Maximizing sales is the goal of every Amazon seller, and one of the best ways to boost your profit margins is to optimize your product listings so that you are visible to potential customers.
When you're measuring the performance of your business strategy on Amazon, advertising cost of sale (otherwise known as ACoS) is one of the most crucial metrics to monitor.
ACoS goes hand-in-hand with the effectiveness of your advertising campaigns as it helps to determine your campaign efficiency and can indicate how close you are to your target profit margin.
Within our informative guide, we shall cover the usefulness of ACoS, how to calculate it, and the ways that you can attain your target ACoS.
Not only will we help you reach your perfect ACoS, but we shall also outline the various types of Amazon PPC ads so that you can make a well-informed decision about which of the Amazon advertising campaigns will best serve your sales revenue.
So, What is ACoS?
Advertising cost of sales (ACoS) is a key metric that measures the profitability of an Amazon Advertising campaign.
Source: advertising.amazon.com
Additionally, ACoS will compare the advertising cost of PPC campaigns (pay-per-click campaigns) to your profit margin and will ultimately determine if your advertising campaigns were cost-effective.
Why Is ACoS important?
Monitoring the performance of your ad campaigns is crucial to interpreting your profit margin, as it can prevent you from losing money on an ineffective ad campaign.
Amazon ACoS can illuminate how much of the money you earn goes toward advertising costs.
Amazon ACoS is also incredibly helpful when it comes to assessing individual keywords, which - when paired with BQool's BigKeywords tool, is incredibly useful for Amazon sellers who are looking to refine their keyword research.
How to Calculate ACoS
An ACoS calculation is the result of dividing the total advertising cost by the total amount of sales generated by your ad campaigns.
Generally, a lower ACoS is considered to be a good ACoS because your resulting profit margin represents that you've spent less money on your advertising budget while still generating the same amount of ad sales.
However, it is worth noting that your ideal ACoS will be more personalized to your advertising goals and will vary depending on your product's average selling price and the budget you allocate for ad spending.
In order to understand how to calculate ACoS, it is crucial to know the factors that affect the advertising cost of sales.
- The competitiveness within your product category.
- The quality of your keywords.
- The span of your budget.
- The settings of your ad campaign.
- The quality of your product listings.
By understanding your ACoS, you can locate areas of profitability that need to be refined and maximize your advertising spend.
The Amazon ACoS Formula
Your advertising cost of sales can be calculated by utilizing the following formula:
ACoS = (Total Ad Spend ÷ Total Sales Revenue) x 100
Say that you spend $200 on your ad campaign, and it results in a single sale of $400 ad revenue - your ACoS formula would look like this:
ACoS = (200 ÷ 400) x 100
ACoS = 50%
As you can see, your advertising cost of sales is 50%, meaning that for every $0.50 you spend on ad campaigns, you will then earn $1 of ad revenue.
As previously mentioned, your perfect ACoS will be dependent on factors that are unique to your business strategies.
However, as a general baseline for your target Amazon ACoS, you should aim for an ACoS of no more than 20%.
Although most Amazon sellers have an average ACoS of 30%, aiming for a lower ACoS is going to be more beneficial for your profit margins.
What is Break Even ACoS?
Break-even ACoS refers to the point where you will either start making money or losing money from Amazon advertising. Specifically, this is where your Amazon advertising cost becomes equal to your profit margin.
Once you've added the costs of your expenditures (product costs, shipping costs, software tool costs, etc), what remains is your profit margin. For instance, if your profit margin is 40%, that is also your break-even ACoS.
Calculate your profit margin using the following formula:
Profit margin = (Value of Sale - Item Cost) ÷ Value of Sale
For example, this would then translate to:
Profit margin = ($70 - $21) ÷ $70
Profit margin = 70%
After your calculations have led you to your target profit margin, you must subtract that from your break-even ACoS to get your target ACoS.
Using the previous example, if you have a profit margin of 40% to work with and your target profit margin is 25%, your target ACoS should aim for 15%.
That target ACoS is relatively low, and although most sellers would rather have a 15% ACoS, we shall now cover how a high ACoS could be equally beneficial (especially for new sellers).
High ACoS vs Low ACoS
A low ACoS: you are spending a lower percentage of ad revenue on sales on advertising, meaning your profit margin will increase.
A high ACoS: you are spending a higher percentage of ad revenue on sales on advertising, meaning your profit margin will decrease.
When to Set a Low Target ACoS
As we've explored, a low ACoS is generally synonymous with a good ACoS by Amazon sellers because it means that your ad spend is paying off and you are seeing an increase in your profit margin.
We recommend that you aim for a lower target Amazon ACoS if your intentions are to:
- Make as much profit as is feasibly possible.
- Sell a product that not many customers have come across (products with a low conversion rate).
- Sell a product that doesn't need high visibility to attain sales; for instance, this could be products with a high number of positive reviews.
Lowering your ad spend isn't everything. When you only grant yourself a low ad spend budget, you risk the visibility of your product.
As it happens, visibility is the main appeal of a high Amazon ACoS.
When to Set a High Target ACoS
Having a high ACoS isn't always a bad thing; it can also mean you have a good ACoS, depending on your unique goals.
A high ACoS on Amazon will increase the visibility of your product, so much so that you could end up dominating your niche, which can result in a boosted profit margin in the long term.
We recommend that you aim for a higher target Amazon ACoS if your intentions are to:
- Draw customers to your brand.
- Want a higher degree of visibility for your product.
- Are trying to get rid of stock that isn't selling well.
Although a high ACoS means that you are spending more money, you are likely also to make more money in the long run. Over time, you are also most likely to generate organic sales because the traffic to your product page will also be more organic.
Types of Amazon Ad Campaigns (PPC)
An Amazon PPC campaign is part of an advertising model that helps sellers and brands boost their product sales online because it allows you to buy Amazon advertising space on listing pages.
A PPC (pay-per-click) ad campaign only charges the seller for the advertising cost when a potential customer clicks on the advertisement.
Source: https://advertising.amazon.com/en-gb
There are three types of PPC campaigns that you should know about:
1. Amazon Sponsored Products Campaigns
With this form of ad campaign, you can choose the products you want to advertise and add relevant keywords to target a CPC (cost-per-click) amount.
Your ads will become eligible to display when customers look up one or more of your keywords.
Source: https://advertising.amazon.com/en-gb/solutions/products/sponsored-products
These campaigns are great if you are trying to dominate your niche and garner awareness for a newly launched product.
2. Amazon Sponsored Brands Campaigns
Promoting your brand is as equally important as promoting your products.
Sponsored Brand ads are great for showcasing your brand's uniqueness, which is great for attaining loyal customers.
Source: https://advertising.amazon.com/solutions/products/sponsored-brands
We recommend sponsored brand campaigns for the seasoned Amazon seller because you have a great degree of autonomy over the appearance of your ad. These ads are designed with the customer's experience in mind, regardless of whether they are new to your brand or not.
Note: To be eligible for sponsored brand campaigns, you need to have an active professional seller account under the Amazon brand registry.
3. Amazon Sponsored Display Ad Campaigns
Sponsored Display Ad campaigns are used to target customers both on and off Amazon's website.
These ads are great for improving campaign efficiency because they are optimized for maximum conversions.
Source: https://advertising.amazon.com/en-ca/blog/introducing-product-targeting-for-sponsored-display
Retargeting is also made easier with Sponsored Display Ads, which are extremely useful for customer retention, whereby your ads are able to reach previous visitors to your product page.
How to Lower ACoS
Let’s now explore some useful strategies that will help you attain the lowest ACoS possible so that you can start generating advertising sales quickly.
Monitor Your Stock
When your product sells out, any ads promoting it will become ineligible. When this happens, your Best Sellers Rank will start to decline.
The worst part is that you won't receive any alerts at campaign level or ad group level, so make sure to monitor your stock levels consistently!
Improve Your Keywords
Remove keywords that aren't performing well and add them as negative keywords so your product doesn't appear in the search results of those keywords.
Avoid keywords with high impressions but low conversions!
Especially look for long-tail keywords with lower competition!
Note: Long-tail keywords are more specific keyword phrases that have lower search volumes but more refined intent, as they focus more on a given niche.
Boost Your Product Ratings
Utilizing product inserts, frequently answering customer queries, providing updates on orders and asking for feedback are all great methods of boosting your product ratings.
When you increase your product's positive ratings and reviews, your sponsored ads will be made visible to more potential customers.
This is a great way to increase product visibility without increasing your ad spend.
Refine Your Bidding Strategy
Your bid is the amount of money you are willing to spend for a click on your ad.
To bid effectively, you should research the competition of each of your keywords. If a keyword is substantially competitive, you may need to increase your bid to ensure that your ad is visible.
If your keyword has low competition, you can lower your bid and still attain clicks at a lower cost.
It is also helpful to consider the time in which you advertise your products. Whether you are looking at the time of day or even which day of the week, you will have noticed that ads perform better at specific times.
By knowing when to advertise, you can adjust your bidding strategy accordingly to maximize the usefulness of your ad spend.
Optimize Your Product Pages
To reduce the need for paid advertising and locate a good ACoS for your business, you should ensure that your product listings are optimized for search engines.
By doing so, you will increase the level of organic traffic to your product page. Here is how you can achieve this:
- Use relevant keywords in your titles and descriptions.
- Make your descriptions clear and informative.
- Employ high-quality images and videos of your product.
Get Started with OA Cheddar
Now that you are an expert on the Amazon ACoS, it’s time to find some handy tools to help you on your way to boosting your profit margins!
Source: https://oacheddar.com
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