Making the most of Amazon ACoS and ROAS

1. What is Amazon ACoS?

Amazon ACoS (Advertising Cost of Sale) is a unit of measurement showing the ratio of how much money expended on advertising to the corresponding sales generated per a certain product on Amazon. The method for Amazon ACoS is given by;

 ACos VS ROAS

The result, helps in calculating the profit margin per product unit sold on Amazon or an e-commerce website. The profit margin is the difference between the selling price and the cost price of the product sold. Costs can also be akin to production, salaries, shipping, cost of storage, Amazon fees, etc. To properly determine if an Amazon ACoS is good or bad, the entire cost structure of the product being considered must be taken into account.

For Example;

To calculate Amazon ACoS percentage – Let’s speculate that a certain product made $200 in sales and $40 was spent on ad. It simply implies that from the formula given above, the Amazon ACoS percentage would be, 20%.

Once a product’s profit margin is determined as a percentage, the next step is to subtract the Amazon ACoS percentage to get the final margin. As long as a brand spends less than its profit margin on product advertisement, then it won’t incur any losses on product campaigns. Most brand managers ask questions like “what happens if my Amazon ACoS is very high?”, well it is vital to note that having a higher Amazon ACoS implies a higher ratio of ad cost to sales generation. Simply put, a product is spending a higher cost on advertising compared to its profit. Conversely, lower Amazon ACoS, implies lower ratio of ad cost to sales revenue. Ideally, for a product to be very profitable, you intend to generate the highest sales revenue figure possible, with the lowest Amazon ACoS possible. This tells you what a good and bad Amazon ACoS is.

2. What key factors drive ACoS on Amazon?

To see the factors that drive Amazon ACoS we take another look at the Amazon ACoS formula above and break it down into several segments. For easy understanding, note that Amazon ACoS increases when the money spent on ads increases faster than the revenue generated by ad or decreases when ad revenue generation increases faster than ad spend.

Ad spend depends on the number of clicks a product ad generates and the cost per click (CPC). Ad revenue on the other hand depends on the number of orders made per ad clicks and the revenue generated per order (which is the ASP, Average Selling Price):

This formula can be extended to reveal two extra key Amazon PPC metrics that govern Amazon ACoS: The Click-Through-Rate (CTR) and the Conversion Rate (CVR).

Clicks are the result of the impressions shoppers see or get when they view an ad and the click rate (CTR) is how often they click on an ad. Orders resulting from the number of clicks and how each of the clicks generates a sale (conversion rate, CVR).

In the end, Amazon ACoS (cost of sale), depends on several different factors that are also interdependent. The most effective and actionable method for optimizing Amazon ACoS is to focus on the following factors:

Click-Through Rate (CTR)

The click-through rate (CTR) shows how attractive or appropriate an ad or product is for a specific search query when compared to similar products appearing on the same search results page.

Example: Below is a pictorial depiction of a Sponsored Product Ad that is not relevant to the search query. If a client is shopping for a product, say a water bottle, the person is not looking for “Nestle Pure Life Purified Water”. Simply put, the Nestle Pure Life Purified Water” ad is in the wrong section and may not generate clicks.

 ACos VS ROAS

How a change in CTR affects your Amazon ACoS

  • If your CTR changes, while your conversion rate does not change, your Amazon ACoS remains the same. The Amazon ACoS remains static because the change in Click-Through Rate impacts both ad spend and revenue through clicks at a similar rate. Increasing CTR is good if the current Amazon ACoS on Amazon is less than the break-even 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 change in Conversion Rate. If your CTR increases by attracting more clicks that do not convert to sales, your overall CVR decreases. This results in your ad spend increasing at a higher rate than your revenue, thus increasing your Amazon ACoS.

How to optimize Click-Through Rate:

  • 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.

Try Amazon Keyword Research Tool!

Cost Per Click (CPC)

Lower cost per click (CPC) simply implies a lower Amazon ACoS, it infers lower ad impressions, clicks and sales volume. However, it may not always be the case:

CPC isn’t 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 of the auction pays the value of the second-highest bid plus $0.01. consider the example below;

 ACos VS ROAS

In the above illustration, the third advertiser wins the auction with a $4.00 bid. If the advertiser’s ad is clicked, the click’s cost charged to the Advertiser will be $3.51.

So, what influences CPC change?

 ACos VS ROAS

How to optimize CPC:

  • Continually optimize and monitor keywords and ensure bids are targeted towards if you are below Amazon ACoS target and decrease bid if you are above Amazon ACoS performance target.
  • Funds should be directed away from high to low Amazon ACoS keywords.

Conversion Rate (CVR)

Put merely, CVR goes up when Amazon ACoS Amazon comes down (and the converse is true)

Calculation of CVR is done as Orders per Clicks 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. This can be broken down into internal and external factors also:

 ACos VS ROAS

In the illustration above on "Nestle Pure Life Purified Water", let's presume a potential buyer eventually clicks the ad while searching for a "water bottle." It is then the PDP's job to persuade the shopper to buy the product. If the shopper chooses not to purchase after the ad click, Nestle's CVR would be impacted negatively for that keyword, increasing its Amazon ACoS.

Here's how to optimize Amazon CVR:

  • Ensure you optimize your product page 
  • Increase your bids on high CVR keywords to drive CVR for the entire campaign continually.
  • Reduce your bids on low CVR keywords to remove financing from low performing keywords
  • generate negative keywords by adding zero CVR keywords 
  • Using Dynamic Bids – Down Only allows Amazon to reduce your bids down to 0% based on the likelihood of conversion to increase your ad campaign's cost-efficacy. Using this strategy, Amazon assesses if a shopper who just carried out a search will convert the search to a purchase and likely change your bid in real-time based on the assessment observed.
  • Placement adjustments will allow for a change to your bid in real-time on Amazon based on where the ad appears. You will have to recalculate the proper ad campaign bid to utilize and to make up for Amazon potentially increasing your bids.

DataHawk offers an excellent Amazon PPC software that enables the visualization and captures how these metrics affect your ACoS.

3. What is Amazon RoAS?

Amazon RoAS is designed to quantitatively evaluate ad campaigns' functionality and how they add value to an e-commerce store's bottom line. When combined with a customer's lifetime value, observations from Amazon RoAS all ad campaigns will inform future budgets, overall marketing direction, and strategy. E-commerce companies and online stores will make proper decisions on the areas to invest their ad finances and increase their efficiency by keeping an eye on Amazon RoAS.

Vital considerations for calculating Amazon RoAS  

The cost of advertising goes beyond just the listing fees. To calculate the actual costs of an advertising campaign, the following factors must be deeply considered:

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.

4. What is considered good Amazon RoAS?

Profit margins, operating expenses, and overall business health are the major influencing factor of a good Amazon RoAS. While there's no direct answer to the poser question, a standard Amazon RoAS benchmark is a ratio of 4:1 ratio; $4 in revenue to $1 in ad spend. Start-ups without huge financial backings may require more significant margins, while e-commerce stores committed to increasing sales and brand growth can afford higher advertising costs.

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. 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. An e-commerce store with small margins must obtain a high Amazon RoAS to reach and sustain profitability.

5. How to calculate Amazon RoAS its difference from Amazon ACoS?

Consider the below illustration;

If revenue generated from amazon product sales is $2,000 from an ad spend of $500 of ad spend, then the return on the ad would be 4x or 400%. On Amazon ACoS, that would be 25%, and this implies that an Amazon RoAS of 4x ratio is equal to an Amazon ACoS of 25%. 

It merely shows that Amazon RoAS and Amazon ACoS are different terms used to describe the same thing. Professional marketers tend to 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. 

The use of Amazon ACoS is mostly confined to Amazon search advertising. However, what Amazon ACoS possesses and displays is a very direct means of gauging the profit of an ad campaign accrues. For example, if the set profit margin was 40%, and 28% of that margin was spent on ads, it's a lot easier to understand the meaning compared to saying that there was a 4x return on ad spend.

6. Amazon ACoS vs. AMAZON ROAS  

Amazon has recently announced it will provide Amazon RoAS (Return on Ad Spend) in its reports while publishing Amazon ACoS. Usually, it only offered Amazon ACoS (Advertising Cost of Sale). So, it should be viewed that Amazon RoAS is an addition rather than a substitution for Amazon ACoS.

  • 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. 

Amazon ACoS = Ad Spend/Ad Revenue 

Amazon RoAS = Ad Revenue/Ad Spend 

Why different terms? The answer comes down to the point of view of the reader. 

Professional marketers tend to 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 very direct means of gauging the profit of an ad campaign accrues. Amazon ACoS focuses on costs of ads in relation to sales generated; Amazon RoAS focuses on returns from advertisements as a result of product sales.

There is also a slight mental shift that comes from viewing ads as an investment rather than as a cost. As an example, which would you more straightforward and better to tell a client if you were an advertising agency?

"Our advertising cost of sale has decreased to 20%" or

"We are making a return of 5x the advertising spends." 

Both show that for each dollar you spent on ads, earnings of $5 were made. But each has a separate emotional impact. 

7. 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 as this, '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 fast becoming a major player in the digital advertising industry, although it is smaller than Facebook and Google. According to Statista, Its gross digital ad revenues increased 23.5% this year to $12.75 billion, 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 metric makes it easier for brands to sell several platforms to benchmark their Amazon campaigns' success against their other advertising channels. This allows Amazon to also 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's 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 is strategically placed to deliver voice ads. 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. But they have to be acknowledged for being able to attract more than just the big advertising dollars. They will have to convince advertisers on whole-package solutions that drive contact with customers.

Amazon has to convince marketing organizations and advertising agencies that Amazon Advertising will help them deliver successful advert campaigns with a proven return-on-investment. They also need to improve the attribution and metric tools to enable advertisers better understand 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.

8. Is Amazon ACoS still vital to you? 

Amazon PPC software ads can be expensive. It isn't easy in a very competitive market to always ensure the numbers work and win search term bids. Amazon ACoS is the fast check that tells you that your ad campaign is spending less than your profit margin pre-advertising.

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 in understanding how changes impact your ad campaign's efficacy. 

From the explanations given above, it becomes noteworthy that both Amazon ACoS and Amazon RoAS provide almost similar information. So, using any of them will depend on what you better understand and are comfortable with. Most Amazon Sellers and Vendors who have been on Amazon for a long-time, they would prefer Amazon ACoS. For brands and advertising agencies that are new to Amazon, they would likely go for Amazon RoAS. But, it's all a matter of perspective, and it is worth experimenting with both to see which you would prefer.

Breakeven points and Customer lifetime value

The key takeaway from Amazon ACoS and Amazon RoAS is standardizing the figure you derive against your break-even point (which is the total amount you can spend on ad campaigns and still turn a profit). But it's 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 your 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. Assumptions used must be fully understood every time CLV is calculated.

Working out your break-even point

Amazon ACoS is a popular standard used to measure the success of Amazon PPC software campaigns. Alone, it doesn't provide insight into the most significant KPI, which is profitability. The break-even Amazon ACoS is the flip point between a profit-making campaign and a profit-losing one. 

The break-even Amazon ACoS corresponds to your product sales profit margin. The pre-advertising profit margin stipulated for a given product is the maximum amount spent on advertising and producing a profit. In order terms, it's your break-even Amazon ACoS. 

three vital data are required when calculating profit margin: 

  1. Revenue: The income earned from selling your products.
  2. Cost of goods sold (COGS): This is the amount of money used in manufacturing your products. It includes the following manufacturing costs, taxes, and storage costs.
  3. Gross Profit: This is your revenue minus COGS.

Dividing Gross profit by revenue equals profit margin. If your Amazon ACoS exceeds the pre-advertising profit margin, you've passed your break-even point.  

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 further buttresses the fact that Amazon RoAS of 4x is an Amazon ACoS of 25%.

And if your cost of goods sold were $120, then the break-even Amazon ACoS would be 40% ($80) because your profit margin is 40%. 

How to plan around your break-even point

There is a need to ensure that your Amazon ACoS is lesser than your pre-advertising profit margin. The wider you make the gap, the higher the profit margin will be, and the more profit your business makes. 

Why CLV changes everything

It's easier and cheaper to retain a customer than gain a new one. By pushing to increase CLV, profitability will increase. Suppose CLV is accurately calculated on a product-specific level. It will change the break-even point required to sell that product in the long run and change the amount needed to be spent on advertising and produce a profit. 

For example: if an ad connects with one customer and generates sales an average of three more times. Using the values in the example above, your break-even Amazon ACoS now becomes $320 ($800-$480). This implies you could spend $320 upfront on the same ad and be at your CLV break-even Amazon ACoS. 

A break-even 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 used to calculate for 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 

9. Key takeaways 

As its platform matures, Amazon is intent on providing more options to its marketers. Video ads and enhancements to e-commerce and online stores are proof of this. Offering Amazon RoAS as a standard of measurement is also a sign of the platform's growth and of Amazon's more comprehensive plan to generate revenue from Facebook and Google. 

There are plenty of opportunities for brands and products on Amazon, and understanding your data and advertising vital in making the best of them.

Also, at DataHawk, we offer solutions that help maximize your RoAS and ACoS to ensure your brand's continued profitability.

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