Too many Amazon advertisers believe that improving ROI is a simple matter of lowering bids to fix a high advertising cost of sale (ACoS). But ACoS is far more nuanced and complex than this tactic suggests.
We’re here to set the record straight and teach you how to truly optimize ACoS on Amazon. To do this, you need to understand the full picture of ACoS, how it works, why it’s important, and what actually determines whether your ACoS is high or low.
Table of Contents
- What is ACoS on Amazon?
- How to Calculate ACoS on Amazon
- How to Calculate Your Break-Even ACoS
- What Makes a Good ACoS on Amazon?
- 3 Tactics for Lowering Your ACoS on Amazon
If you’re new to advertising on Amazon, we’ve got a quick refresher section on ACoS for you right at the top of the post. If not, you can skip forward to “How to Calculate ACoS” to start learning how to leverage the nuances of this metric.
What is ACoS on Amazon?
ACoS is the metric that tells you what kind of return you’re seeing on your Amazon advertising. It’s calculated as:
Ad spend ÷ Ad revenue × 100 = ACoS
Many sellers are satisfied with this formula and never question it. They make campaign management decisions—changing bids, budgets, and keywords—based on the ACoS figure they see in their campaign manager.
We urge sellers to dig deeper. By dissecting the nature of ACoS—such as what actually goes into an ACoS calculation and what determines “good” ACoS versus “bad”—you will have more granular data to inform your campaign management decisions.
How to Calculate ACoS on Amazon
The formula Amazon gives for ACoS is very straightforward, but it leads sellers into an oversimplified approach to campaign management. Based on the calculation, many sellers will simply lower their ad spend when they think their ACoS is too high. But this move can lead to lower ad revenue, which ultimately hurts not only your overall sales goals, but often your ACoS as well.
That’s why at PPCWIZ, we break down Amazon’s formula even further:
Cost per click ÷ [conversions × item price] × 100 = ACoS
This formula gives you the exact same ACoS result that Amazon does. The difference is that, in breaking “ad revenue” into its constituent parts (conversion rate and item price), you have two additional, actionable metrics you can use to affect your ACoS.
Armed with this data, you can make campaign adjustments geared to improving your ad revenue instead of just lowering your ad spend. For example, if you’re experiencing high ACoS for a certain campaign, you can try raising bids on keywords with high conversion rates, which will generate more sales and could ultimately lower your ACoS. (More on this tactic later in this post.)
How to Calculate Your Break-Even ACoS
Before we dive into tactics for improving your ACoS, we need to first establish what “improving ACoS” means for your campaigns. To do that, you need a break-even benchmark from which you can determine “high” ACoS and “low” ACoS.
You’ll calculate this figure on a per-product basis, since costs and item price likely varies between your products. An ACoS higher than this target means you’re spending more than you’re getting back in revenue, while any ACoS lower than break-even indicates a profit.
Step 1: Calculate your Profit Per Sale
The first step is to figure out how much profit you make off each sale of a given product. To do this, you’ll need to total all the costs associated with the item before promotional costs. These expenses should include (but aren’t limited to):
- Cost of goods sold
- Amazon seller fees
- Fulfillment and shipping costs
Once you’ve figured out these expenses, you’ll run a simple equation to calculate your profit:
Item price - costs = profit per sale
So if you sell a product for $10 and your costs amount to $3 dollars per product, your pre-ad profit per sale is $7.
Step 2: Factor ad costs
Once you know your profit per sale, account for promotional costs. If you make $7 in profit off every sale, you can spend up to $7 advertising that product before you hit a net profit of zero. Here’s how that translates into a break-even ACoS calculation:
Pre-ad profit per sale ÷ revenue × 100 = break-even ACoS
So in our example of a $7 profit on a $10 item, the break-even ACoS would be 70%.
7 ÷ 10 × 100 = 70% (break-even ACoS)
Take the time to run this equation for each of your products. You won’t be able to set a single break-even ACoS benchmark for your entire account unless every single product you sell has the exact same cost and item price.
What Makes a Good ACoS on Amazon?
Now that you know your break-even ACoS, you can determine whether the ACoS you see in your advertising reports is high or low. However,it’s very important to note that your break-even benchmark is just a guiding figure, and high isn’t necessarily bad when it comes to ACoS.What determines a “good” ACoS on Amazon is very situational and can change frequently.
The main factor of this is Amazon’s suggested bid range. In short, the suggested bid range is Amazon’s way of telling you how much you’ll need to spend per click in order to have any success with your ads. This range is updated often and aggregated from data on your product category and your competitors, so it’s the most practical way to understand the current marketplace landscape.
When competition is low, the suggested bid range will be lower, which in turn lowers your ad spend. So in this climate, a “good” ACoS might be as low as 30%.
For example, let’s say that, based on suggested bid range, you can bid competitively at $0.30 on a product priced at $10. You’d need to convert one sale every 10 clicks to achieve a 30% ACoS.
[$0.30 CPC × 10 clicks] ÷ [$10 item price × 1 conversion] = 30% ACoS
When competition increases, so does CPC, leading to a higher minimum for your ad spend. It’s unrealistic to try and hit that same 30% ACoS target in a hotter, more expensive marketplace. And if you lower bids to try and hit that 30% target anyway, you’ll likely only hurt your performance by cutting off conversions.
Taking our earlier example, let’s say you had to spend $0.60 per click in order for your ads to show. All other factors being equal, your ACoS equation would look like this:
[$0.60 CPC × 10 clicks] ÷ [$10 item price × 1 conversion] = 60% ACoS
Lowering your bids in order to hit 30% ACoS in this scenario would result in no traffic and no sales. This is why you must stay flexible with your ACoS targets. Use bid range data to set realistic targets, and continue to update those targets based on the available data.
Besides greater competition, there are other situations that may lead to a higher ACoS (but aren’t necessarily red flags).
- Low data volume. If you’ve only been running your ads for a week, you don’t yet have enough conversion and cost data to judge whether or not your campaign will be profitable. The high ACoS you’re seeing isn’t actually a bad thing—it’s just a result of starting a new campaign.
- Launching a product on Amazon. Whenever you have a new product, your conversion rate will naturally be low at first. This will cause your ACoS to look very high—but again, you need to remember that this is just a part of getting your advertising off the ground.
In short, “good” ACoS is very subjective. Instead of trying to figure out one single, perfect target for your campaigns, invest your time in understanding your account data and the competitive landscape for your product. This empowers you to be responsive to the market and to manage your ads profitably over time.
3 Tactics for Lowering Your ACoS on Amazon (Without Lowering Your Bids)
It’s true that lowering your bids can be a useful tactic for lowering ACoS, but it’s far from the only tactic. You can also make an effort to increase your product’s conversion rate. These three tactics are key to optimizing your ad campaigns for sales and, in turn, lowering your ACoS.
Optimize your product pages for conversions
To lower ACoS without cutting off sales, you must first make sure your product page isn’t sabotaging your conversion rate. Start by asking these three questions:
- Is your product page clear and readable? These factors go a long way toward improving conversions. If buyers can’t quickly scan your product page and understand why they should buy your product, they’ll return to the search results.We recommend Sellbrite’s article Creating a Unique Amazon Product Listing as a resource to guide you through revamping your page.
- Does your product page include trust markers? In addition to making the benefits of your product clear, you need to inspire confidence in your buyers. Three key “trust markers” on Amazon are the Fulfillment by Amazon (FBA) label, Prime eligibility, and positive reviews.
- Is your product priced competitively? Price is a major part of a shopper’s decision-making process. If your product isn’t positioned competitively in the marketplace, your conversion rate will suffer. While it’s true that a lower selling price will affect your ACoS, the boost to your conversion rate might give you a net win for revenue. Experiment with pricing strategies, and monitor their effect on both ACoS and overall product performance.
Once you make these optimizations, you can refocus your attention on your ad campaigns, secure in the knowledge that your product page is supporting your advertising efforts (not sabotaging them).
Improve your ad placements
Amazon shows your Sponsored Products ads in two different places: search results and product pages.
These placements affect how much traffic your ads get, which in turn affects the likelihood of making a sale. The more revenue the campaign generates, the lower its ACoS.
What determines whether your ads get high-traffic placements? Your bid amounts. Lower bids mean your ads get placements that receive less traffic—for example, the second page of search results, or farther down the list of product page ads (forcing shoppers to scroll in order to see your product).
A decrease in traffic from poorer ad placements means a decrease in conversions, which ultimately leads to higher ACoS. This is one of the key reasons we warn sellers that simply lowering bids is not a sure way to lower ACoS.
Study your placement report to see which ad placements drive the most conversions. Then, leverage Amazon’s Adjust Bids by Placement option to cost-effectively target ideal placements.
This tool allows you to set bid modifiers that will automatically increase your bid (by a percentage you specify) in order to win a specific placement.
By pursuing high-traffic placements with a tactical use of bid modifiers, you can lower ACoS by driving more conversions.
Leverage your keywords to drive profitable traffic
When it comes to keywords, sometimes even small variations in a search phrase can make a big difference in the profitability of a keyword. That’s why an attentive approach to keyword management is the best way to improve ACoS. Adjusting the phrases you target has the potential to both raise conversions and lower CPC.
- Add profitable keywords to your campaigns. By leveraging both automatic and manual campaign types, you can generate a constant source of keywords that convert. First, run a search terms report, and look for search phrases and long-tail keywords (from your automatic campaign) that have driven sales. Then, take these profitable keywords and add them to your main campaign, where you can adjust bids to try to increase conversions.We suggest reading about this tactic in-depth in our 3-Step Amazon Advertising Strategy for Small Businesses.
- Prune your keyword list. Just as important as adding new keywords to your campaign is removing keywords that drag down performance with sluggish sales and high CPC.
Both of these keyword management activities should happen monthly at the very least. Ideally, you’ll manage keywords on a weekly basis to ensure that you’re capitalizing on opportunities.
A Profitable ACoS on Amazon Depends on Data Management
It might feel excessive to focus on all of these nuances of ACoS. Trust us—it isn’t.
A detailed understanding of ACoS gives you a framework with which to understand your account data and provides benchmarks on which to judge performance. With this deeper level of insight comes an extra level of control over your campaign management. By closely monitoring and experimenting with the three elements of ACoS—CPC, conversion rate, and item price—you can make Amazon advertising a sustainable and profitable part of your business.
Still feeling overwhelmed? PPCWIZ manages Amazon advertising through the power of artificial intelligence, offering sellers the knowledge of a human expert at the speed of automation. Our algorithms factor the dynamic and nuanced nature of ACoS in order to improve both long-term and short-term performance. Learn more about what PPCWIZ can do for your business.