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Want to Lower ACOS on Amazon? This Metric is the Key

Want to lower your ACoS on Amazon? You are not alone. Many retailers see revenue and profit roll in when they start advertising on Amazon, but then they hit a harsh plateau in sales. Their ACOS keeps rising and rising, while their overall revenue just stays the same. 

Equations comparing 20% ACOS to 50% ACOS.

Imagine your ACoS jumps from 20% to 50%. Before, you paid $20 in ad spend of every $100 earned, now you’re paying $50 of every $100 earned. Suddenly you’re losing half your sales dollars to ad spend! So how do you stop your ACoS from climbing and consuming your sales dollars?

Let’s take a look at two ways to lower your ACoS on Amazon.

The Easiest Way to Lower ACoS on Amazon— Cut Ad Spend 

The easiest way to lower your ACoS is obvious: cut ad spend. If your ACoS keeps rising, it means that your ad spend is consuming more of your sales dollars. Let’s look at an example. 

Example of Cutting Ad Spend to Lower ACoS 

The equation for Advertising Cost of Sales is: ACoS = Total Ad Spend / Total Sales 

ACOS = Total Ad Spend / Total Sales

Imagine your ACoS increased to 50%. Here you can see your ad spend is exactly half of your $500 in sales. How can you lower your ACoS? To lower you ACoS, you cut $150 dollars in ad spend. Now your ACoS is 20%.  

50% ACOS = $250/$500, to change ACOS to 20%, cut ad spend by $150

Why Cutting Ad Spend Isn’t the Best Solution 

Unfortunately, the easiest way isn’t always the best way. Cutting back ad spend will only work temporarily— you can’t keep cutting back on ad spend forever. While this method might be beneficial if you are actually overspending, it won’t help you grow your Amazon campaigns. 

Eventually you’ll need to find the cause of the problem. That’s where the next method of lowering your ACoS comes in!

The Best Way to Lower ACoS on Amazon — Measure Profit 

The best way to lower ACoS on Amazon is actually not to worry about lowering it at all. Surprising, right? Instead of using ACoS as the only indicator of your Amazon success, try tracking a different metric instead: profit. 

First let’s look at why you shouldn’t only track ACoS by itself. Then we’ll see the benefits of tracking profit on Amazon. Finally, you’ll learn how to use profit to calculate your ideal ACoS!

Why You Should Use Profit and ACoS Together

Why You Shouldn’t Only Track ACoS 

ACoS doesn’t give you the full picture of your account performance. You can have a great ACoS number on paper, but no profit. For example, you might have the following ACoS: 6.7% ACoS = $100 Ad Spend/ $1500 Sales Dollars 

6.7% ACOS = $100 ad spend/ $1500 sales

This looks pretty good! However, when you look into it, you’ve only made a handful of orders worth $1500. While a 6.7% ACoS looks good on paper, in reality this simply isn’t growth. You can’t scale your campaigns this way. Now that you know why ACoS can’t stand alone, it’s time to learn how profit can help.

Why You Should Track Profit on Amazon 

ACoS can lie about your success in more than one way. Did you know ACoS doesn’t account for costs like commission and shipping fees? These are very important costs to Amazon sellers like you! When most commission fees are between 8% and 15% of your profit, these costs can really start to rack up.

Let’s look at an example where your ACoS is 20%.  

20% ACOS = 100 Ad Spend/ 500 Sales

That’s not so bad, except when you consider that ACoS doesn’t account for cost of goods, commission, or shipping fees. When we consider these costs, costs are actually a much larger portion of your sales dollars. In this example, we’ll calculate contribution margin to account for these costs that ACoS leaves out.

contribution margin = revenue - (costs/sales)

Let’s add up our costs first. For this example, we’ll pretend commission is 10%, shipping fees are 5%, and Cost of Goods equals 55%.

100 ad spend + 50 commission + 25 shipping fees + 275 cogs = 450 Total costs

Costs totaled $450. Now we’ll plug that number into the equation for Contribution Margin. Remember, sales totaled $500 dollars.

10% contribution margin = 1 - (450 / 500)

As you can see, profit gives you a more holistic view of your performance. Without looking at shipping costs and commission, your ACoS looks decent, but after including these costs, your costs take up more than half of your sales dollars!

How to Use Profit to Lower ACoS on Amazon

How to Use ACoS and Profit Together 

Now that you know what you’ve been missing out on, you’re ready to get a transparent view of your Amazon success by using ACoS and profit together.

To use profit on Amazon, you’ll need to start by segmenting your campaigns. To effectively do this, you need to segment your products by margin (or by how much profit they can make). This ensures the bid you apply to each ad group will create profit—maximizing your ad spend. Then you will be able to use profit to calculate your ideal ACoS per ad group. Let’s look at how to calculate your ideal ACoS per ad group.

How to Calculate Ideal ACoS Example 

This toy retailer has their ad groups segmented according to Cost of Goods Sold. They want to figure out their ideal ACoS for each ad group, so they need to calculate their Target Contribution Margin for each ad group.

They calculate Target Contribution Margin using the following equation:

target contribution margin - (Revenue % - COGS %) * Efficient Profit %

What is Efficient Profit %?

Efficient Profit % is how much of your available margin you need to preserve as profit, in order to maximize profit. This number will differ for everyone.

Let’s assume this retailer’s Efficient Profit % is 65%. For this example, we’ll calculate the Target Contribution Margin for the Board Games ad group. Now,  we’ll plug the numbers into the equation. 

(1 - .25) * .65

Now that they have their benchmark, they can find their ideal ACoS for the Board Game ad group using the following equation: ACoS = Revenue – COGS – Target Contribution Margin

ACOS = Revenue - COGS - Target Contribution Margin. ACOS = 26.25%

Using this number, the toy retailer knows how many advertising dollars they can put towards Board Games while remaining profitable. Instead of fruitlessly trying to find an ACoS that works across all their ad groups, they now have the perfect ACoS to match each ad group! 

How to Calculate Ideal ACoS Example 

We calculated the ideal ACoS for the Board Game ad group. If you want some practice, take a shot at calculating ACoS for the Action Figure, Craft Kit, and Stuffed animal ad groups. Then compare your answers to the chart below. Did you get the same numbers?

Do You Want to Lower ACoS on Amazon? Or Grow Your Business with Incremental Profit? 

Lowering your ACoS on Amazon is easy—but it might not be the answer to your problems. 

If you’re using ACoS to drive spend, you’re missing out on important costs like shipping and commission. Likewise, if you have your products all lumped together without regard for their margin, it will be difficult to drive spend to those products.  

Instead, try using profit to track your success on Amazon. You’ll be able to see the full picture of your account performance and direct your spending to maximize profit. Coupled with product segmentation, you will be able to find the perfect ACoS for each of your ad groups—eliminating wasted spend! 

Ready to grow your Amazon business? Start using profit alongside ACoS today! If you need help using a profit-driven approach, don’t hesitate to reach out here. 

Author

Savannah is a Marketing Specialist at Omnitail. She has a Bachelor of Science in Marketing with a minor in Graphic Design from George Mason University. She enjoys working with the amazing team at Omnitail to create original, helpful content.

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