noticed is by sponsoring ads on Amazon. Just make sure you have a good ROI before over-advertising.
Raising brand awareness
If you’re new on the market, getting your shoppers to know you could be daunting. In this case, it is acceptable to lose money while you’re sponsoring ads on Amazon, as long as you have a good ROI nonetheless. Advertising will give you more visibility, you’ll get to sale and score reviews, and all this will actually help you to pull down the advertising costs in the long run.
Now that you know what ACoS Amazon means and what is a good advertising cost of sales, perhaps you’d like to know how to lower this figure, so you can score higher profits.
Luckily, there are a few methods you can use:
Use a combination of strategies
Most inexpert sellers believe that setting up an automated advertising campaign would do. However, that’s not true at all. To optimize costs and draw off the ACoS, you should use a combination of automated and manual strategies.
You should start off your campaign with an automatic tool, then check it regularly and adjust the keywords and parameters based on the results you achieved up to that moment. If you’re not a marketing expert and don’t know what to do, perhaps you should outsource your Amazon advertising campaign to an expert agency.
Use keyword match type
Utilizing optimized keywords is key to a successful and profitable advertising campaign, but this doesn’t mean the campaign won’t be costly. A trick to cut off its costs is to monitor the keywords and see which perform better.
There are many online tools you can use to monitor which keywords are more clicked or searched. Do your homework before starting the campaign and also keep everything under control and adjust your strategies regularly, to make sure you’re getting the most for your money.
Use negative keywords
Negative keywords are those keywords for which you don’t want to rank. Utilizing them in your campaign will tell Amazon for which keywords it shouldn’t show your ad.
Wondering how this can help? Simple. If you’re selling a shovel, you don’t want Amazon to show it to people looking for other gardening tools. So, you could rule out the keywords garden tools or gardening tools and have Amazon show your ad when people are searching for a shovel or related keywords.
In this way, shoppers who are not searching for shovels will not see your ad and won’t click on it. So, you won’t have to spend money on a useless click on your ad.
Optimize your product’s page
A strong advertising campaign is only half the work you have to do to maximize your sales while reducing the PPC costs. Your product page matters too. Therefore, you should take some time and invest in creating stellar content.
Have your listing written by a professional copywriter; it really makes the difference in terms of sales. Take professional photos of your product and add them to the page.
If you’re not an expert in any of these, trust us that you can see a clear boost in sales and lower your ACoS Amazon if you present your product professionally and have a clean copy on your listing.
Advertise only during peak times
When setting up your campaign, it is also essential to advertise when it’s the right time. It might be useless to spend money during the days of the week when people are less likely to buy.
If you didn’t know it by now, there is a whole psychology of sales that can tell you when people are more likely to make a sale. For instance, research shows that it is best to advertise from Sunday to Wednesday. When it comes to the time of the year, spring is perhaps the best season.
Use Amazon PPC tools to optimize your campaign
You might have some marketing knowledge and believe you could manage a PPC campaign by yourself? Perhaps you could. But there are higher chances of reducing the advertising cost of sale if you decide to use an Amazon PPC tool.
There are literally dozens of tools you can use; all it takes is a bit of research to find out which one is the best for you.
Set the right bid amount
When trying to cut off the ACoS, it is also crucial to set the right bid amount for your campaigns.
Set it too low, and you might not be visible enough. Set it too high, and you’ll spend too much to get the same results as you would have gotten if you would have set the right bid amount.
To figure it out, multiply your average order value by your conversion rate and divide the number by 1 divided by your target ACoS, as shown by this formula – (average order value x conversion rate)/(1/target ACoS). This is the estimated bid amount, and you should use this calculation to get the best results for your campaign.
Wrapping It All Up
ACoS Amazon refers to how much money you spend on advertising. It can determine either your visibility or your profit; either way, there are certain thresholds you can’t exceed.
Sure, you can have a higher ACoS and lose money on some circumstances, but your main goal should be to spend as little as possible on advertising, so you can maximize your profits.
Follow the strategies above and hopefully, and you’ll be able to reach the best ACoS Amazon for your business.