Calculating and Understanding Amazon ACOS: Tips and How to Maximize ROI

In Amazon advertising, understanding key metrics is essential for maximizing return on investment (ROI) and ensuring that your campaigns are as effective as possible. One of the most critical metrics that advertisers need to understand is ACoS or Advertising Cost of Sale.

The average ACoS across various Amazon advertising categories ranged from 30% to 40%, highlighting the importance of optimizing this metric for profitability. Knowing how to calculate, interpret, and optimize your ACoS can significantly affect your Amazon business's profitability.

In this blog post, we will explore what ACoS is, how to calculate it, and how to use it to improve your Amazon advertising strategy.

What is ACoS?

ACoS, or Advertising Cost of Sale, is a key performance indicator used by Amazon sellers to measure the efficiency of their advertising campaigns. It is a percentage that reflects how much of your revenue is spent on advertising. Specifically, ACoS is calculated by dividing the total amount spent on ads by the total sales generated from those ads.

In simple terms, ACoS tells you how much you're spending on advertising to generate a certain amount of sales. For example, if you spent $20 on ads and generated $100 in sales, your ACoS would be 20%. The lower the ACoS, the more profitable your advertising campaign is.

ACoS is a metric that helps you understand the balance between ad spend and revenue. It provides crucial insight into whether your advertising campaigns yield a positive return or cost you more than they’re worth.

Now that we've established the importance of ACoS let's discuss the practical side and understand exactly how you can calculate it for your Amazon campaigns.

How to Calculate ACoS?

To calculate your ACoS on Amazon, use the following formula:

ACoS=(Total Sales from Ads/Total Ad Spend)×100

Example:

Suppose you spent $500 on an Amazon advertising campaign and earned $2,500 in sales as a result. Here’s how you would calculate your ACoS:

ACoS=(2500/500)×100=20%

This means that for every $100 in sales, you spent $20 on advertising.

The ACoS formula is straightforward, but understanding its significance and using it to adjust your campaigns effectively requires deeper insight into your business goals and profit margins.

Once you've grasped how to calculate your ACoS, let's explore the ideal range and how it varies based on your specific business goals.

What is a Good ACoS on Amazon?

Determining what constitutes a "good" ACoS can be a bit subjective, as it depends on your business model, profit margins, and goals. However, the general rule of thumb is that a lower ACoS indicates higher profitability, as it means you're spending less on ads for every dollar of sales.

For instance:

If you sell high-margin products, you may be able to afford a higher ACoS because the profit from each sale is greater.
If your products have a lower margin, you’ll want to keep your ACoS low to maintain profitability.

A good ACoS typically ranges between 15% to 30% for most sellers. However, this varies widely depending on industry, product type, and sales volume. For example:

For new products or seasonal items, ACoS might be higher as you're building brand recognition and traction.
A lower ACoS may be more realistic and sustainable for well-established products with high sales volume.

It’s a reflection of your ad efficiency and needs to be aligned with your profitability goals. Keeping ACoS in check ensures that you're getting the most value from your advertising budget.

Your Amazon ACoS directly impacts your profitability, and you can’t let inefficient ad spending reduce your margins.

SellerMate's recommendation feature ensures your PPC campaigns align with your specific goals. Simply set your objectives—whether slashing ACoS or boosting sales and our AI will deliver customized recommendations, optimizing your ad efficiency and maximizing your budget.

While ACoS is a critical metric, understanding how it compares to ROAS (Return on Advertising Spend) is equally important. Let's break down the differences between these key metrics and how they impact your campaigns.

Difference Between ACoS and ROAS

While both ACoS (Advertising Cost of Sale) and ROAS (Return on Advertising Spend) are used to evaluate the success of advertising campaigns, they are inversely related.

The table below shows the comparison between ACoS and ROAS

Aspect	ACoS	ROAS
Definition	Advertising Cost of Sale (ACoS) is a metric that tells you how much you are spending on advertising in relation to the sales it generates.	Return on Advertising Spend (ROAS) measures how much revenue you earn for each dollar spent on advertising.
Formula	ACoS = (Total Ad Spend / Total Sales from Ads) * 100	ROAS=Total Ad Spend/Total Sales from Ads
Example	For example, if you spent $500 on ads and generated $2,500 in sales: ACoS = (500 / 2500) * 100 = 20%	For example, if you spent $500 on ads and generated $2,500 in sales: ROAS = 2500 / 500 = 5
Expression	Percentage	Ratio or multiple
Relationship	Inverse relationship with ROAS.	Inverse relationship with ACoS.

It’s essentially the flip side of ROAS, with a lower ACoS equating to a higher ROAS. Both metrics are critical for assessing advertising performance but provide slightly different perspectives on ad efficiency.

Understanding the difference between ACoS and ROAS is key, but to truly optimize your campaigns, you must also know your break-even ACoS. In the next section, we'll explain how this metric helps you determine when your ad spend costs you more than it’s earning.

What is Break-even ACoS?

Break-even ACoS refers to the percentage of your revenue that you can afford to spend on ads without losing money. It is the point at which your advertising spend equals the profit you generate from those sales.

To calculate your break-even ACoS, you need to consider your profit margin. If you have a 20% profit margin on a product, your break-even ACoS will be around 20%. If you spend more than that on advertising, you will end up with a negative ROI.

The formula for break-even ACoS is:

Break-even ACoS=1-Profit Margin/Profit Margin×100

For example, if your product has a profit margin of 30%, the break-even ACoS would be:

Break-even ACoS=(0.301−0.30)×100=233.33%

This means you can afford to spend up to 30% of the revenue on advertising without losing money. If your ACoS is higher than your break-even ACoS, your campaign is not profitable.

Now that you know your break-even ACoS, it's time to focus on finding your target ACoS. Let’s explore how you can set this important goal.

How to Find Target ACoS for Your Business?

To find your target ACoS, you must understand your profit margins, desired ROI, and other business goals. A target ACoS is typically set based on your desired profit margin and how much you're willing to invest in advertising to reach those margins.

Here are the steps to identify the target ACoS:

Start with your profit margin: If your profit margin is 20%, you’ll want to keep your ACoS below this to ensure you're making a profit.
Factor in additional costs: Consider operational costs, Amazon fees, and any other overhead when determining your target ACoS.
Adjust for long-term goals: If you’re launching a new product, you might be willing to accept a higher ACoS in the short term to build brand awareness and generate initial sales.

Your target ACoS is not a one-size-fits-all figure and should be adjusted as your business grows and your advertising strategy evolves.

Before setting your target ACoS, you need to understand how to calculate your break-even ACoS accurately. Here’s a simple formula that will help you determine your exact threshold for profitability.

How to Calculate Break-even ACoS?

To calculate your break-even ACoS, follow these steps:

Determine your profit margin: For example, if your product costs $30 to make and you sell it for $100, your profit margin is 70% ($70 profit per unit).
Apply the formula: Using the formula mentioned below, calculate your break-even ACoS.
- Break-even ACoS=1-Profit Margin/Profit Margin×100

For the above example, the break-even ACoS would be 30%. This means that if you spend more than 30% of your revenue on advertising, you’re operating at a loss.

Once you know your break-even and target ACoS, the next step is optimizing your campaigns. In the next section, we'll share three practical tips that can help you improve the efficiency of your advertising efforts.

3 Essential Tips for Lowering Your ACoS on Amazon

Achieving a lower ACoS and maximizing ROI requires strategic adjustments to your advertising efforts. Here are three effective tips to help you lower your ACoS on Amazon:

1. Add Negative Keywords

One of the quickest ways to improve your ACoS is by adding negative keywords. Negative keywords prevent your ads from showing up in irrelevant searches, thus reducing wasted ad spend. By focusing your ads only on highly relevant keywords, you can ensure that your budget is spent on the right audience.

2. Use Exact Match Keywords

Using exact-match keywords helps you target customers who are actively searching for exactly what you sell. While exact match keywords generally have lower search volume, they typically result in higher conversion rates and more efficient spending. This can ultimately lower your ACoS.

3. Take a Proactive Approach to Bid Management

Bid management is crucial to controlling your ACoS. Regularly monitor your ad campaigns and adjust your bids based on performance. Lower bids on underperforming keywords and increased bids on high-converting ones to maximize ROI.

Tools like Amazon's dynamic bidding allow you to set up automatic adjustments based on performance, making this process more efficient.

Lowering your Amazon ACoS requires a focused effort on keyword targeting, bid management, and continuous testing. Consistent monitoring and adaptation are crucial for long-term profitability.

Summing Up

Understanding ACoS and how it impacts your Amazon advertising strategy is key to improving profitability and maximizing ROI. By calculating ACoS, setting a target ACoS, and using strategies like negative keywords, exact match keywords, and proactive bid management, you can optimize your campaigns to drive better results.

Remember, while a low ACoS is desirable, the key is to balance it with your profit margins and business objectives. With careful monitoring and adjustments, you can ensure that your Amazon ad campaigns are a lucrative part of your business strategy.

Ready to take your Amazon advertising to the next level? SellerMate can help you optimize campaigns, lower ACoS, and maximize ROI. Let us handle the strategy so you can focus on growing your business. Book a demo today and start driving more sales with smarter ads!

FAQs

Q1. What role does the Amazon algorithm play in ACoS?

Ans- The Amazon algorithm significantly determines how your ads are shown and to whom. Your ad performance and relevance score, which are influenced by factors like click-through rates (CTR) and conversion rates, can directly affect ACoS by making your ads more or less expensive.

Q2. How do I know if my ACoS is profitable?

Ans- To determine if your ACoS is profitable, compare it to your break-even ACoS and profit margin. If your ACoS is lower than or equal to your break-even ACoS, you are making a profit. However, if it exceeds your break-even ACoS, your ads are unprofitable, so you might have to optimize your campaigns.

Q3. Can ACoS be negative?

Ans- No, ACoS cannot be negative. Since ACoS is calculated as a percentage of ad spend relative to the sales generated, the lowest possible value for ACoS is 0%. A negative ACoS would imply that you are earning more than you're spending, which isn't possible through the traditional advertising spend structure on Amazon.

Q4. How do seasonality and holidays affect ACoS?

Ans- During peak seasons or holidays, such as Prime Day, Black Friday, or Christmas, your ACoS may increase due to higher competition and increased ad spending. However, this can be justified if sales significantly rise during these periods. Monitoring daily ACoS performance during these times is crucial to ensure that the spike in ad spend is generating proportional sales.