How to Optimize Your Amazon RoAS by Understanding ACoS
First and foremost, this article explains the Amazon RoAS benchmark and establishes what is a good RoAS on Amazon. However, for framework purposes, the article will begin by describing what an ACoS is and ways to reduce ACoS on Amazon. By the end of this article, you will be able to calculate your Amazon ACoS and RoAS, assess the growth of your platform, and maximize your RoAS and ACoS to ensure profitability.
- What Is Amazon ACoS?
- What Is a Good ACoS on Amazon?
- Factors That Drive ACoS on Amazon
- How to Reduce ACoS on Amazon?
- What Is Amazon RoAS?
- What Is a Good RoAS on Amazon?
- Amazon ACoS vs. Amazon RoAS
- Calculating Amazon RoAS
- Why Did Amazon Make a Switch?
- Is Amazon ACoS Still Relevant to You?
- Breakeven Points and Customer Lifetime Value
- Main Takeaways
What Is Amazon ACoS?
Advertising Cost of Sale (ACoS) is a unit of measurement showing the ratio of how much money is expended on advertising to the corresponding sales generated per a specific product on Amazon. Essentially, your ACoS measures the performance of your advertising campaigns. To calculate your ACoS on Amazon, follow the formula below:
What Is a Good ACoS on Amazon?
However, a high Amazon ACoS signifies a high ratio of ad cost to sales generation. Conversely, lower Amazon ACoS suggests a lower ratio of ad cost to sales revenue. Ideally, for a product to be very profitable, you should aspire to generate the highest sales revenue figure possible, with the lowest ACoS possible.
ACoS varies substantially depending as it is contingent on the marketplace, competition, product price, and ad type, among other factors. Typically, a good ACoS on Amazon constitutes a marketing strategy that ranges between 15-20%, with an average of roughly 30%.
Factors That Drive ACoS on Amazon
Amazon ACoS increases when ad spend increases faster than the revenue generated by the ad or decreases when ad revenue generation grows faster than ad spend. Ad spend depends on the number of clicks a product’s ad generates and the cost-per-click (CPC). On the other hand, ad revenue depends on the number of orders made per ad click and the revenue generated per order (which is the ASP, Average Selling Price).
This formula can reveal two key Amazon PPC metrics that govern Amazon ACoS: The Click-Through-Rate (CTR) and the Conversion Rate (CVR). Clicks result from the impressions shoppers see or get when they view an ad, and the CTR is how often they click on an ad.
In the end, Amazon ACoS depends on several interdependent factors. The most effective and actionable method for optimizing Amazon ACoS is to focus on CTR, CPC, and CVR.
1. Click-Through-Rate (CTR)
For example, below is a visual representation of a Sponsored Product Ad that is not relevant to the search query. If a consumer is shopping for a product, such as a water bottle, they are not looking for actual water but a reusable bottle to put it in. The Nestle Pure Life Purified Water ad in the photo is in the wrong section and may not generate clicks.
How a Change in CTR Affects ACoS
If your CTR changes and your conversion rate does not, your Amazon ACoS remains the same. The Amazon ACoS remains static because changes in CTR impact both ad spend and revenue through clicks at a similar rate. Increasing CTR is good if the current ACoS is less than the breakeven Amazon ACoS as it will grow your all round volume of both sales and profit.
However, a change in the CTR impacts the Amazon ACoS if it causes a shift in CVR. Your overall CVR decreases if your CTR increases but does not convert to sales. This results in your ad spend rising at a higher rate than your revenue, thus increasing your Amazon ACoS.
How to Optimize CTR
To improve your CTR, you can do the following:
- Optimize your product page.
- Ensure your keyword and target lists align with your products to ensure your ads appear for the appropriate audience.
- Prevent your ads from appearing for the wrong audiences by including irrelevant keywords as negative keywords.
Use Amazon keyword research tools to increase ranking chances.
2. Cost-Per-Click (CPC)
A lower CPC implies a lower Amazon ACoS, and it infers lower ad impressions, clicks, and sales volume. However, that may not always be the case as CPC is not similar to a bid. A bid is the maximum value advertisers are willing to pay in the auction. In a real-time auction, the winner pays the value of the second-highest offer plus $0.01.
In the illustration above, you will see that the auction winner is advertiser number three, who placed a bid of $4.00. If the advertiser’s ad is clicked, the click’s cost charged to the advertiser will be $3.51. So, what influences CPC change?
How to Optimize CPC
To improve your CPC, you can do the following:
- Continually optimize and monitor keywords and ensure bids are targeted if you are below Amazon ACoS target and decrease bids if you are above Amazon ACoS performance target.
- Funds should be directed away from high to low Amazon ACoS keywords.
3. Conversion Rate (CVR)
CVR goes up when Amazon ACoS comes down. Calculation of CVR is done as orders per click and is highly dependent on the Product Detail Page (PDP) than any other Amazon PPC software metric. By clicking the ad, shoppers confirm that your ad corresponds to their search inquiry. After that, your PDP will have to win over the shopper to buy your product. The aim should always be to increase the CVR. Reference the chart below for more information.
How to Optimize CVR
To improve your CVR, you can do the following:
- Optimize your product page
- Increase your bids on high CVR keywords
- Reduce your bids on low CVR keywords
- Use dynamic bids
- Recalculate the proper ad campaign bid to utilize and make up for Amazon increasing your bids.
DataHawk offers an excellent Amazon PPC software that enables the visualization and captures how these metrics affect your ACoS.
How to Reduce ACoS on Amazon?
Amazon sellers worldwide want to have low ACoS Amazon sales. This section offers four tips on how to reduce ACoS on Amazon. The goal with Amazon ads is to get them near or just below the profitability threshold.
1. How to Reduce ACoS on Amazon: Analyze the Efficacy of Keywords
It is essential to look at your product’s keywords and your competitors to better understand which keywords have a higher search volume. Sometimes high ranking keywords are broad, increasing the odds of conversion. For example, bidding on specific keywords might cost you too much and not yield any results. The best way to conduct this kind of breakdown is using Amazon keyword research tools and Amazon keyword ranking tools.
2. How to Reduce ACoS on Amazon: Bid on Keywords With Fewer Impressions
Some keywords have high impressions but low CTR; however, keywords with low impressions can be more effective if they have a higher bid. By bidding on keywords with lower impressions for a select time frame, you may be surprised at the rate at which they turn clicks into conversions.
3. How to Reduce ACoS on Amazon: Optimize Listing Page Content
4. How to Reduce ACoS on Amazon: Determine the Right Bid Amount
What Is Amazon RoAS?
The cost of advertising goes beyond just the listing fees. The following factors must be considered when calculating the cost of an advertising campaign:
- Partner/Vendor Costs: These fees and commissions are associated with vendors and partners that assist on the channel or campaign level. In-house advertising staff expenditure, including salaries and related expenses, must be accounted for. If these factors are not accurately verified and quantified, Amazon RoAS will not explain each marketing effort’s efficiency, and its utilization as a measuring unit will decline.
- Affiliate Commission: This includes network transaction fees and percentage commission paid to affiliates.
- Clicks and Impressions: Measurements, which include average cost per click, the average cost per thousand impressions, the total number of clicks, and the number of impressions purchased.
What Is a Good RoAS on Amazon?
Businesses require different Amazon RoAS ratios for profitability, while some may require a ratio of 10:1 to stay profitable, and others can grow and sustain at a ratio of just 3:1. Only businesses with a defined budget and firm handle on their profit margins can genuinely gauge its Amazon RoAS goals. As a result, companies with a wide margin can survive a low Amazon RoAS. In contrast, those with smaller margins imply that the business must assert low advertising costs. For example, an eCommerce store with small margins must obtain a high Amazon RoAS to reach and sustain profitability.
Amazon ACoS vs. Amazon RoAS
- Amazon ACoS (Advertising Cost of Sale): shows how much you spent on ads to gain a dollar from connected sales.
- Amazon RoAS (Return on Ad Spend): tells you the amount of money you generated from sales for every dollar you spend on advertising.
Why different terms? The answer comes down to the point of view of the reader.
Professional marketers prioritize Amazon RoAS as a metric because it justifies the ad spend. It also allows for easy comparison to other marketing parts since it is the standard marketing metric. However, what Amazon ACoS possesses and displays is a straightforward means of gauging the profit of an ad campaign accrues. Amazon ACoS focuses on the costs of ads in relation to sales generated, whereas Amazon RoAS focuses on returns from advertisements resulting from product sales.
There is also a slight mental shift that comes from viewing ads as an investment rather than as a cost. For example, which of the following would you rather tell a client?
- “Our advertising cost of sale has decreased to 20%.”
- “We are making a return of 5x the advertising spend.”
Both show that for each dollar you spent on ads, $5 was earned. Nonetheless, each has a distinct emotional impact.
Calculating Amazon RoAS
To calculate your RoAS on Amazon, follow the formula below:
A great way to work out your Amazon RoAS benchmarks is to figure out your minimum RoAS. Your minimum RoAS is telling of how profitable your campaigns are. You can determine your minimum RoAS by calculating your breakeven point, which is the sum of a sale after the cost of goods sold (CoGS).
Your ads are not profitable if your minimum RoAS is less than 3. However, as mentioned earlier, good RoAS on Amazon are contingent on your profit margin.
Why Did Amazon Make a Switch?
Amazon RoAS is the standard measurement in Amazon PPC software and other digital advertising firms. Amazon ACoS is an Amazon-centric standard of measurement. So, it might be proper to ask the question, “why did Amazon choose Amazon ACoS to begin with?”
Firstly, it might be that Amazon ACoS is in line with Amazon’s campaign-focused approach. To speculate, it might just have been a way to make the platform different. And the current switch to Amazon RoAS might be about joining the group.
Amazon is quickly becoming a significant player in the digital advertising industry, although smaller than Facebook and Google. According to Statista, its gross digital ad revenues increased 23.5% to $12.75 billion this year, bringing its US market share from 7.8% to 9.5%.
As Amazon gradually becomes a more significant part of the larger digital advertising industry, they will be looking to increase their appeal to brands both on and off the platform.
The use of the Amazon RoAS benchmark makes it easier for brands to sell several products to measure their Amazon campaigns’ success against their other advertising channels. This allows Amazon to provide a similar comparison of its ad’s performance against competing platforms. Lastly, it becomes easier for brands and agencies that justify their ad spend in terms of returns to apply the RoAS formula to advertising on Amazon.
Growth aside, there is another twist to Amazon’s potential future dominance of the digital ad market: its voice offerings using Alexa. As Alexa-controlled devices become more prominent, Amazon strategically delivers voice ads. But, again, Amazon RoAS helps set a standard to measure these ads’ success compared to the usual offerings.
Amazon advertising has done a fine job delivering on Amazon PPC software product advertising. They will have to convince advertisers on whole-package solutions that drive customer contact.
Amazon has to convince marketing organizations and advertising agencies that Amazon advertising will help them deliver successful ad campaigns with a proven return on investment. They also need to improve the attribution and metric tools to provide advertisers with a better understanding of the actual performance of an entire social media portfolio.
Finally, Amazon will have to show advertisers that they understand their contribution throughout the shopping journey, and Amazon RoAS helps with all this.
Is Amazon ACoS Still Relevant to You?
Although Amazon RoAS can deliver the same perspective, because Amazon ACoS is presented as a percentage instead of a return multiplier, it becomes easy to compare against pre-advertising profit margin. And the Amazon ACoS cost-centric nature helps sellers understand how changes impact an ad campaign’s efficacy.
From the explanations given above, it becomes noteworthy that both Amazon ACoS and Amazon RoAS provide similar information. So, using any of them will depend on what you better understand and are comfortable with. For example, most Amazon sellers and vendors who have been on Amazon for a long time prefer Amazon ACoS. For brands and advertising agencies new to Amazon, they would likely go for Amazon RoAS. Nevertheless, it is all a matter of perspective, and it is worth experimenting with both to see which you prefer.
Breakeven Points and Customer Lifetime Value
The key takeaway from Amazon ACoS and Amazon RoAS is standardizing the figure you derive against your breakeven point (which is the total amount you can spend on ad campaigns and still turn a profit). But it is also vital to note that all revenue is not created equal.
Customer Lifetime Value (CLV) is an easy method of estimating the value of each additional customer you win. CLV allows you to evaluate your marketing channels’ efficacy while providing insight into the key performance index (KPI) driving your company’s value.
CLV can be used in calculating the number of new customers an advertising campaign must produce to break even. As a result of its simplicity, CLV tends to conceal its assumptions concerning the future. Therefore, such assumptions must be understood at large each time CLV is calculated.
Working Out Your Breakeven Point
Amazon ACoS is a popular standard used to measure the success of Amazon PPC software campaigns. Alone, it does not provide sufficient insight into the most significant KPI, which is profitability. The breakeven Amazon ACoS is the flip point between a profit-making campaign and a profit-losing one.
The breakeven Amazon ACoS corresponds to your product sales profit margin. The maximum amount spent on advertising and producing a profit is the pre-advertising profit margin stipulated for a given product.
Three crucial data points are needed when calculating profit margin:
- Revenue, which is the income earned from selling your products
- COGS, which is the amount of money used in manufacturing your products. It includes the following manufacturing costs, taxes, and storage costs
- Gross profit, which is your revenue minus COGS
Dividing gross profit by revenue equals profit margin. You have surpassed your breakeven point if your Amazon ACoS exceeds the pre-advertising profit margin.
For example: If you generate $200 in sales from $50 advertising spend, the return on ad spend would be 4x (or 400%).
Then Amazon ACoS for the values given above would be 25%. This supports the fact that Amazon RoAS of 4x is an Amazon ACoS of 25%.
How to Plan Around Your Breakeven Point
There is a need to ensure that your Amazon ACoS is lesser than your pre-advertising profit margin. The wider the gap, the higher the profit margin, and the more profit your business will earn.
Why CLV Changes Everything
It is easier and more affordable to retain a customer than gain a new one. By pushing to increase CLV, profitability will increase. For example, suppose CLV is accurately calculated on a product-specific level. In that case, it will change the breakeven point required to sell that product in the long run and change the amount needed to be spent on advertising and produce a profit.
Assume an ad connects with one customer and generates sales an average of three more times. Using the values in the example above, your breakeven Amazon ACoS now becomes $320 ($800-$480). This implies you could spend $320 upfront on the same ad and be at your CLV breakeven Amazon ACoS.
A breakeven point change will allow you to push competitive bidding while ensuring profit. A $50 spend is now generating $800 of revenue, which results in an Amazon ACoS of 6.25% rather than 25% first calculated.
How to Calculate CLV on Amazon
There are two methods for calculating CLV:
- The simple method used in providing ballpark figures
- The complete method, calculated on a month-by-month, quarterly, or cohort basis
CLV calculations will require both product and customer data. Data will also be necessary to forecast the lifetime value based on previous behavior.
The information required to calculate the CLV includes:
- The initial cost of acquiring the customer
- Customer annual revenue contribution
- Cost of associated products
- Customer annual direct costs
- Annual customer retention rate
As its platform matures, Amazon intends to provide more options to its marketers. Video ads and enhancements to eCommerce and online stores are proof of this. Offering the Amazon RoAS benchmark is also a sign of the platform’s growth and its more comprehensive plan to generate revenue from Facebook and Google.
There are plenty of opportunities for brands and products on Amazon. However, understanding your data and advertising metrics is vital in making the best of them. Fortunately, solution-driven eCommerce acceleration platforms exist to help sellers maximize their RoAS and ACoS to ensure continued profitability.