What is ACOS? The basic metric for evaluating PPC campaigns on Amazon.

What is ACOS on Amazon?

When creating PPC campaigns, every seller on Amazon is interested in how much cost they will incur for the campaigns to achieve the desired sales effects. Every seller, understandably, wants to keep expenses as low as possible, as any additional cost reduces profit. However, especially at the beginning, the ACOS of the campaign will be higher than we would like. This is a normal situation as we pay for each click rather than for sales; additionally, campaigns have what's called a "long tail", which means that if a customer makes a purchase within 7 days of clicking on our advertisement, it will be included in the statistics of our campaign. Therefore, the results are always partially underestimated since we pay for a click immediately, while we have to wait for the effects.

At the beginning, it is worth starting with what ACOS actually is, i.e., Advertising Cost of Sales? It is the ratio of the expenses incurred on PPC campaigns to the revenue from those campaigns. ACOS includes expenses and revenue exclusively from PPC campaigns, not from total sales.

For example, if our campaign cost 400 EUR in a given month and the sales revenue from 100 units of products was 2000 EUR, does it mean that our profit was 1600 EUR? That could be indicated by an ACOS of 20%. Unfortunately, that is not the case. The biggest drawback of the ACOS indicator is that it relates to gross sales, which includes our profit margins, the 15% fee for Amazon, the VAT applicable in the respective country, storage costs, and the cost of purchasing or producing our goods.

So how do you calculate the net profit from our campaigns?

Assuming the price of our product on Amazon is 20 EUR, and the production cost is 5 EUR.

From the product price of 20 EUR, we need to subtract the Amazon fee (for most categories this is 15%) from the retail price.

Next, subtract the VAT of 19% (this tax rate applies in Germany).

The next step is to subtract the costs of our product, which we have determined to be 5 EUR.

20 EUR -15% (Amazon fee) = 17 EUR; 17 EUR-19% (VAT) = 13.77 EUR- 5 EUR (Product cost) = 8.77 EUR.

8.77 EUR/ 20 EUR = 43.85 %.

Our margin on production is 43.85 %.

Selling 100 products with a unit profit of 8.77 EUR, our profit will be 877 EUR. Subtracting the campaign costs of 400 EUR from this amount will give us our net profit of 477 EUR.

However, it should be noted that the provided example does not take into account storage and operational handling costs.

What ACOS is optimal?

The answer to this question is, of course: it depends.

Knowing our product’s margin, we know that any ACOS below our margin level brings us profit. Of course, the higher the margin of our products and the lower the ACOS, the better. We also know where the point lies where we sell our products "at zero", meaning without profit, but not losing money on them.

For example, two campaigns with an ACOS of 20%, with very similar revenue levels, can have completely different net profit levels depending on the size of the margins of the products included in them. Because of this, each campaign for each product should be approached individually.

However, the higher the margin level of our products, the higher the ACOS we can afford. The category in which we sell our products is also important; categories such as cosmetics or electronics are heavily saturated and very competitive. As a result, the average cost-per-click will be relatively high, which may translate into a higher ACOS. However, knowing the margin level, we can determine what portion of our net profit we are willing to spend on promoting our products.

Very often the practice, when launching a new product on Amazon, is called "launch". This usually occurs when introducing a product to the market and aggressively stimulating sales by setting high click bids to appear as often as possible at the top of the search results. This aims to build our product’s ranking in the particular category, as well as indexing it under many relevant keywords for us. For this purpose, we may sacrifice all of our net profit for, for example, the first month to later achieve greater sales not only from advertisements but primarily from organic sales.

To determine the final profit, we need to subtract all the costs incurred, including those related to storage (especially in the FBA model, we need to pay attention to this) and the expenses incurred on campaigns.

Many dimensions of ACOS.

ACOS can be determined for all our campaigns collectively, for an individual campaign, or for a selected portfolio (group of campaigns). We can also set a time frame for our campaigns. Statistics from a week, month, or quarter will obviously differ, including those related to ACOS. It is important to check ACOS, for example, over the last 7 days, because if our campaign has been running for several months and achieving good results, and recently the ACOS has doubled, we may not notice it if we look at ACOS over a long term - such spikes can be masked by good results over a long period.

In the opposite situation, we may find that our campaign after the first week has an ACOS of 70%, for example, campaign costs 140 EUR, sales 200 EUR, but this is not a reason to panic. It is only the beginning, and if ACOS is above our margin, this situation might change soon when further sales are counted towards the campaign. Here it’s worth noting our product prices. If our products are from a lower price range, we might wait longer for the ACOS to "normalize". Of course, this article does not exhaust the topic of evaluating the effectiveness of PPC campaigns but rather just begins it. If you have any questions, we invite you to contact our PPC specialists through the website go2markte.eu.

Do you want to share the results of your campaigns or have tips or remarks for others? Be part of our community and leave a comment under the article.

Happy Advertising,

Go2Market Crew