One of the biggest concerns sellers have when it comes to Amazon PPC is their Advertising Cost of Sale (ACoS).
ACoS is by far the most popular metric used to measure the performance of Amazon advertising campaigns. ACoS is that fickle percentage many sellers rely on to help them determine how they should bid on search terms.
While ACoS is important, it should not be the only metric you use to measure the success of Amazon Advertising. ACoS is just one of them. This blog post explains why.
What is ACoS?
ACoS measures the relationship between your ad spend and your ad sales; it shows for every dollar earned from PPC, how much was spent on PPC. You can find your ACoS in Campaign Manager in your Seller Central account:
ACoS is expressed as a percentage and is calculated using this simple formula:
ACoS = Total Ad Spend / Total Ad Sales x 100
ACoS is how most sellers measure the profitability of a PPC campaign but this is not without its drawbacks.
Don’t fall into the ACoS trap!
If ACoS is the only metric you focus on, you’ll miss out on opportunities that could generate more sales and revenue.
Let’s say you spend $1 on PPC and generate $100 in sales. This would give you a crazy low ACoS of 1% and gross ad revenue of $99. But what if you increase your ad spend to $100, and in turn generate $1,000 in sales? While your ACoS has increased to 10%, you now generate a gross ad revenue of $900! Which would you prefer?
As illustrated by the above example, the problem with ACoS is that it is confined to measuring only your advertising efforts. It fails to measure the true value of your ad spend and how it impacts the overall performance of your business. This is an important distinction because the ultimate goal of Amazon PPC is to drive sales volume and velocity to positively impact organic rank and organic sales.
That’s why here at Sponsored Profit, we prefer to measure True AcoS or Total ACoS (TACoS). And no, we’re not talking about the delicious Mexican food!
TACoS measures your advertising spend relative to the total revenue generated, and the effect of advertising on long-term growth.
It provides a much more accurate picture of how your ad spend is performing. You can calculate your TACoS using this simple formula:
TACoS = Total Ad Spend / Total Sales x 100
Tracking your TACoS over time shows how your ad spend creates a ‘snowball’ effect by helping to increase your organic sales.
So what should your target TACoS be? As a guide, the average Amazon business will spend somewhere between 7.5% and 12.5% of their sales revenue on marketing, more when they are launching a brand new product.
The long-term goal is for your TACoS to remain reasonably flat or even falling over time as organic sales increase and you become less dependent on ad sales.
That said, with the ever-increasing number of ad types and placements becoming available on Amazon, PPC sales are starting to make up a larger contribution to total sales. PPC sales would typically make up between 28-33% of total sales; that is starting to rise as high as 40%-50%. It is simply the cost of doing business on Amazon.
Like ACoS, your TACoS is relative to your business and PPC goals. But unlike ACoS, monitoring TACoS will give you a much better indication of how your advertising is impacting the overall performance of your business. Armed with this information, you can use Amazon PPC far more effectively as a long-term growth strategy.
Laura McCaul is co-founder of Sponsored Profit, an Amazon PPC management, education and software company. As the company’s chief content creator, Laura is obsessed with demystifying the enigma that is Amazon PPC and creating content that is easy to consume and absurdly useful. You can email Laura at firstname.lastname@example.org or find her on LinkedIn.
Interested in Profit First for Ecommerce Accounting?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits. Contact bookskeep today to learn more about ecommerce bookkeeping and accounting.