What is a Healthy ACOS Goal for Amazon Advertising?
One of the first steps to an effective advertising campaign within any ad channel is defining your goals. This is certainly true with Amazon Advertising. There are a number of specific goals that can be set, measured, and achieved within Amazon, but among the most common is ACOS (Advertising Cost of Sale).
ACOS is calculated by dividing your ad spend by the revenue it brought in. This metric is represented in the form of a percentage. For example, if you spent $100 on ads and sold $500 worth of products, your ACOS would be 20% ($100 divided by $500 = .2 and when converted to a percentage, that is 20%).
ROAS (Return on Ad Spend), on the other hand, simply flips the equation so that your revenue is divided by your ad cost. ROAS is represented in the form of a number, often with one or two decimal points. To use the same example as above, $500 worth of sales from a $100 investment would equal a 5.0 ROAS ($500 divided by $100).
You can now view both ACOS and ROAS in the Amazon Advertising dashboard, but since they historically only offered users the ACOS view, many experienced advertisers became accustomed to measuring success by ACOS.
Two Crucial Calculation Clarifications
Before your team can set an accurate ACOS goal, we need to cover a couple of crucial clarifications.
Understanding Amazon’s Formula
First, within the Amazon Advertising dashboard, ACOS is calculated by the price a consumer pays, not the revenue your company receives from that sale. This is an important clarifier, especially if you are set up as a vendor within Amazon.
The revenue that vendors receive from each sale is based on the discount terms agreed upon in the contract. The discount percentage and terms vary, but for simplicity, let’s say that Vendor XYZ has a 50% discount with Amazon. For each sale, Amazon keeps half of the full retail price, and the other half goes back to the Vendor XYZ.
However, Amazon has the freedom to discount products to consumers as they see fit and those discounts can vary widely. But remember, the revenue you see within the Amazon Advertising dashboard is based on what the consumer pays.
If you have to answer for the bottom-line impact of increasing your Amazon Advertising investments, this gets complicated since you’ll need to pull in the constantly changing discounts Amazon offers to consumers and use that to determine a healthy ACOS goal.
In the three scenarios represented in the table below, Options A, B, and C all have the same retail price, cost per click, vendor terms, revenue received by Vendor XYZ by Amazon, and ACOS based on revenue received (all of the gray rows are the same). The difference comes in when Amazon gets more aggressive with their consumer discount. A is the least aggressive and C is the most aggressive.
What the table above demonstrates, is that when Amazon increases their consumer discount, the perceived ACOS within Amazon’s Ad dashboard looks worse (27.3% compared to 20% ACOS), but the revenue impact to your company and the actual ACOS of your ad is the same as when Amazon credited your ads with a 20% ACOS.
In this scenario, ACOS varies by 7.3% when the consumer discount rises up from 20% to 45%.
Let’s put it this way…
The more aggressive Amazon gets with discounting your products to consumers, the worse the ACOS appears in the Amazon Ad dashboard.
This is why it is important to factor in a variety of data when setting goals and optimizing ads. Often, when a carefully structured Amazon ad brings in a sudden increase in sales, Amazon will sometimes raise the discount.
When this happens, the campaign appears as though it is not performing as well as it was before the consumer price fell. But that rise in ACOS within Amazon’s dashboard is artificial, and a discerning and observant marketer knows to keep the foot on the gas even though the artificial ACOS is higher than a previously set goal.
Accurately calculating ACOS isn’t terribly difficult when you only have 3-5 products to promote, but if you are responsible for hundreds or thousands of ASINs, it becomes too tedious (and even impossible) for you to check consumer discounts on each ASIN in order to know if your true ACOS is healthy.
This is where Amazon Advertising agencies like Amplify come in. We use proprietary formulas and complex software tools to monitor and optimize so that you have a healthy bottom line.
Don’t make the mistake of thinking that the primary measure of success is what Amazon reports as ACOS!
Including Agency Fees
There is one more clarification to make regarding ACOS calculations. If you are using an Amazon Ad agency, you may want to add the cost of ad management services to your total hard cost and calculate a third set of numbers for ACOS:
ACOS according to the Amazon Advertising dashboard (based on consumer prices)
ACOS according to actual revenue received by Amazon (based on the retail price and discount terms)
ACOS according to the calculation in 2 above but with ad management fees added to the hard cost of the ads
Ten Factors to Plug Into Your ACOS Formula
Let’s get back to our original question. What is a healthy ACOS goal for Amazon Advertising? Aside from the argument above that your ACOS goals needs to be a sliding scale based on fluctuating consumer discounts, the answer to this question depends on a few more factors.
The questions below are important to consider when setting ACOS goals for Amazon Ads (these are the kinds of questions we’ll ask during an exploratory call about a potential partnership with Amplify Marketing Services):
Is this a new product or one with sales history, a good star rating, and plenty of product reviews? Established products usually sell at lower ACOS than new ones (but this varies).
Are you working with a new brand or is it already an established market leader? Established brands that people are searching for by name can achieve lower ACOS than new brands with no name recognition.
Are you in a category that is highly competitive within Amazon Advertising? Some keyword categories can cost much more per click than others ($0.10 vs. over $10 per click based on the product category).
Do you have an ambitious goal of de-throning a market leader? If so, it will require an aggressive strategy that includes a higher ACOS until momentum is achieved and enough trust is earned with Amazon.
What range of price points do your products fall into? If your retail price is low and competition is high, ACOS goals will need to be higher.
What is your cost of goods, and does it vary? Products with a lower cost to manufacture or those with lower royalties or shipping costs should be given a higher ACOS threshold when calculating profitability than products with thinner margins.
What are your terms with Amazon? Check the terms of your partnership with Amazon and factor your fees and discount schedules into the ACOS equation. For book publishers in particular, now that Audible audiobooks are eligible for Sponsored Product ads, if you choose to include subscription-based digital products with standard print and Kindle editions, your ACOS goals will need to be adjusted accordingly to factor in zero value conversions.
How long have your ads been running? As with Google Ads, relevance and authority are key factors in determining who wins a PPC (pay-per-click) bid in Amazon. If there is enough history to establish relevance and authority, the bids can be won for less and your ACOS will go down.
Is there a likelihood of repeat purchases by the same consumer? If so, you can justify a higher ACOS to secure the first sale because the lifetime value of that customer is another factor to plug into your equation.
Is it peak season? If your answer to question 8 was “yes,” then it is even more important to be aggressive (higher budgets & higher ACOS thresholds) during peak season when relevant search volume is at its highest. For many product categories, relevant search volume for keywords in Q4 (October through November) can be 5-10x their normal levels. If one sale can lead to multiple future purchases, Q4’s ad budget & ACOS goals should be higher than the rest of the calendar year.
After considering all 9 of these factors, along with the sliding scale of varying consumer discounts, you should be close to setting a specific ACOS goal that is healthy for your company’s bottom line.
It may be helpful to set a few different ACOS goals for different groupings of products and different groupings of targeting strategies. Here are a couple of examples:
Lump all of your new products into one group that is assigned a higher ACOS goal than you give another group with your historic bestsellers.
Separate campaigns for the same products by the keywords you will target. One group focuses on highly competitive keywords using a higher ACOS goal and the other group promotes the same products using niche keywords that aren’t as competitive and can have lower ACOS goals.
Separate campaigns based on branded searches (bidding on your own company name and product names) vs. competitor targeting. The branded search campaigns can have a lower ACOS goal than the competitor-focused campaigns.
Without knowing your products’ average discounts within Amazon, or your goals based on the 7 factors mentioned earlier, it wouldn’t be helpful for us to list a particular ACOS percentage as a goal to shoot for. However, if you want a range to consider, from our experience, some of our partners set ACOS goals as low as 15% and others at 35% or higher. Some advertisers can justify ACOS approaching 100% or more, but those are in the repeat purchase category listed in point 7 earlier.
There is one last question to consider regarding ACOS…
Can ACOS Ever Be Too Low?
At first glance, most people would assume that the lower, the better when it comes to ACOS. The less we have to pay for a sale, the more money goes to the bottom line, right?
Discerning advertisers and companies know that there actually is such a thing as too low of an ACOS.
In many ways, an ultra-low ACOS means you’re leaving money on the table.
We like to tell our partners that our goal is to maximize revenue at the lowest possible ACOS. It’s not just about managing ACOS, it’s about maximizing revenue by using all of the best placement opportunities within Amazon for intercepting your customers.
When ACOS falls too low, that is an indicator that you’re not testing enough opportunities. There are always more ways to intercept your customers within Amazon.
We wrote another article about this, but the takeaways are that…
New targeting options are rolled out within Amazon on a regular basis
New products are released by your competitors each season
Different keywords trend at different times
Even without knowing your unique market, it is still safe to say that there are hundreds of ways to intercept your customers using Amazon Ads! Start with the most obvious, but don’t stop obsessing until you’ve exhausted the best places to intercept customers using bidding structures that convert at a healthy ACOS.
[Note: We’ve been doing this since 2015 and we’ve never stopped obsessing! The opportunities for maximizing revenue never end!]
This is why we love Amazon Advertising and have chosen to prioritize it as a service in our agency. We enjoy exploring the dynamic, ever-changing nature of this ad platform!
We hope this article helps you zero in on ACOS goals that make sense for your organization.
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