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.
How to calculate ACoS?
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.
What is the difference between ACoS and ROAS?
RoAS stands for Return on Ads Spent and is very similar to ACoS. It is defined as followed:
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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.
What is a good ACoS on Amazon?
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.
How to reduce ACoS on amazon?
In our experience, here is the best way to keep the TACoS under control:
- Monitor weekly during low season and daily during high season the TACoS. If you can't measure it, you can't improve it.
- Structure your accounts around customer intent: brand, generic, long tail, competitors, substitute products. Watch out intent from broad match keywords in your search query report.
- Add negative keywords to block unrelated intent and keep control of your account structure.
- Increase bids for keywords or product targeting below your Target ACoS and decrease bids for those higher than your Target ACoS.
- Use bid adjustment to rank higher on top of the page for top keywords like Amazon’s Choice keywords, high traffic and autocomplete keywords.
How to calculate break-even ACoS?
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.
Fixed costs:
- Amazon monthly fees
- CPA or accounting expenses
- Any monthly subscription, like Helium 10
- And so on…
Variable costs:
- Shipping cost from supplier to Amazon Fulfillment Center
- Shipping cost to end customer, if you sell through FBM
- Referral fee
- Fulfillment fees, like FBA
- Rebate
- Return and Refund
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.
- Selling price
- Fixed cost allocated by unitssome text
- Amazon Monthly fees
- CPA & Accounting
- Subscription fees
- Fixed cost allocated by unitssome text
Now deduce variable costs:
- Variable costs:some text
- Cost of Goods Sold (COGS)- per unit: How much do you pay to pay for a unit that you sell. This can also be your manufacturing cost if you are a manufacturer.
- Shipping Cost - per unit: for instance if you pay $200 for 4000 units, it will be $0.05 per unit
- Amazon referral fees: 15% on average, click here for more details
- Fulfillment fees like FBA fees, click here for more details
- Rebate or vine costs
- Return fees: for each unit return, you still need to pay the fulfillment fees as well as on average 20% of the referral fees. In other words, if your return rate is 10%, your selling price is $20, your referral fee is 15% and your fulfillment fee is $5.43. Your return fees will be around $5.43*10%+20%*10%(return rate)*15%(referral) *$20(selling price)=$0.60
Let’s walk through an example. If you sell 600 units a month at $20, here is what your profit may look like:
- Selling price: $20
Fixed cost:
- Monthly Amazon fee: $39.99/600=$0.06
- CPA : $25/600=$0.04
Variable cost:
- Cost of Goods Sold: $5
- Cost of shipping: $150/600=$0.25
- Amazon referral fees: $20*15%=$3
- FBA fees =$5.43
- Return cost: $0.60
=$5.62
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.
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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.
What should my ACoS be on Amazon?
Your Target ACoS depends on the profit you want to make, and the phase of your product life cycle.
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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.
What does TACoS mean in Amazon?
In fact, many eCommerce businesses are walking away from ACoS and prefer looking at the TACoS:
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Especially for 2 reasons:
- The operating margin (Sales - Cost of Good Sold - Fulfillment - Shipping Cost - Return) can easily be compared with the TACoS. If the operating margin is larger than the TACoS, the business makes money.
- Advertising sales have an impact on organic sales. On Amazon, for instance, advertising sales improves the seller ranking which leads to more organic sales. In addition, the more sales your product gets, the more reviews you have, and the better are your conversion rates.
What is the difference between TACoS and ACoS?
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.
Final Thoughts:
Every industry, and therefore every product category, is different. We have seen hundreds, if not thousands, of Amazon accounts and can give you better advice on how well you are doing compared to your industry average. If you need help with decreasing your ACoS and make your business more profitable, we offer a free account analysis that includes:
- A competitor and market analysis
- A clear and predictable pricing
- A road map and an action plan that we would follow if you were working with us