How to choose the right ACOS target and How to Calculate it?

How to choose the right ACOS target and How to Calculate it?

What is an ACOS?

The ACOS is the first metric any person that deals with Amazon advertising will talk about. It stands for Advertising Cost of Sale. It can be computed with the following formula :

ACOS = Amazon advertising costs / sponsored sales

What is a “good” ACOS?

Many sellers and vendors are wondering if their ACOS is “good”. Some are trying to compare it to other people they know and others are just trying to make it as small as possible no matter the consequences.

Unfortunately, there is no absolute ACOS number to answer this question. It strongly depends on too many factors, here are some :

  • The product’s category : “Smartphone Cases” are for example more crowded than “Bakeware Sets”
  • The competition intensity : Amazon advertising is based on a second price auction system, the more products participate in the auction the higher the paid CPC will be at the end
  • The product’s maturity : New products are much more expensive to be promoted than established and well ranked products.

So a good ACOS is something strongly dependent on the Amazon shop or group of products. The only way to answer this question is to fully control the products total costs and final margins everything included except advertising costs.

You can find here the main recurrent costs that every margin computation should take into account :

  • Amazon commission
  • Expedition fees
  • Storage fees
  • Refund costs
  • Cost of goods
  • Other taxes

If some costs are hard to compute at product level, it also makes sense to compute them at a product’s group level.

When the Total Costs Excluding Advertising ( TCEA ) are computed, it is now possible to compute a breakeven ACOS.

Breakeven ACOS = (Sponsored Sales - TCEA) / Sponsored Sales

For example, when an account generates the following numbers during a month:

  • Total sales: $1000
  • Sponsored Sales: $300
  • Amazon commission on sponsored sales: $45
  • Expedition fees on sponsored sales: $60
  • Storage fees on sponsored sales: $1
  • Cost of goods for sponsored sales: $60
  • Refund costs for sponsored sales: $10
  • Taxes for sponsored sales: $10

Its TCEA on sponsored sales will be:

TCEA = 45 + 60 +1 + 60 + 10 + 10 = $186

then :

Breakeven ACOS = (300 - 186) / 300 = 38%

So when the ACOS is higher than 38%, the previous account is losing money on the short term and this might be a bad strategy excluding product launching periods.

Is it really important to lower the ACOS?

Trying to lower the ACOS by all means can lead to suboptimal strategies. Lowering the bids on all the campaigns and keywords will lead to a lower advertising cost, lower sponsored sales and probably lower ACOS.

Let’s consider the  two following accounts scenarios:

Amazon acos explained

Account B has a higher ACOS than account A, the same costs structure and margins but makes +44% profit than account A.

How to choose an ACOS target?

The right ACOS target depends on the breakeven ACOS and the maturity of the product or group of products.

The following ACOS target ranges can be used as a baseline:

product maturity on Amazon

Key takeaways

  • The ACOS is an important metric to monitor closely but it shouldn’t be the only one that drives the account decisions.
  • It is important to have a clear and perfect view of the cost structure to be able to find the right ACOS target depending on the maturity of the products.
  • Absolut profit on sponsored traffic is a better metric than ACOS.

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Tarik Berrada Hmima
April 10, 2024
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