One of the biggest concerns that sellers have when it comes to Amazon PPC advertising is their Amazon Advertising Cost of Sale (ACoS).
For many sellers, ACoS feels like a runaway train that's veering out of control with no way of stopping. The good news is, this is not the case. Like most metrics on Amazon, you can improve your ACoS.
In this post, we cover everything you need to know when it comes to managing your ACoS including what does ACoS mean, what does ACoS stand for, how to calculate ACoS, and the main reasons that cause ACoS to change so you know what to do to get your ACoS to where you want it to be.
Amazon Advertising Cost of Sale (ACoS) is the most popular metric used to measure the performance of Amazon Sponsored Products campaigns.
ACoS shows for every dollar earned from PPC, how much of it was spent on PPC. Therefore, ACoS can be used to measure the profitability of a PPC campaign.
Knowing how profitable your campaigns are means you can use ACoS to determine how much you can afford to spend on PPC.
As the above description implies, ACoS measures the relationship between your ad spend and your ad sales.
ACoS is simply ad spend divided by ad revenue, expressed as a percentage. It can be calculated using this simple formula:
ACoS = Total Ad Spend / Total Ad Sales x 100
This is probably one of the most common questions we get asked by sellers. However, as frustrating as it is, there is no such thing as a 'good' (or 'bad') ACoS.
That's because your ACoS depends on the profitability of your product, specifically, your net profitability which comprises of your net profit and profit margin.
Your net profit is your sale proceeds less Cost of Goods shipping and Amazon fees. It does not include ad spend. Your net margin is your net profit divided by total revenue, expressed as a percentage.
When you know what your net margin is, you also know what your break-even ACoS is i.e. the point at which you are neither losing money or making money on ads.
We wrote a whole post on break-even ACoS as an effective PPC strategy.
In short, your break-even Amazon ACoS is equal to your profit margin. If you run your PPC campaign at or around your break-even ACoS, you won't ever spend more than your profit margin on advertising.
This way, you will never lose money on ads, and make money on every organic sale you make.
To put it simply, Amazon ACoS goes up when ad spend grows faster than ad revenue, and down when ad revenue grows faster than ad spend.
If you go one step further and understand the main underlying reasons that can cause ACoS to change, and the associated metrics, you will know what actions you need to take fix any problems, and ultimately improve your ACoS.
Metric: Click-Through Rate (CTR); the percentage of people that see your ads and click on them.
Problem: You are targeting the wrong keywords; you have lots of keywords with low CTRs
Solution: Make sure you are targeting the most relevant keywords that convert into clicks and ultimately sales.
Your CTR is an indicator of how relevant your ad is to a shopper’s search query.
Therefore the keywords you are targeting (and products and categories if you are using the additional targeting options in Sponsored Products) must be on point and in your product listing so that your ads are shown to the right audience.
Conversely, you want to ensure that your ads do not show for unrelated customer search terms, thereby remove keywords that are hurting your campaigns through negative keywords.
Using negative keywords helps to keep your campaigns laser-focused both in terms of keyword relevancy and budget. They help to reduce wasteful ad spend and re-focus those savings to what is working to further improve relevancy which in turn improves overall campaign performance and therefore ACoS.
Additionally, because CTR is essentially influenced by everything the shopper sees in your ad, you can improve your CTR by optimizing your main image; product title; the number of reviews and price.
You also want to get rid of any keywords that are getting lots of impressions but have a low CTR and driving very few sales.
The average CTR on Amazon is 0.4%. However, it is not uncommon to have what you think are 'relevant keywords' in your campaigns but for whatever reason have a low CTR which is far short of the average.
Because these keywords are getting lots of impressions relative to your other keywords, they will drag down your campaign's overall performance so it's critical that you remove them.
Metric: Cost per Click (CPC); the amount you pay every time somebody clicks on your ad.
Problem: you are bidding on keywords you cannot afford
Solution: Focus your ad spend on your money-making keywords; reduce your bids on high CPC keywords.
You should always be using your Search Term Report to identify keywords you are converting on. Not only because they drive sales but because as a result of that, you can afford them.
You want to prioritize your ad spend on these high-performers so you can maximize your PPC sales, which in turn, positively impacts organic rank and sales for those keywords.
You may also need to reduce your bid below the average Cost Per Click (CPC). Most sellers do not fully understand the relationship between bid price, Cost Per Click and ACoS so let me explain.
Many strategies recommend that if your ACoS is too high then you should reduce your bid by some arbitrary percentage, say 20% etc. This is simply is not effective. Here's why.
Let's say you are bidding $2.03 on a keyword; your average CPC $0.64 and your ACoS is 45.15% which you consider to be high because it is above your break-even ACoS. Here are two different scenarios:
To reduce your ACoS, you need to reduce your CPC. That's because as long as your bid is higher than your CPC, your CPC, and therefore, your ACoS will not come down. The only way to be sure to reduce your CPC, and therefore your ACoS, is to lower your bid to below your CPC.
By reducing your max bid to below your current Cost Per Click, you will start to see your CPC fall, and in turn, your ACoS.
Metric: PPC Conversion Rate; measures how well your ads convert.
Problem: you have low converting ads
Solution: Improve how well your ads convert by improving how well your product listing converts; remove keywords with low conversion rates that do not drive sales
Driving up your PPC conversion rate should be a regular focus because by doing so you are generating more sales for the same ad spend.
The way to do this is by optimizing your product listing to drive up your organic conversion rate (or ‘Unit Session Percentage).
You need to make your product offering as compelling as possible by ensuring your supplemental product images, bullet points and product description and/or Enhanced Brand Content (EBC) are engaging and persuasive.
Another way to drive up the conversion of your ad campaigns is to re-direct ad spend away from poor performing and irrelevant keywords - through reduced bids and adding negative keywords - and re-invest those ad dollars into keywords that are performing and have a higher conversion rate. Doing so will have the effect of pushing up your overall campaign performance.
It's important to keep overall campaign performance in mind. Generally speaking, no matter how many keywords you have in a campaign, only a small percentage are going to be driving sales. The rest will be getting clicks; if those clicks do not convert into sales, that will lower your overall conversion rate.
That's why you want to focus on fewer keywords so that you can keep conversion high. You always want to be testing new keywords, but only a handful at a time. That way you won't dilute your conversion rate too much as you take the necessary time to test and optimise.
When it comes to testing new keywords, you want to take at least 14 days because you need to allow for the 7-day sales attribution window.
Amazon Sales Attribution is when Amazon assigns credit for a sale to a specific campaign. In the case of Sponsored Products campaigns, if a shopper clicks on an ad, comes back up to 7 days later, and buys that product, Amazon will attribute the sale to that ad.
What this means is that you have to effectively ignore your last 7 days sales data, to allow any sales to 'catch up' with the associated clicks and ad spend.
This is where many sellers fall short. They don't take this into account and therefore don't allow sufficient time to make informed decisions and instead start making decisions based on incomplete data.
Amazon ACoS is just like any other performance metric on Amazon; it can be measured and improved.
The key is to understand the underlying metrics that cause ACoS to go up to increase (and conversely, decrease) so you can determine the best solution and achieve your ACoS goals.
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