Resources - Blog
How to Tell Between a Good and Bad ACoS on Amazon
Stay on top of the latest e-commerce and marketplace trends.
A key metric that sellers and brands advertising on Amazon should monitor closely is the advertising cost of sales (ACoS), which indicates the effectiveness of your campaigns relative to your advertising spend. ACoS is calculated by dividing total ad spend by total sales from advertising. For example, if you spent $2 on advertising and those ads resulted in $25, your ACoS would be 8%.
ACoS = total ad spend ÷ total ad sales x 100
ACoS depends on a number of factors — business goals, proper campaign structure, product life cycle, profit margins, and so on. A lower ACoS means you are spending a lower percentage of your sales on Amazon and how you classify “low” will vary by ASIN. In this post, we will discuss how you can tell the difference between a good and bad ACoS on Amazon.
Calculating Total Sales for ACoS on Amazon
For your Sponsored Products campaigns, your total sales consist of product sales generated within one week of clicks on your ads. This total includes both sales of the advertised SKU, as well as sales of other SKUs in your inventory. For example, if a click on your ad for a red shirt generates a sale for one of your blue shirts, this sale is included in the total sales calculation.
With Sponsored Brands, the total sales metric is comprised of the product sales generated from ad clicks in two weeks. This total includes sales of the advertised products as well as sales of other products within the same brand that resulted from clicks on your ads, regardless of whether they were sold by you or by others on Amazon who sell products under your brand.
For example, if you own an athletic equipment brand, your Sponsored Brands ad for your new sneaker collection could also include sales for your brand’s socks and workout apparel, allowing you to understand the impact your ad spend is having beyond the scope of your advertised SKU. Unlike Sponsored Products, Sponsored Brands are shown to consumers regardless of who is winning the Buy Box, giving you more impressions with those shopping on Amazon.
ACoS Is One Advertising KPI of Many
ACoS alone does not reveal how profitable a campaign is. An understanding of the entire cost structure of each product is necessary as you cannot assume that every SKU has the same margin. As a seller or brand on Amazon, your intention is to drive profits over time in order to grow your business. Therefore, you need to clearly define the net profit margin you are targeting after ad spend in order to determine each product’s target ACoS.
Given this information, you first need to decide on the strategy and objectives for each campaign. By clearly establishing and presenting your goals, you will be better equipped to decide which products to include in your campaigns, properly structure them, and measure results. Examples of advertising campaign objectives include launching and promoting a new product, liquidating inventory, garnering positive reviews, generating profits, driving brand awareness, and more.
What Are Breakeven and Target ACoS?
Depending on the strategy you are utilizing and the product you are marketing, you then need to calculate the breakeven ACoS and the target ACoS. Breakeven ACoS is the point where your advertising cost becomes equal to your profit margin — which is calculated after all fees and costs involved with selling on Amazon are subtracted from the sale price — and you have a net loss and net profit of $0. Next, as its name implies, target ACoS is the ACoS you are striving to achieve.
Once you have calculated your breakeven and target ACoS, you can assess whether a certain ACoS is good or bad. If the ACoS is less than the product margin, your campaign is profitable, but it may not be hitting your targeted margin goal. For example, to launch a new product and get the system going, you may be willing to have an ACoS that is above your margin. Whereas for existing products, you will likely be driving towards profitability and have an ACoS well below your breakeven point.
Typically, a lower ACoS is associated with strategies such as maximizing profitability, optimizing underconverting SKUs, or selling items that you know will sell without having a high level of visibility. A higher ACoS can be beneficial for sellers who are looking to increase product exposure or brand awareness, liquidate stale inventory or products with low sales velocity, or maximize product visibility. All said, whether a certain ACoS is good or bad will depend on the business strategy behind each campaign.