You might have already come across ACoS on Amazon. What is that? We are here to tell you more about ACoS which stands for ‘Advertising Cost of Sale’ and means one of the key sellers’ metrics that is used for measuring the performance of Sponsored Products campaigns on Amazon. Many Amazon sellers use this ACoS formula to see if their ad campaigns are successful.
Welcome to our ‘ACoS explained’ guide where we’ll tell you what does ACoS mean!
Advertising cost of sales shows the ratio of ads costs to retargeted sales. ACoS formula is the following:
Ad spend ÷ retargeted sales
Take a look at an example:
Let’s pretend that an imaginary campaign has got $280 from sales, an expenditure is of $70. ACoS will be: 70/280 = 25%.
We can now also state that you spend 25% on ads to make $1 of sales from this ad campaign.
Many Amazon sellers use this ACoS formula to see if their ad campaigns are successful. The most difficult thing is defining the correct target value for advertising cost of sales as ACoS can’t say anything about direct profitability of ad campaign. To determine whether the calculations tell you good or bad things, you should look at the whole cost structure of the product you’re advertising.
As long as your costs for advertising are less than your profit margin, you won’t suffer losses. You might already know that profit margin is the amount of money you make after all costs (production, shipping, salaries for employees, storage, and so on) and Amazon fees (maybe even FBA fees) are taken from the final selling price.
Here is an example of how the cost structure for a product may look like. Let’s imagine a product with the following calculations:
So, the break-even ACoS for this product will be 22%. That means ACoS of 22% and lower ensures a profit.
In our example, 22% stands for the net profit margin. You won’t lose money as long as you spend on advertising less than 22%. Your Amazon ACoS has to be 22% or lower for you to remain profitable.
The first one - break-even - is not often used by professional Amazon sellers. The main interest for every seller is making the profit with their ad campaigns, not zero profit. So, you have to calculate how much profit you strive to make for defining your target ACoS on Amazon.
Let’s remember the example shown above, where we had a 22% profit margin. If you want to have 10% as pure profit margin, then your target ACoS will be of 12%.
So, 12% is the target ACoS for our example. That means that you spend 12% on advertising and keep 10% of profit.
You see, there is no such things as good or bad ACoS. This is just a metric which helps you understand how much you spend on advertising. However, when people say ‘good ACoS’, they mean low advertising cost of sales for maximum profit.