Amazon ACoS and its relation to PPC profits
The Importance of ACoS in PPC
Before we dig deeper into understanding how the ACoS impacts your Amazon business, Let’s get a better understanding of the ACoS
What is ACoS?
Advertising Cost of Sales better abbreviated as the ACoS is the most important metric, for determining the profitability of the Amazon Ads.
Calculated by dividing the Revenue from PPC with the PPC Spends, the ACoS aligns to the conversion rate for the money invested into the campaigns.
ACoS = Total PPC Sales ፥ PPC Spends
Usually, a lower ACoS is desirable. The lower the ACoS the better. Eg, an ACoS of 25% means that you spent $25 dollars in PPC where you got back a sales of $100. The sales vs spend is, in this case, is 25%.
Setting up ACoS targets within the SellerApp Amazon PPC Analyzer
Click on the Settings section, in the top right corner.
From the campaign view, set up ACoS targets based on the aim of running the campaign. Say, for instance, a new launch product could do good with a high ACoS, whereas for profitability, you might require to focus on a lower target ACoS.
The ACoS can be calculated at all levels, at the campaign level, the ad group level, and even the keyword level. Calculating the ACoS at different levels of the campaign helps analyze different granular levels of the campaign.
At the campaign level, ACoS helps you understand the profitability of the campaign - if the campaign in an overall profitable state or in a negative one.
At the keyword level, ACoS helps determine the profitability of the keyword in converting to sales. A keyword with a lower ACoS is said to be a better converting keyword from your campaign than a keyword with am ACoS of 30%.
This makes setting up ACoS targets, a very important thing in well organized planned PPC campaign. We shall discuss in detail the nature of different campaign types and setting up target ACoS based on the end target - Launch, Scaling, Profitability, in the next set of articles.
Calculating your break-even ACoS
The easiest method of calculating the Breakeven ACoS is to use the Free Amazon ACoS calculator. However, we'll also learn how to calculate the ACos manually and understand its importance in a profitable Amazon business.
For calculating the break-even ACoS, we have to start with the break-even condition of your product. In simpler words, the break-even point is where, you make no profits but no loss either, you make back the money invested in the product. Your marketing campaigns are break even only when the product costs equal the net profits. i.e. the Cost of the goods = Net Profit
The Net profit is the costs incurred in the product which does not include the marketing / PPC costs.
Net Profit = Listing Price – Sourcing / Manufacturing Cost – Vat - packaging Cost – shipping Costs – FBA fees
- The Listing price is what the customer pays for your product, including the shipping costs the customer pays.
- VAT is the value added tax.
- The Sourcing/ Manufacturing cost is the net price you buy the product for. For manufacturers, the purchase price equals your production costs.
- Packaging costs are the costs for product package (if not part of the purchase price) and repackaging
- Shipping costs are the costs for shipping the product from the warehouse to the fulfillment center or to the customer if you are using FBM.
- The FBA fees are the prices, Amazon transacts for storing the product in the FBA warehouse.
Eg. if a product sells at $30, with a sourcing cost of $5, shipping and packaging fee of $2.30 per unit, having a payable VAT of $2, with $3.20 FBA fees. The Net Profit, in this case, would be,
Net profit = $30 - $5 - $2.30 - $2 - $3.20 = $17.5
The break-even ACoS in this case would be $17.5/$30 * 100 = 58.33%
Calculating your Target ACoS
For a campaign to be profitable, you will always want to ensure your actual ACoS is lower than your break-even ACoS. Ideally, this is a phase that has to be focused on post the launch, and you start to make sustainable organic sales, for a period of time.
Define the target profit margin, the total profit margin expected from the profits, based on this number and your break-even ACoS calculate your target ACoS or you could simply use the PPC ACoS calculator to arrive at the desired number.
Is the lowest ACoS the best?
A question we often hear from our clients, the ACoS is a very complex term which could require you to dig in deeper to analyze the actual advantages of your current ACoS targets.