When advertising on Amazon, one of the most important metrics to keep track of is the ACOS. This metric has a huge impact on profitability and is a good indicator of how your ads are performing. A good ACOS can lead to growth, increased profit, and good account health.
But what is a good ACOS?
As always, it really depends. Industry standard is usually somewhere around 30% for a “good” ACOS. But really, product category, profit margin, listing conversion rate, and other factors all affect what a good ACOS might be each seller.
What is ACOS? And Why Does it Matter?
Before we delve into what ACOS target might be best for your account, it’s important to define terms.
ACOS stands for “Advertising Cost Of Sale”, and it’s calculated by dividing the amount of money spent on advertising by the amount of revenue generated by advertising. So, for example, if you spend $30 on ads, and those ads generate $100 in sales, your ACOS would be 30%.
If you’ve run ads on any other platforms, you’ll notice that ACOS is very similar to another advertising metric: ROAS (Return On Ad Spend).
And that’s correct! ACOS is actually the flip metric of ROAS. So if you divide Ad Revenue by Ad Spend, you get ROAS. And while ACOS is represented by a percentage, ROAS is typically represented by a decimal number. So a 30% ACOS would be a 3.33 ROAS.
Why Use ACOS?
Since ACOS and ROAS are the same thing, represented differently, you can use whichever metric makes the most sense to you.
Generally speaking, on Amazon, ACOS has been the more popular metric to use—and it wasn’t until about 2019 that Amazon even displayed ROAS in the advertising console.
It’s not that ACOS is the better metric to look at, it’s just more popular. And that could be because it’s easy to calculate with all of the the other fees. But Amazon is typically the only platform that uses this metric, so if you’re running ads on other platforms, it might be easier to use ROAS.
Either way, on the surface, what you’re measuring is the profitability of ads. But it actually gets a little more complicated than that.
And Then, There’s TACOS
Total Advertising Cost Of Sale is measured by taking Ad Spend and dividing it by Gross Revenue. Since not all of your sales on Amazon come through advertising, TACOS is a smaller percentage than ACOS.
The TACOS metric is a more holistic metric as it doesn’t operate in the vacuum of advertising. However, its usefulness is limited because you can’t measure the effectiveness of any campaign through just TACOS.
Another way of thinking about TACOS is that it’s your ad budget represented as a percentage of your gross sales.
Factors That Influence ACOS
There are a lot of things to think about when deciding on what will make a good ACOS for your Brand. It’s not as simple as saying “30% is what other people are shooting for” and calling it good. It’s important to consider the different factors that influence ACOS and pick an ACOS target that fits inside your overall advertising strategy.
Consider the following things when developing an ACOS target for you PPC campaigns.
Profit Margin
Before you even start advertising, you should figure out your profit margin on Amazon. Amazon has a lot of fees for sellers—especially if you’re selling FBA.
If after the cost of the product, FBA fees, and other costs, you have a 10% profit margin, then your ACOS should probably be a lot more conservative than if your profit margin is 50%.
The higher your profit margin, the more room you have to play around with advertising—and the more aggressive you can be with your PPC campaigns.
This is actually where the “standard” 30% ACOS comes from. On average, most sellers have a 30% profit margin. As a result, a 30% ACOS is the most aggressive you can be with advertising without getting in the red.
But profitability isn’t the only thing to consider when deciding on a good ACOS. Just because you have a 40% profit margin doesn’t mean that should be your ACOS target.
Category
What you product is can influence how you approach advertising—and it should.
For example, in the apparel category, you may want to be conservative with your PPC campaigns. Not only are the keywords competitive (expensive), but product returns can be really high.
…Or maybe not. Because apparel is also a consumables category, and if your brand is one that customers will purchase from repeatedly, it might be worth taking a hit early on and recouping costs down the road.
The same can be true about supplements, cleaning products, and other consumables. If your product needs to be purchased every month, it probably makes sense to play the long game.
The same is probably not true for automotive parts. If you’re selling a radiator, you probably don’t want to lose money on any sale.
Your product category has its own unique benefits and challenges, and it’s important to account for those in your advertising strategy.
Conversion Rate
PPC stands for Pay Per Click, which means that your paying for traffic—but you want sales. So getting people to come to your product listing is only part of the battle.
If your product listing doesn’t have good images, A+ content, a descriptive title, or compelling bullet points, then your ACOS is probably higher than it should be.
Your conversion rate might be 5%, which isn’t horrible, but it’s not great. If you can increase your conversion rate to 10%, then you can bet your ACOS is going to come down as a result.
This doesn’t mean you base your ACOS off of your conversion rate. It just means that it’s important to consider because it influences your ACOS.
For example, if your ACOS is 40% and you want it to be 25%, you might get there by lowering your bids. But you could also get there by increasing your conversion rate. Or maybe both.
And if your ACOS is “too high” then you can always ask yourself “what’s our conversion rate?”
Growth Strategy
This might seem obvious, but it’s important to consider how fast you can or want to grow when deciding on an effective ACOS. You might want to ask the following questions as you think about how aggressively you want to grow:
- Could our company handle twice as many sales next month?
- Are you okay growing sales on a smaller margin?
- What’s your plan for scaling next month, next year, and in five years?
These might sound like silly questions to ask yourself, especially because growing sales is typically a good thing.
But we’ve seen it happen where a seller over-leverages advertising, grows sales, and then runs into issues with their manufacturer, or can’t handle the growth internally, and runs out of stock. And a more steady, slower growth strategy would have helped them avoid these issues, all while leading to better margins.
So even though every seller wants to grow—growing too fast can lead to issues if you’re not careful. And if you don’t have the infrastructure in place to handle the growing sales, then it ends up being a bad thing.
Ad Types and Broader Strategies
Having one ACOS target can be a pretty narrow-minded way of approaching PPC. If you’re running more than one ad type, or you’re using different targeting strategies, then it would make sense for ACOS targets to change too.
For example, let’s assume that you’re in a category where your Brand really matters—like cosmetics, for example. Most of your customers are likely not searching for your product by your Brand Name. But some will.
And so you’ll probably want to separate brand keywords from non-brand keywords in your advertising efforts.
As you can probably imagine, your ACOS on brand name keywords will be much lower than the ACOS for those non-brand keywords. So your ACOS target should be different as well.
The same is true for different ad types. A Sponsored Brands banner ad probably will have a higher ACOS than a Sponsored Product SERP ad. But if the banner ad leads to more followers, that might justify the higher ACOS.
And if you, like many sellers, sell your products off-Amazon as well, then it’s important to consider how those efforts affect on-Amazon efforts.
Setting ACOS Targets
These aren’t the only things to consider when deciding what ACOS is right for your specific PPC campaigns—but these are the most important ones.
Ultimately, a good ACOS is highly dependent on what your overall goals are in your business, and what resources you have available to you.
If you’ve hired an agency to manage your ads, these are all things you’ll want to talk to them about. No one brand should have the same advertising strategy as another. Your business isn’t cookie cutter, and your advertising efforts shouldn’t be either.
It’s also important to keep in mind that goals change, and as your goals change, so should your ACOS targets. There’s something to be said for developing consistency and reliability in your advertising efforts. But it’s also important to always be improving, which might involve moving the goal post a little bit.
If you’re having trouble setting a good ACOS target, reach out to us, and we’ll talk you through it for free. We’d be happy to audit your account and give you some recommendations based on what we see.
But we’re really just scratching the surface here. There’s a lot more to learn about PPC on Amazon, and a good place to start would be our Amazon PPC Guide.