March 14, 2019
Two Recent Amazon Changes Shaking Up Ecommerce
The Amazon Advertising platform measures and reports on ACoS (advertising cost of sale) for ad spend instead of ROAS (return on ad spend). This, combined with all the different costs associated with selling on Amazon, can lead to a confusing goal setting situation. We’re here to help with that. This blog post includes some answers to commonly asked questions, as well as a short guide to setting the right ACoS goal.
ACoS = spend/revenue
Simply put, it’s just the percentage of your revenue that you had to spend in order to drive that revenue. If you generated $100 in revenue at a 10% ACoS, that means you spent $10 to achieve your $100 in revenue. If you’re used to thinking about your advertising in terms of ROAS, ACoS is the inverse of ROAS — just divide 1 by your ACoS percentage to convert it.
Yes! ACoS translates to product margins very easily, so keeping everything in percentage form simplifies your math. If you know that you have roughly 40% profit margins on a certain product, and you’re spending 45% of the revenue you generate on that product, then you’re unprofitable.
The truth is, they’re pretty much the same. However, we recommend picking just one and sticking with it. Speaking the same language makes communication and budget allocation decisions easier. That’s one of the pros of having your SEM, Facebook, and Amazon ads all run by the same team.
No. Amazon is an amazing revenue-driving platform; however, your efficiency goal needs to be different than on SEM or Facebook to account for the additional costs of Amazon and the potentially diminished lifetime value of a customer from Amazon. You should generally aim for better efficiency (lower ACoS and higher ROAS) on Amazon.
This is not a one-size-fits-all process — businesses in different stages will require different thought processes. The goal setting example below is what we would recommend for an advertiser that is new to Amazon Advertising and looking to set themselves up for future growth. Since we’ve been talking about ACoS, let’s use that as our basis to set this goal.
If you’re a new Amazon advertiser, we recommend that you first aim to break even in your ad efforts early on; after a successful launch, you can move toward a profit-focused goal. This helps get organic rankings off the ground for your product and sets you up for future growth. It’s important to keep in mind that successful Amazon advertising can contribute to driving more “organic” sales on Amazon.
· Product margins
· Shipping plan/costs – for example, will you be utilizing Fulfillment by Amazon (FBA)?
· Amazon’s cut – as a seller it’s likely 15%
For our example, let’s say my product sells for $50, and I have 40% margins on my product overall. I’m going to use FBA shipping, which is adding $4 per product in shipping costs (sending to Amazon and them shipping to customers), and Amazon is taking a flat 15% of every sale.
My goal needs to be a 22% ACoS in order to completely break even on ads, which is a 4.54 ROAS.
Math: $50 sale x 40% margin = $20 profit before Amazon costs
$20 profit minus $5 (amazon 15% cut) minus $4 (shipping) = $11 profit post-Amazon cost
$11 profit divided by $50 sale price = 22% break even ACoS
We’ll talk about the Amazon algorithm and why exactly we recommend starting at or above break even to begin your Amazon ad campaigns in a future blog post. If you’re looking for additional guidance on Amazon Advertising, our team can help.