What is ACOS on Amazon?
When creating PPC campaigns, every seller on Amazon is interested in the amount of costs they will have to incur in order for the campaigns to achieve the desired sales results. Every seller is understandably keen to spend as little as possible, as every additional cost reduces profit. However, especially at the beginning of a campaign ACOS will be higher than we would like. This is a normal situation because we pay for each click and not for sales. Additionally, campaigns have a so-called “long tail”, which means that if a client makes a purchase within 7 days of clicking on our advertisement, it will be included in the statistics of our campaign.
To begin with, what is ACOS, or Advertising Cost of Sales, anyway? It is the ratio of expenses incurred on PPC campaigns to the revenue from these campaigns. ACOS includes expenses and revenue from PPC campaigns only, not from total sales.
For example, the cost of our campaign in a given month was €400 and the revenue from the sale of 100 units of products was €2000.Does this mean that our profit was €1600? This might be what ACOS 20% would indicate. Unfortunately this is not the case. The biggest disadvantage of the ACOS indicator is that it refers to gross sales. In addition to our margin, this includes Amazon’s 15% fee, the VAT applicable in the country, warehouse costs and the cost of purchasing or manufacturing our goods.
So how do you calculate the net profit from our campaigns?
- Assuming the price of our product on Amazon is €20 and the production cost is €5
- From the product price of €20 we need to subtract the amazon fee (for most categories this is 15%) from the retail price.
- Then subtract the 19% VAT (this is the tax rate in Germany).
- The next step is to deduct the cost of our product, which we have determined to be €5
- 20 € -15% (Amazon charge)= 17 €; 17 €-19% (VAT) = 13,77 €- 5 € (Product cost)= 8,77 €
- 8,77 €/ 20 € = 43,85 %
- Our margin on production is 43.85%
- Selling 100 products with a unit profit of €8.77, our profit will be €877. If we subtract the campaign costs of 400 € from this amount, we obtain our net profit of 477 €.
Note, however, that this example does not take into account warehousing and operating costs.
Which ACOS is optimal?
The answer to this question is of course: it depends.
Knowing the margin level of our product, we know that any ACOS below our margin level is profitable for us. Of course, the higher the margin of our product and the lower the ACOS the better. We also know where the point lies where we sell our products “at zero”, i.e. without making a profit but not adding to it.
For example, two campaigns with an ACOS of 20%, with very similar levels of revenue, can have completely different levels of net profit depending on the size of the margin of the products 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 level ACOS can afford. The category in which we sell our products is also important, categories such as cosmetics or electronics are highly saturated and there is a lot of competition. Therefore, the average cost per click will be relatively high, which may translate into a higher ACOS. However, knowing the level of margin, we can determine how much of our net profit we are willing to spend to promote our products.
A very common practice is, when introducing a new product on amazon, the so-called “launch”. This is most often done when launching a product and aggressively stimulating sales by setting high click-through rates (bid) to appear at the top of search results as often as possible. This is done in order to build our product’s ranking in a given category, as well as to index it under many of our relevant keywords. For this purpose we can devote our entire net profit for e.g. the first month, in order to later achieve higher sales not only from advertising, but mainly the organic one.
To determine the final profit we need to subtract all the costs incurred, including storage costs (especially in the FBA model we need to pay attention to this) and costs incurred for campaigns.
Multiple dimensions of ACOS.
We can specify ACOS for all our campaigns collectively, for a single campaign or for a selected portfolio (group of campaigns). We can also set the time frame for our campaigns. The statistics for a week, month or quarter will of course be different, for the ACOS as well. It is important to check the ACOS over the last 7 days because if our campaign has been running for a few months and is performing well and the ACOS has recently doubled, for example, we may not notice this if we are looking at the ACOS over a long period – such spikes can be covered up by good results over a long period.
The opposite situation can happen when our campaign after the first week has an ACOS of 70%, e.g. campaign costs €140 to sell €200, but this is no reason to panic. This is just the beginning and if the ACOS is above our margin, this situation may change in a moment when more sales are added to the campaign. Here it is worth paying attention to the prices of our products, If our products are from a lower price range we can wait longer for ACOS to “normalize”. Of course, this article does not complete the topic of evaluating the effectiveness of PPC campaigns, in fact, it just begins it. If you have any questions feel free to contact our PPC specialists via go2markte.eu
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