Understanding The Amazon ACoS Formula | Calculate Breakeven ACoS
What is the ACoS Amazon formula? ACoS is an acronym that means “Advertising Cost of Sale.” The ACoS Amazon formula is a metric that sellers can use to see how their sponsored product campaigns are performing. This is a term specific to Amazon, or that at least originated with Amazon, so even if you understand Pay Per Click (PPC) advertising, it might not be familiar to you. If you understand the Advertising Cost of Sale and how it affects your products, then you’ll be in a better position to make a profit from PPC.
ACoS Amazon Formula: The Least You Need to Know
There are a few things you need to understand about ACoS. Firstly, this is a key metric for Amazon campaigns involving sponsored products. Secondly, the formula is the amount spent on the ad divided by sales. Thirdly, while this tells you what you spent to get a certain amount of sales for a given campaign, it doesn’t actually tell you anything else. Most importantly, the ACoS number, by itself, is not definitive. In other words, the ACoS score doesn’t tell you if a campaign is profitable enough. It only tells you how much you paid to earn each dollar.
For example, a campaign on which you spend 100 dollars, and which generates 200 dollars in sales, has an ACoS of 50%. In other words, you are spending 50 cents for every dollar you make for that campaign. At the same time, ask yourself a question. What should your ACoS be? If you know what your target ACoS should be, then you can determine if a campaign is worth the money. Most importantly, you can then use that ACoS figure as a benchmark to continue or terminate PPC campaigns.
Determining Profitability Using the ACoS Amazon Formula
If you’re going to determine a “good” ACoS for your campaigns, you have to first know what your profit margin is. That amount is the leeway you have to spend on a campaign. Most importantly, that amount is what you cannot exceed. If you go over your profit margin on paid campaigns, then you are losing money. That you already know.
If you are at your profit margin exactly, then you are only breaking even. This is the target ACoS that I shoot for as it will help you drive organic sales.
If you are want to improve your profitability then you want to try to remain under the amount of your profit margin for you to have any profit left.
Profit Margin and the ACoS Amazon Formula
Given these points, how do we determine profit margin? To begin with, you have to look at all your costs. Most importantly, you have to know at what amount you break even. The first thing to remember is that you have to include ALL costs.
Firstly, there is the cost to manufacture the product.
Secondly, there is the cost to process order.
Thirdly, there is the cost to ship the product.
Fourthly, there is the cost of inventory, storage, and handling for the product.
Finally, there is the cost of the direct labor involved to do all these things. Most importantly, all other general costs must be factored in. In the long run, any missed costs mean an inaccurate analysis of your break even.
What Is Your Cost of Goods Sold?
If the previous analysis didn’t make it clear to you, then this one may help. As long as you think in terms of Cost of Goods Sold, you’ll be okay. Investopedia defines the Cost of Goods Sold as the direct costs for production of your product. In other words, what does it cost to sell your product or service? To say it another way, this is the “cost of sales.” Every business, sooner or later, comes to grips with its many expenses. Firstly, you have your freight costs. In other words, the cost to ship the product (or to get the service to the customer) is part of Cost of Goods Sold. At the same time, you must include the cost of raw materials.
Secondly, there is the cost of direct labor for the workers involved. In other words, anyone who has to work to make the product or perform the service is a cost. Most importantly, your company will be paying a lot of money in wages to personnel in order to do business. All these wages should be factored in to the Cost of Good Sold. Thirdly, Cost of Goods Sold also includes overhead on the manufacturing facility. After all, without your facilities you cannot produce your goods or services. At the same time, you may be missing a significant cost. In other words, you may be failing to account for depreciation. The first thing to remember about depreciation is that it should be included in your cost of sales. This is because it decreases the value of your assets. It therefore costs you money.
The ACoS Amazon Formula and Your Net Profit Margin
Whatever your net profit margin, you must stay within that cost for PPC. Your ads must cost no more than that amount for you to break even and continue operating. That does not mean, though, that a single campaign could break you if you exceed that margin. We’re talking about the aggregate among your PPC campaigns. Once you know your break even point, you know the profit margin. If you know the profit margin, then you can use that as a target to determine if any given campaign is worth your time.
RELATED: How To Calculate Your Breakeven ACoS
Break Even Isn’t Enough: Why the ACoS Amazon Formula Matters
Using your ACoS Amazon formula to target break even will ensure that your company meets its costs. Most importantly, it will make sure you aren’t losing money. At the same time, breaking even is not really your goal. In other words, you are in business to increase profit and grow. After all, if you aren’t growing, you aren’t building on your investments. Think about your goals for your business at this point.
Firstly, you want to produce a quality product (or service). At the same time, you don’t want your product to cost more than it has to for that level of quality. Secondly, you want to sell your product at a healthy profit margin. At the same time, you don’t want your profit margin to large. Most importantly, if your profit margin is too large you will price yourself out of the market. Thirdly, you want to make sure your PPC campaigns support your overall business strategy.
Using the ACoS Amazon Formula as Part of Your Business Plan
At the same time, understanding your ACoS Amazon formula can help you with your targets. Most importantly, your target ACoS supports your desired net profit margin. Fourthly, all these elements work together to sustain your business. At the same time, be on constant lookout for any costs or other elements you might have overlooked. Most importantly, the more accurate your business picture, the more accurate your numbers.
Finally, the more accurate your numbers, the better you’ll be able to run your business like clockwork. This means hitting your financial targets and achieving desired net profit. In the meantime, you’ll also be hitting your desired ACoS by definition. Any campaigns that don’t hit your target values should be discarded as not worth what it costs to buy the sales.
Related: Free Amazon PPC Masterclass
What Should Your ACoS Amazon Formula Number Be?
As long as you are breaking even, you can set your target ACoS higher or lower based on your business strategy. There are several reasons you might want your ACoS to be as high as possible. Firstly, you might hope to sell your entire inventory. Secondly, you might be trying to get the word out about your product. At the same time, you might be trying to dominate your target market. Most importantly, you might be trying to establish your brand as the leader. Finally, you might be trying to sell off an underperforming product so it won’t be an issue for your anymore.
On the other hand, there are several reasons you might want your ACoS to be as low as it can be. Firstly, you could be trying to increase your profits to maximum. At the same time, you might need to increase revenue for any number of reasons. Secondly, you might have a product that doesn’t convert well. In other words, a low ACoS accounts for this low conversion rate. Finally, you may not be worried about whether your product gets noticed.
Calculating Your Maximum Cost Per Acquisition
I make four new columns in my spreadsheet (more on how to use the spreadsheet here) and build out a simple formula in the Max CPA column to calculate it.
Then, figure out the Amazon fees by using the Helium-10 Chrome Extension, which you can get FREE by clicking here (affiliate link).
I then put these into my spreadsheet and double check to see if they match.
This is a pretty simple formula, which is just
Selling Price – Product Costs (COGS) – Amazon Fees = Maximum Cost Per Acquisition
Calculate Your Breakeven ACoS and Determine Your Target ACoS
Let’s add two more columns to this spreadsheet and title them Breakeven ACoS and Target ACoS. Now we want to figure out what our breakeven ACoS (average cost of sale) is and then determine how aggressive you want to be by THINKING and STRATEGIZING about what you want your target ACoS to be.
Breakeven ACoS is simply your profit margin, which is your maximum CPA divided by your Sales Price.
Breakeven ACoS = Maximum CPA / Sales Price
Target ACoS is determined on a product by product basis. For the product example that I am giving, eyelid wipes, I will be going a little more aggressive because this is a consumable product.
No matter what the numbers, use the tools available to you. In other words, pay close attention to your product pages. At the same time, optimize your advertising. Finally, make sure you use the available PPC tools to help make your job easier. If you take advantage of all this advice, then you’ll soon have the ACoS Amazon formula working for you. From time to time, recheck your numbers to keep yourself on track. Good luck!
