ACoS, or Advertising Cost of Sales, is one of the most important metrics for evaluating your Sponsored Product campaigns on Amazon. Despite that, many people misinterpret ACoS and what it means for their campaigns.
Let’s start with a definition. ACoS is expressed as a percentage, and it measures what percentage of profits from advertised sales were spent on the advertising. Expressed as a formula, ACoS = ad spend / gross advertised sales.
As an example, if you made $1,000 in advertised sales over a particular period, and your ad spend was $180, your ACoS would be 180 / 1000 = 18%. Pretty good! That means that every dollar of sales from advertising is costing you 18 cents.
As you can imagine, the general advice for ACoS is that lower is better. Low ACoS means that you’re bidding on all the right keywords (usually, exact-match keywords are the best for ACoS), your conversion rate once they click through is good, and your bids are competitive without being too high.
However, pushing as hard as you can to lower your ACoS isn’t always the correct course to take. For some campaigns, having a higher ACoS, even one so high that you’re losing money, is totally acceptable. We’ll discuss this after we get into the details of break-even ACoS and how to best determine the profitability of campaigns.
Understanding Break-Even ACoS
ACoS is a useful tool for judging profitability, but you need to know exactly how to interpret it first. People will give you generic ACoS targets such as 30% or 50%, but that doesn’t tell the whole picture. That’s because ACoS can only (usefully) be judged on a per-product basis.
What matters is break-even ACoS, which can only be measured for one product or for products with very similar adjusted gross margins. The break-even ACoS of a product is, as you may have guessed, equal to the adjusted gross margin of that product.
For example, if, after fees and everything are taken off, you’re left with a margin of 22%, then your break-even ACoS is 22%. If your ACoS is higher than 22%, you’re losing money; if it’s lower, you’re profitable.
That’s all intuitive, but the problem is that Amazon doesn’t actually show you ACoS on a per-product basis by default. They’ll only tell you the overall ACoS for a campaign or an ad group. If the products in that grouping have dissimilar adjusted gross margins, the overall ACoS is not very informative. Depending on the distribution of advertising cost, the same overall ACoS could either mean you’re gaining or losing money. You can learn more in this informative blog post by Sellics.
In order to get ad-group-wide ACoS that’s actually meaningful, you need to group products with a similar break-even ACoS. Alternately, you can dedicate one campaign to each one of your products, which requires more maintenance but will give you more precise control over your keywords in the long run.
Once you have a break-even ACoS for your products, you have a yardstick for determining “high” and “low.” But we know that low ACoS means you’re profitable, and high ACoS means you’re not, right? So why would we ever want high ACoS?
The Time and Place for High ACoS
Lower ACoS is better, yes. It means you’re getting more return on each ad dollar spent. But what if your goal isn’t maximum return?
With the death of incentivized reviews, Sponsored Products have become a critical method of drawing attention to your products, spurring sales as well as reviews.
In the case of recent product launches, or any products which need a visibility boost, high ACoS campaigns can be acceptable or even desirable.
Of course, we should qualify this a bit. “I have high ACoS, I must be doing great” isn’t the end of the story when it comes to product launches. Specifically, if your goal is exposure and visibility, high ACoS and decent CTR/conversion rate is the gold standard.
If your click-through rate is too low, then you aren’t bidding on the relevant keywords, and you’ll need to adjust if you actually want to accomplish your goal of reaching out to customers. Similarly, if your conversion rate is too low, you can have a very high ACoS even if you’re not bidding very competitively. This is simply because no one is buying your products after clicking on your ads.
In the case of low CTR, your keywords were the problem. In the case of low conversion rate, your listing quality is often the problem. Make sure your listing is high quality so that people aren’t scared off as soon as they click on your ad — high-quality images, informative bullet points, and a thoughtful, compelling description are all key. Low conversion rate can also be a sign of irrelevant keywords — customers might click on your ads out of curiousity, then back out as soon as they realize it’s not what they’re looking for.
In general, your Sponsored Product conversion rate should be at or close to your organic conversion rate. If it’s significantly lower than that, it’s likely that you’ve included some irrelevant search terms that you need to fix.
However, if you’ve got a newly launched product and your Sponsored Products are converting at a decent rate, then having ACoS at or above your break-even ACoS isn’t a bad thing. Depending on how much you’re willing to spend, it might even be desirable to go above your break-even threshold. You may lose money in the short term, but you’re banking on gaining much more in the long term.
High ACoS and the Amazon Flywheel
To understand how high ACoS can help you in the long term, i’ll defer to a metaphor that we like to use here at Efficient Era: the Amazon flywheel.
A flywheel is a mechanical device that conserves energy that you put into it, continuing to spin even after input has stopped. It’s slow to get going, but once you get it spinning, it will keep spinning without much effort, and it’ll resist any changes in momentum after it’s gotten going.
On Amazon, each product is a flywheel, and sales create the motion.
When you first launch a product, the flywheel isn’t moving. You’ve got to put additional effort to start it moving, because no one’s going to buy a just-launched product with no reviews. Sponsored Product ads, promotional sales, and other common launch strategies contribute to starting the flywheel moving.
Once the flywheel gets moving, things get easier, because sales generate reviews and start to boost your product’s sales rank. You’ll rank higher for organic searches, and people will confidently purchase after seeing your reviews, resulting in more and more sales, which beget more sales…
A high-ACoS campaign is part of this launch strategy, the initial plan to get the flywheel moving. When a product’s just starting out, profitability isn’t the immediate priority — that comes later, once the product is off the ground. Your top priority is getting that flywheel spinning by generating as many sales as possible, profitability be damned.
Of course, you don’t want to hemorrhage too much money in the process, either. But, in this introductory stage, breaking even or going a little bit into the red on your ACoS should be embraced, not feared. It means that you’re bidding aggressively and getting priority placement over your competitors, hopefully getting more clicks and conversions than you would at a “profitable” ACoS.
The Importance of Balance
Of course, balance is important. Clicks and conversions are nice, but no one can keep all their campaigns running in the red forever.
If you already have well-established products which consistently get organic sales, you should still be running Sponsored Product campaigns for them, but you can (and should) use traditional measures of campaign profitability. This means that in addition to calculating your break-even ACoS, you should calculate your target margin for each product and campaign. Your target margin is whatever you want your final gross margin to be, adjusted for ACoS. Determining your target margin allows you to determine your target ACoS, and make decisions about your campaigns from there. For example, if your adjusted gross margin is 30%, and your target margin is 10%, then any ACoS at or below 20% is on target.
That’s all well and good, but there’s still an important concept to establish. When we get down to it, what’s the difference between a well-established product and a newly-launched product? More importantly, when does a newly-launched product “graduate” into a well-established product? It’s not always clear-cut, but we should discuss this anyway.
When to Adjust your Target ACoS
As we’ve discussed, target ACoS varies depending on the goal of the campaign: ROI versus visibility. But how do we know when a product should make the switch from a visibility campaign to an ROI campaign?
Well, there are a couple of metrics you can base this on. The most obvious one is organic clicks and sales. The goal of a high-ACoS visibility campaign is to generate advertising clicks and sales, which raise your sales rank and your organic search ranking for those keywords. Once your organic metrics are high enough, you can take your hands off the wheel and let organic sales slowly take over, reducing your bids (and ACoS) to profitable levels.
Once your campaign is mature enough, you’ll have also collected enough keyword data to know what your customers are searching for. This means you can add exact match long-tail keywords and reduce your bids on broad keywords, pulling your ACoS down further.
Since Sponsored Products can also help you gain reviews — as long as you’re collecting reviews using the correct techniques for review generation. So, reaching a threshold of reviews is another great way to know if your product has gotten over the initial hump. Usually, around 10–20 reviews is enough to make customers feel secure in their purchase.
Remember, though, that visibility campaigns aren’t exclusive to new products! If a product of yours has been in a slump for several months, you can consider upping your bids in an attempt to generate some extra attention and hopefully brings its organic sales back to acceptable levels. Point is, the categories of “newly-launched” and “well-established” can be a bit limiting when we’re talking about different advertising strategies. Always stay flexible when considering your options.
Conclusion: Be Patient with ACoS
As a final point, any judgment of Sponsored Product campaign performance should be delayed until at least two weeks (preferably a month) of data have been collected. This applies doubly for ACoS. When a campaign has just launched, the metrics will be all over the place, simply because of the natural variability of advertising campaigns. Data doesn’t start to get reliable until about 100–200 clicks have been gathered, but even then, you should let your campaigns run without touching them for several weeks.
Waiting this long is also important because Amazon attributes a sale to a click if that sale happened a week or less after the initial click. During the first week of a campaign, your ACoS will almost always look horrible. Wait a week or two, however, and your metrics will start to improve.
The same advice holds for keyword performance. Week-to-week keyword performance can vary wildly, so to get the big picture, you need to wait for around a month before adjusting bids or removing keywords. For the same reasons, be sure to look at the cumulative data over that entire month rather than weekly performance. Otherwise, slumps or surges could affect your judgment.
Have you run high-ACoS campaigns in the past? What have your experiences been? Let us know in the comments!