Whatever your reason for selling on Amazon, whether you want to quit your 9 to 5, or just earn some extra cash, you need your Amazon business to be profitable.
But many sellers, especially those just starting out, make sales without having any idea if they are making a profit. According to JungleScout 37.6% of first-time Amazon sellers lose money because they don’t know their TRUE profits.
Which is why Amazon ACoS is such a key Amazon PPC metric. It can be used to measure the profitability of a PPC campaign and therefore determine how much you should spend on PPC.
In this post, we're going to provide a brief overview of ACoS, what it is and how to calculate it, before diving into how to use your 'break-even ACoS' as the simplest way to understand how much you can afford to spend on Amazon PPC and still be profitable.
What does ACoS stand for? Advertising Cost of Sale (ACoS) is the most popular metric used to measure the performance of Amazon Sponsored Products campaigns.
So what does ACoS mean? It measures the relationship between your ad spend and your ad sales. Simply put it is the percentage of ad sales made from ad spend and can be calculated using this simple formula:
ACoS = Total Ad Spend / Total Ad Sales x 100
For example, if you spend $30 on ads and make $100 in ad sales, your ACoS is 30%.
However, what you are spending on PPC, and what you can afford to spend on PPC are not always the same thing. That's why you need to calculate your net margin.
To earn money from Amazon FBA, your net profitability should be your top concern. There are two parts to your net profitability.
The first is your net profit. Amazon’s definition of net profit is ‘seller proceeds less Cost of Goods’ e.g. Cost of Goods, shipping and Amazon fees. It does not include ad spend.
The second is your net margin, which is expressed as a percentage. To calculate your net margin, you simply divide your net profit by total revenue.
So here's an illustration to show you help you calculate your net profitability:
To understand how much you can afford to spend on Amazon PPC is to understand what your break-even ACoS is.
Your break-even ACoS is the tipping point between making a profit or loss on a campaign; you are neither losing money or making money on ads.
In other words, it's where your advertising cost is equal to your profit margin:
Break-Even ACoS = Net Margin
For example, let’s say your product sells for $10 and your landed costs plus Amazon fees are $7; that gives you a $3 net profit or a 30% net margin. That means you can spend $3 on ads, or run your campaigns at a 30% ACoS, to generate a sale and still break-even.
Now we know what our break-even ACoS is, it's easy to gauge how well our campaigns are performing.
Some PPC strategies include ad spend in their break-even calculations so their break-even ACoS is ‘post-ad profit’. That’s because they are looking to run the business at break-even to drive profit.
The drawback of this strategy is that it is short-term in nature because it generates profit at the expense of sales volume.
That’s why we don’t include ad spend in our break-even ACoS calculations. We only want to run our PPC campaigns at break-even because we want to make our profit on organic sales.
We want to spend as much ‘pre-ad profit’ as we can afford on advertising to grow organic sales over the long term.
This way we can drive the maximum amount of PPC sales at little or no cost to have the biggest positive impact on organic rankings. This, in turn, will positively impact organic sales, and ultimately drive bigger ‘post-ad’ profits i.e. pure profit which goes straight into our pocket at the end of the month after all costs including ads are taken out.
This simple yet effective break-even ACoS strategy is what has allowed us to create thousands of PPC campaigns that drive profit for our clients.
When you launch a new product, you're looking to gain high visibility and drive ranking in a relatively short amount of time.
For this reason, you are going to have to run your ads above break-even ACoS. You have to "spend money to make money.”
That's why we recommend to our members that they target an ACoS of approx 100% during the early stages of a launch.
A common mistake many sellers make during product launches is to fixate on their ACoS and panic when it spikes.
Time after time, sellers tell us that they launched a product “but it didn't work”. When we ask them how much they invested in PPC or how long was their launch campaign, they say “I was losing all my money on PPC so I turned my ads off after 3 days”.
Don't make this mistake. While a high ACoS is unsustainable long-term, it is necessary during a launch.
Conversely, there are times when you want to use a low ACoS strategy, like the ‘post-ad profit’ strategy mentioned above, as a way of generating maximum profits. For example, if you are preparing to sell your business and want to maximise its value.
But you wouldn't want to target a low ACoS all the time because a low ACoS almost always means you are leaving money on the table. The downside to a low ACoS is low advertising spend which tends to equate to low visibility of your product.
As we’ve said many times before, Amazon PPC exists to drive maximum sales volume and velocity to positively impact organic rank, and in turn, organic sales.
That is the goal of the break-even Amazon ACoS strategy. When you are driving as many PPC sales as possible at little or no cost, you too are maximising organic sales and driving bigger profits because every organic sale you make is pure profit/money in your pocket.
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