Do you want to sell more products with fewer expenses? Well, we suppose that everyone wants this. It’s a healthy desire to minimise the losses and maximize the profits. But if you want to sell something, you always need to invest some funds in marketing before growing your sales. Amazon is not an exception.
Amazon’s market is huge. It always requires some advertising efforts for the product to stand out amongst thousands of competitors. Sometimes marketing expenses can be gigantic, so it’s essential to understand how to tell if your campaign is profitable or not. If this task becomes overcomplicated, Amazon ACoS (Advertising Cost of Sales) logic can help you.
To create the first impression of what ACoS on Amazon is, we can say that it’s information that allows tracking the marketing success of your products. Later on in the article, we’ll dive deeper into this subject.
The right use of ACoS requires lots of knowledge and practical experience in the professional sphere. Don’t worry if you know nothing about ACoS, we’ll provide some brief explanations of the most common questions about this value. We’ll discuss the general definition of ACoS, rules of calculations and what we usually name as bad, average and good ACoS values. We assume, that such type of review will give you enough information to understand what ACoS means on Amazon and how you can use it for a greater profit.
What is Amazon ACoS?
First of all, let’s find out the ACoS definition in the Amazon marketplace. As it was mentioned above, it stands for Advertising Cost of Sales. ACoS is a percentage that represents how profitable your marketing campaign is.
You may use ACoS to achieve greater profit. Usually, sellers tend to keep this value as low as possible. The key is simple: the lowest ACoS percentage ensures the highest profit. The reason is that you spend the smallest possible part of your profit to advertise your products.
It’s not always that simple. Reduction of marketing funds can decrease the conversion rate. Such a situation means that the number of possible customers will be smaller. It’s hard to buy something when you don’t know anything about it, right? As a result, sale rates of your products will also fall. If your products aren’t intended to be viral, you can just ignore this pitfall and aim to lower the ACoS percentage.
In other situations, it’s important to find out the optimal ACoS value for your advertisement campaigns. High ACoS means high visibility. Low values represent high single sales profit. It can be a challenge to balance those factors for your specific product. Furthermore, it’s not the final logic. To calculate the optimal strategy you also need to consider such factors as target and break-even ACoS.
Break-even ACoS is a percentage that represents which part of your profit you can spend on your marketing and not experience any financial losses. It’s a point where you don’t get any profit and do not lose money. You lose money if your advertising efforts percentage is more than the break-even ACoS. It’s a bad ACoS value.
Target ACoS Amazon value, or TACoS, on the other hand, requires you to determine the net margin. It’s the part of the profit you want to save anyway. TACoS defines how much money you can spend to promote the product and ensure this definite net margin. We assume that nobody wants to earn zero profit, so the TACoS doesn’t need to be the same as break-even ACoS.
At this point, we’ve discussed the factors that must be considered in ACoS. It may cause issues in understanding this logic, so we’ll take a look at how to calculate Amazon ACoS in practical examples. When we see how it goes with real numbers, all these terms become considerably clearer.
How to calculate Amazon ACoS formula?
So, we’ve already explained what ACoS means on Amazon. Now it’s time for actual calculations. ACoS formula represents the ratio of the total amount of money you spend on ads to total sales.
ACoS =Total Ad Spending / Total Sales
This is the actual ACoS value. If you feel more comfortable with the percentage number format, just multiply the result by 100.
For example, you spend $25 on marketing for each $100 you earn from the sales. Your ACoS value will be ACoS = 100 * (25 / 100) = 25%. You can play around with the sum you spend on advertising to optimize the promotion strategy for your needs. Spend less, for example, $15, to achieve the lower ACoS value of 15%. Such an approach increases the standalone profit but decreases the sale rates and vice versa.
Calculating just the single ACoS value is not enough. The next step is to find out the point of balance when you have zero profit and don’t experience any financial losses. We need to find out all the expenses without promotion payments before we start the calculations of the break-even ACoS. Such a list may include:
- Sales Tax
- Amazon Fees
- Production & Logistics Costs
Sales Tax is one of the mandatory taxes for each sale. Amazon fees are a list of all payments that Amazon takes from the seller. It’s also consists of possible FBA (Fulfillment by Amazon) fees.
Those are payments for the ability to use Amazon services in your retail, especially Amazon FBA. ACoS, particularly break-even ACoS, can be significantly decreased after those expenses. The third item refers to all expenses connected with production, shipping, workers’ salary, etc. Overhead is a type of expense that you can’t directly track or define but also takes place when you try to sell your products.
For example, you sold a stack of products for $247. You pay 9% ($22.23) for sales taxes, 20% ($49.4) for Amazon fees, 40% ($98.9) for production & shipment and 13% ($32.11) for overhead. You’ll will make the total profit of 100 – 9 – 20 – 40 – 13 = 18% or $44.46. There is your break-even ACoS. What does that mean? In this case, you can spend up to 18% of your revenue on the promotion and you won’t suffer any financial losses.
If your ACoS exceeds the break-even threshold you probably need to optimize ACoS Amazon value. That can be reached by decreasing your advertisement expenses. This is one of the ways that doesn’t influence production powers.
The target ACoS Amazon value is another deal. This value represents the part of your profit you can spend on ads campaigns. So, we need to calculate this value from the break-even ACoS. No one wants to work at a loss.
Imagine the next situation. Your total revenue is $553. 12% you pay for sales taxes, 25% for Amazon fees, 33% for production expenses and 10% for overhead. Your break-even ACoS is now 100-12-25-33-10 = 20% ($110.6). Also, you want to ensure that you’ll still have at least 15% of the revenue after the promotion. Using this information, you can now form the target ACoS value. You can spend up to 20-15 = 5% on the advertisements to achieve 15% of net margin.
What is an average ACoS Amazon value?
According to the statistics provided by AdBadger, we can take a look at fresh average ACoS Amazon data. In September 2018, the average ACoS for U.S. sellers was 41%. We can use this information to understand the approximate market situation on Amazon. As you see, it’s a high value, which means that at that moment sellers orientate on high visibility of their products instead of increased profits.
This situation is understandable. It’s always a brutal competition on Amazon, so you need to ensure that users will see your product in search results and buy it. Otherwise, sale rates may not be as great as you want them to be. Also, there are high advertisement expenses. Almost half of the profit transfers to promotion actions. Take this information into account during the planning of a marketing strategy.
What is a good ACoS on Amazon and why?
Good ACoS can be defined only by analyzing your goals. There is no particular definition for a good ACoS because sellers usually have different goals and development plans. We decided to highlight both situations when ACoS value is high or low.
If you aim to achieve the biggest possible profit from a single product sale, your option is to minimize the advertising cost of sales to the lowest possible value. You can use this approach when you do not bother with the conversion rate of the product or its visibility.
It’s legitimate if your product is unique. For example, you have a peculiar software or tool for specific professions or a rare collectable object. The other option is that the product is already top rated in organic search results for its niche.
On the other hand, there can be a situation when you want to sell more products or increase their rate in search results. You may also not want to bother with high profits. Well, in this case, it can be better to keep a high ACoS value unless it becomes unprofitable.
We’ve observed the basics of advertising cost of sales on Amazon. It’s an important value that represents how profitable your current marketing campaign is. You may keep the ACoS value as low as possible to minimize your advertisement expenses. Nevertheless, low ACoS value may cause losses in sales amounts for each of your products. It’s essential to find the right balance between high conversion rates and a situation where you don’t lose money.
Yes, it’s true that achieving this kind of an ACoS value is a hard and complex task. We understand possible issues and pitfalls. So, we want to offer our help. We are Amz Expert. Leave it to us. We will develop a strategy to achieve the optimal advertising cost of sales value on Amazon for your products.