How to calculate Amazon ACOS? How can eCommerce brands reduce their ACOS of Amazon?

Saffron Edge

Feb 8, 2022

7 min read

Source: Pexels

Have you ever imagined that an online bookseller will one day turn out to be the second most valuable brand in the world? Yes, we are talking about Amazon, a leading multinational conglomerate and eCommerce company with a brand value of almost $254.2 billion (as of 2021). The company has almost 214.5 million monthly visitors to its websites, making it the most popular eCommerce company worldwide in terms of traffic. And not just this, the global advertising revenue of Amazon was expected to reach $26.1 billion in 2021, and the same forecast says it can reach up to $85.2 billion by 2026. You must be wondering why you see all these statistics about Amazon's growth and business. Well, the answer is simple - to guide you through the importance of using Amazon for advertising. Almost 9.7 million Amazon sellers are connected with this giant eCommerce platform, making it a perfect place for marketing your products and services. However, to efficiently advertise your products on Amazon, you need to constantly look after a crucial key metric to get better sales at a lower investment. That key metric is Amazon ACoS (Advertising Cost of Sales). Let's learn about it in detail.

What's Amazon ACoS, and How Can You Calculate it?

If you are from a marketing background, you probably know what ACoS is. Therefore, when you talk about 'Amazon ACOS,' it is Amazon Advertising Cost of Sales for the advertising campaigns you run on Amazon. In simple words, you can say it is a metric that determines how much money you spend on advertising your products on Amazon versus the sales you make through it. To calculate it, you can divide the money you pay for the clicks from Amazon ads by the total number of sales you make from those clicks. Below is the formula to calculate it:

ACoS =(Total ad spent / Total sales) X 100

Specifically, the ACoS value helps you understand how much money that you have earned by advertising your products was spent on running that ad campaign. For instance, let's say you run an advertising campaign on Amazon that has generated sales amount to $500. Now suppose, if the total cost of an ad campaign is $150, then the Amazon ACoS will be = (150/500)*100=30 So for every dollar you made through Amazon advertising, 30 cents have been spent on running the campaign.

How to Calculate a Good and Break-even ACoS for Your Amazon Ad Campaigns

Calculating the right Amazon ACoS (also known as benchmarking) is the process of improving the efficiency of your ad campaigns with the help of bid optimization or keyword analysis. However, a good ACoS value also depends on individual factors for every advertiser. The amount you can afford for the campaign (depends on your profit margin) and the amount you are willing to pay (depending on your advertising goals) are such factors. You can quickly determine what ACoS value will be perfect for your business through these steps:

Calculate the Profit Margin of Your Product

To find that, you need to subtract all the costs on the product (manufacturing costs, shipping charges, Amazon fees) from the product's price.

Find Out the Break-even Point of Your Amazon ACoS

Your break-even Amazon ACoS is equal to the value of your profit margin. The ACoS is part of the revenue you spend on advertising. Similarly, the profit margin is the part of the revenue you have received as a profit. When the value of your ACoS equals your profit margin, you are putting all your profit into advertising, which means you are breaking even! That's the point that decides whether you are making money or losing it!

Determine Your Target Amazon ACoS

The ultimate objective of advertising and selling your products on Amazon is to make money. For that, it is crucial to determine your target ACoS, which is the value at which you receive the profit margin you have targeted. Here's the way to calculate it: Target ACoS = Profit Margin (Before Advertising) - Target Profit Margin (After Advertising)

How to Reduce Your Amazon ACoS for Your Business?

There is a reason why business owners are inclined towards Amazon for advertising, and that reason is that it has been a paramount advertiser for years. According to Statista, Amazon's US ad spent value in 2020 was over $6.8 billion, still more than its four greatest competitors collectively spent. Touching a sales milestone with Amazon advertising is not that challenging. All you need to do is get your Amazon ACoS value close to or below the break-even point. It's alright even if you do not make any profits initially. At least your brand will reach the maximum number of people, and that's a little victory, too, right? In fact, many sellers leverage Amazon advertising to get more user reviews, to improve their rankings and brand awareness. It's not always about profitability; sometimes, it's all about brand presence and customer engagement. However, here are the three most straightforward ways to lower your Amazon ACoS:

Prioritize the Right Keywords

Be it a blog or an ad copy, keywords play a crucial role in making or breaking the success of a content piece. In order to get relevant leads that have the chance of converting, you must pick the right keywords for your product listings. But how will it reduce the ACoS of your ad campaign? Well, that's simple. You get more organic traffic by using suitable keywords relevant to your ad campaign and target audience. As a result, you do not need to lose your pocket and spend more money on advertising. You might not believe it, but a single ad can attract dozens of leads by simply stuffing the relevant keywords in your ad copies. Worried about how to choose the right keywords for your product listing? Follow these steps for that:

Conduct Amazon keyword research using an Amazon-specific keyword tool, such as Sonar.
Once you get your keywords, incorporate them into your listing.
One good thing with Amazon ad campaigns is that you don't need to add your keyword multiple times, unlike SEO. One time is more than enough for your product to rank for that specific keyword.

Well, that's it. Now, you can easily attract more genuine leads by adding the right keywords to your sponsored content.

Be Proactive in Bid Management

Look, not every product is evergreen. Some products are seasonal, and their sales vary based on different seasons. For instance, if we talk about most of the regions in India, there will be a higher sale of raincoats in July and August (rainy season). However, you can see a drop in their sales from October to January. Therefore, it is crucial to regularly check and manage your bids to optimize the cost spent on the ad campaign. You can analyze specific products and lower the bids for their ad campaigns during an off-season. Why spend an extra penny on advertising the products that your users aren't purchasing during that time? Instead, you can use that budget for high-demand products. In this way, by managing the bids, you can lower your Amazon ACoS and maximize the profits.

Source: Pexels

Optimize Your Page Content

Do you want to make your customers feel disappointed in you for the wrong information in your product listings? Well, don't tell the answer, it's already clear. Nobody wants to make their customers walk away, be it eCommerce stores or brick and mortar shops. When you get leads through your ad campaigns, make sure you show the correct information to your visitors relevant to the keywords you have used. For instance, if someone searches for a casual polo t-shirt, your listing must contain information related to a casual polo t-shirt. Remember, if the product description and details do not match with the product itself, you might lose a good amount of genuine leads. Amazon recommends those products having relevant information and generating value for the customers. By optimizing your web page content, you can get maximum leads organically. Subsequently, you might not need to invest much in advertising for that purpose.

Key Takeaways

The stats and facts have already shown why Amazon is the perfect marketplace to advertise your product listings. Even most US marketers believe that apart from its promotional features, its robust performance and high ROI make it the best advertising platform' for lead generation. However, not everyone can leverage the benefits Amazon as an advertiser offers. It depends on how efficiently you manage the Amazon ACoS with proper bid management and keyword research. Moreover, the level of competition, type of products, and seasonality also influence the critical metric. But with the proper knowledge and optimized management, it could be as easy as ABC. All you need is a professional and efficient PPC campaign management company that knows how to deal with Amazon's advertising algorithms and tactics. Their team of experts can assist you with your marketing part to fulfill your business goals within the designated budget. After all, everything we want eventually is the accomplishment of our objectives, be it with assistance or without assistance.