Many customers ask us how much they should spend on advertising, and what is a good ACoS (advertising cost of sales). The answer to this, as for many business questions, is the same: it depends. Let’s get a better understanding on what is a good ACoS and how to improve it.
ACoS stands for Advertising Cost of Sales and measures how efficient your advertising spends are to generate sales. The higher the ACoS, the more you spend to generate sales and the less profitable you are.
If your ACoS is 20%, this means that you spend $20 in advertising to get $100 in sales.
RoAS stands for Return on Ads Spent and is very similar to ACoS. It is defined as followed:
As you can see, RoAS is the inverse of ACoS. So you will ask me, why do we need RoAS? The truth is that RoAS has been around longer, especially for people who manage Google Ads accounts. RoAS measures in the same way as ACoS to see how efficient is your advertising spend. The higher your RoAS, the less spend to generate sales and the more profitable you are.
A good ACoS is relative. If your ACoS is 10%, but your operating margin is 8%, you are losing money. Now, if your ACoS is 10% but your operating margin is 30%, you might think that your ACoS is good. However, you might be leaving some money on the table and miss incremental profitable sales. An ACoS of 15 % with $5000 of net income is better than an ACoS of 10% with $2000 of net income.
If you break-even, it means that you don’t make any profit or loss. Your revenue is just enough to cover your cost. This is not a good or a bad thing as you might want to break even to grow faster, get more reviews, or increase your market share and create brand awareness before increasing your price or lowering your cost.
To understand your break-even point is very important in understanding if your business can sustain in the long term.To calculate your break-even ACoS, you need to list all your fixed and variable costs. A fixed cost doesn’t depend on the number of units you sell. Variable cost directly depends on your sales. Here is the list of the costs you might want to consider.
Once you have listed all your costs, enter them in a spreadsheet and allocate your fixed cost per unit. Divide your monthly total fixed cost by the number of units you sold per month.Deduce your fixed cost from your unit price.
This means that for each unit you sell, you make $5.62 profit.
Note: The more you sell, the more your fixed cost becomes irrelevant.
Now, get the ration between your operational profit and your sales.
This gives a ratio of $5.62/$20 = 28.1%
Now if your ACoS is 28.1%, you break-even (with regards to advertising). This means that you don’t make any profit or loss from advertising sales. If your ACoS is lower than your Operating profit ratio, you are profitable.
Having said that, the Amazon A10 Algorithm is based on Sales Velocity. The more you sell, the more you sell. Your ranking depends on your sales of the last 30 days. Therefore, many sellers are willing to breakeven on advertised traffic to get more organic sales.
Your Target ACoS depends on the profit you want to make, and the phase of your product life cycle.
During the Product Launch, you most likely will need to invest and have to spend more money to increase your reviews and get more social proof. During the Growth phase, your profit increases. You scale up ads and gain market share. The maturity phase is the stage where you are the most profitable. It is the right time to think about launching new products to avoid loss in revenue.
In fact, many eCommerce businesses are walking away from ACoS and prefer looking at the TACoS:Especially for 2 reasons:
Whereas your ACoS only measures the performance of your Ads, the TACoS measures your overall selling performance. The more you sell through organic, the lower is your TACoS. As you develop more upselling and cross selling strategies, and as people become aware of your brand, you will also drive more organic traffic. This traffic is not captured by the ACoS.
Co-Founder of Growth Scalers. Jeremie excel at crafting growth strategy using PPC and conversion rate optimization.
Let’s get a better understanding on what is a good ACoS and how to improve it.
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