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Why a Low Amazon ACoS Isn't Always A Good Thing

acos ppc mindset Oct 13, 2020

One of the biggest misconceptions Amazon sellers have when it comes to Amazon PPC is thinking that a low Amazon ACoS (Advertising Cost of Sales) is a 'good' ACoS. 

And while technically speaking, there is no such thing as a 'good' or 'bad' ACoS, more often than not, a low ACoS can do more harm than good to your campaigns, and ultimately, your business.

As important a PPC metrics as ACoS is, in this week's post, we're going to cover why it's more important to see the 'bigger picture' when it comes to your ACoS and your overall advertising efforts.

ACoS Definition

We've dedicated whole blog posts to Amazon ACoS previously that talk about what does ACoS mean and what does ACoS stand for. But in short, your ACoS measures the relationship between your ad spend and your ad sales. It's for this reason that it is used as a measure of the performance or profitability of a PPC campaign.

Your ACoS can be calculated using this simple formula: 

ACoS = Total Ad Spend / Total Ad Sales x 100

While measuring and tracking your ACoS is helpful, it doesn't give you the whole picture when it comes to your advertising efforts. Two key concepts will help you with this bigger picture thinking.

The 'Halo' Effect

The ultimate goal of PPC for Amazon is to drive organic rank and sales. This is called the halo effect. Amazon PPC provides much-needed visibility for your brand and products which, in turn, boosts organic sales thereby boosting your organic ranking.

This is because whenever a product generates high sales whether organically or through PPC Amazon's algorithm will place that product's organic placement higher up in the search results.

And it doesn't stop at keyword ranking. As your paid and organic visibility increase, and you start taking up more and more 'real estate' on Amazon, you'll drive up impressions to increase brand awareness. 

Total (or True) ACoS

One of the limitations of ACoS is that it is confined to measuring only your advertising efforts. 

It fails to measure the true value of your ad spend and how it impacts the overall performance of your business.

That's why it's important to measure your 'Total ACoS' (or 'true' ACoS). Your TACoS measures your advertising spend relative to total sales, not just PPC sales. In doing so, it provides a much more accurate picture of how your ad spend is actually performing. 

Your TACoS can be calculated as follows:

TACoS = Total Ad Spend/ Total Sales x 100

Tracking your TACoS over time shows how your ad spend is contributing to the long term growth of your business by helping to increase your organic sales.

As a general rule of thumb, companies should aim to spend around 10% to maintain their current position and around 12-15% when looking to grow or gain greater market share. It's no different for Amazon sellers.

The long term goal is for your TACoS is to remain reasonably flat or falling over time as organic sales increase and you become less dependent on ad sales.

The Low ACoS 'Trap'

Understanding the 'bigger' picture when it comes to your Amazon PPC can help you to avoid falling into what we call the low ACoS 'trap'. 

It's easy to fall into this trap and give in to the temptation to 'quit while you're ahead'. So you stop optimizing or growing your campaigns further. Or you mistakenly think that because you don't spend all of your ad budget that you have maximised your PPC sales through that keyword or campaign. 

Amazon PPC is all about visibility and signalling to Amazon which keywords you want to be shown for. In both of the above scenarios, your reluctance to invest in ads is signalling to Amazon that you don't want to be shown. In the case of unspent budgets, the reason you are not running out of budget is that you are telling Amazon that you don’t want to be shown, or be shown less prominently.

Remember the ultimate goal of Amazon PPC is to drive organic rank and sales. This is why we want to run our campaigns at break-even ACoS, so that we can drive the maximum amount of sales at little or no cost i.e. drive high quality, targeted traffic that you don't have to pay for. 

So as counter-intuitive as it sounds, we want to adjust our bids until we hit break-even ACoS, then gradually scale our campaigns and increase budgets to drive the maximum sales volume and velocity through those keywords.

If we don't, the result is lost keyword opportunities, lower visibility and fewer sales. Worse, you are leaving money on the table for your competitors to scoop up. That's because all things being equal, if your competitors are signalling a stronger intent or desire to be shown for the same keywords through bigger budgets or higher bids, Amazon will show their ads instead.

Conclusion

Understanding the 'bigger picture' when it comes to your ACoS and your overall advertising efforts is crucial if you want to maximise your sales, paid and organic, on Amazon.

While it's easy to be seduced by a low Amazon ACoS and seeing PPC as a 'cost' to be minimised rather than an investment to grow your business, the reality is you are leaving money on the table and stunting the growth of your business.

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