Having a profitable Amazon advertising presence is an important component of maintaining and scaling your Amazon sales channel. Since its debut in 2014, Amazon advertising has grown from a “nice to have” to a “need to have” component for any business serious about selling on Amazon.
In this article, we are going to focus on 3 key metrics that can give you insight on the health of your Amazon advertising presence and if monitored properly will help you sustainably scale your business while keeping a low advertising cost.
As an agency that has earned our clients a combined $6 million in ad revenue in a single month last year, we assure you that we accomplished this by focusing on a variety of metrics besides Amazon ACoS alone (the way most businesses and even some PPC agencies do). If you want to learn more on how you can make that much money, check our 7 expert Amazon PPC tips.
Advertising cost of sales (ACoS) is not the be-all-end-all ad spend metric that you should be focusing on, and overemphasizing ACoS % without considering other metrics is, in fact, detrimental to the long-term sustainability of your Amazon ad campaign.
Don’t get me wrong, ACoS is an important metric that we continually monitor. However, it’s one of many factors that contribute to the success (or failure) of any advertising campaign as a component of a healthy overall Amazon account.
But just because it’s important (and is talked about on Facebook groups and LinkedIn posts non-stop) doesn’t make it the most important.
There are two other useful indicators AMZ Pathfinder monitors when it comes to keeping track of your Amazon advertising health.
- Blended ACoS (Often called TACoS, or Total ACoS)
- Attributed revenue vs Overall revenue
Before we jump into the two other metrics, let’s make sure we’re on the same page when it comes to ACoS.
Advertising Cost of Sales (ACoS)
ACoS is the relationship between your ad spend and how much that spend is generating you in revenue. Don’t worry, once you read the formula, ACoS is easy to understand.
The formula to calculate your ACoS is simply cost over sales
ACoS helps answer the question: “How efficient are my advertising efforts from a pure ROI perspective?” This is looking at advertising performance in isolation.
So What Is a Good ACoS?
All things being equal, you want to lower your ACoS as much as possible since it means every Dollar, Pound, or Euro spent has led to more ad revenue.
Now, this may seem like the ‘no-brainer’ best possible result for any campaign, but a good ACoS is not the only metric that should be taken into account. Ad performance and strategy depend on other factors like:
- Seasonality, holidays and current events
- Product listing quality, age of the product and history
- The ever-evolving competitive environment
Even though it may sound counter-intuitive, these factors could lead to higher ACoS percentage campaigns that are still successful on Amazon.
The advertising cost of sale percentage is influenced by external forces, so it’s possible that a specific keyword, campaign, or even your entire account can perform one way last month, but will have a different ACoS this month due to factors beyond your control or influence.
ACoS is only useful as it is specific. For example, for August of last year, your total account ACoS might have been 30% but you had some campaigns with an ACoS of 10% while others were at 60% and within those campaigns, you might have had keywords doing well at single-digit ACoS to those with higher ACoS at 80-120%.
In large accounts with dozens or hundreds of campaigns, it’s normal to have a wide range of ACoS percentages throughout your campaigns as many of them are built to serve different objectives.
So it’s important when looking at this metric to understand what you are optimizing for, what the purpose of the campaigns are, and at what level and time frame you are examining your data.
What effects ACoS?
Some hard mathematical realities influence ACoS. The big 3 being conversion rate, cost per click, and product sale price. (Learn More: How to Set ACoS Expectations)
If any of those figures are too far out of line, like let’s say the conversion rate is low due to a poorly optimized listing, that’s going to create issues with a high ACOS calculation regardless of if the other two are optimized and on target.
So in addition to campaign objectives and time frame examined, you also need to monitor:
- Conversion rate – The higher the conversion rate, the better your ACoS percentage will be. Conversion rate is affected by the Product Detail Page and since no product on Amazon is seen in isolation, your direct competitors page too.
- Product price – The higher your product’s sale price -what the shopper pays – the more forgiving your ACoS percentage calculation will be. Some products with a high sale price can earn an ACoS percentage that looks great just because they are costly. However, their conversion rate may be poor and CPC (cost per click) high.
- Cost per Click – What you pay each time a shopper clicks your ad. Determined mostly by your competitors and the bid auction process but also product relevance and performance history. In some categories, the CPC is so high compared to the product price, that without ultra-high conversion rates making money on ads might be impossible (for example supplements)
In general, a low ACoS percentage is desirable and a good sign for a healthy Amazon ad campaign, but there are times when ad managers may intentionally aim for a higher advertising cost of sale percentage to meet other objectives.
Those specific strategies will be discussed in a future article, so stay tuned to learn when not to lower your ACoS and instead go for a break-even ACoS. In the meantime, increase your ad revenue with our detailed article.
Our second metric is Blended ACoS, or what some refer to as “Total ACoS” aka “TACoS”.
We prefer to call it blended because what this metric is doing is blending ad spend and total revenue, not just the ad revenue, and reserve the term TACoS for Target ACoS which is something we ask clients about during onboarding.
If you were to search the term ‘blended ACoS’ or even TACoS Amazon’ on Google, you’ll be surprised by how few results there are.
But we think it’s an essential marker when determining what role advertising plays in your business overall.
In our experience, bigger Amazon businesses pay just as much attention to and optimize for their Blended ACoS as they do their ACoS.
This is because Blended ACoS factors in organic sales and considers the whole picture, while advertising-only ACoS gives us just one isolated dimension of our ad performance. Thus, blended ACoS can be more considerate of your profit margin.
Blended ACoS allows you to better measure the overall effect of advertising on the business over time, and help gauge what impact advertising has on increasing organic sales on Amazon.
Making sense of Blended ACoS
You should first assess what your existing Blended ACoS figure is and then determine if that percentage is meeting your current business objectives.
The calculation is simple:
The goal should be to hold this percentage at a comfortable level in relation to your profit margin or decrease it over time while still hitting revenue growth goals.
A decrease, while still hitting your revenue objectives, means the business needs to spend less and less money on advertising while sales continue to grow. In most cases, this is due to your organic sales becoming a larger percentage which is a result of better keyword ranking and ad placing.
Keep in mind that when launching a new product a high TACoS is normal, as most of its visibility while in the launch phase, will come from advertising.
This is fine for the short term but when that product listing matures, that should no longer be the case and the average ACoS should of the product should
One scenario to watch out for and be aware of is one that seems great at first but could be bad, and that’s seeing your ACoS decrease while Blended ACoS % increases.
Typically seeing your ACoS decrease is a cause for celebration, but when your Blended % is trending up over the same time period that means a bigger and bigger percentage of your overall revenue is reliant on advertising spend.
So no matter what that ACoS figure is, the Blended ACoS is telling us to closely examine where we should be allocating ad spend and where we might be able to back off a bit where we are already organically dominating.
Consider also how much of your advertising spend and sales are attributed to branded terms or ASINs.
Where should your Blended ACoS % fall? Typically we see Blended ACoS in client accounts range from 4% – 14%. The larger the account, the smaller this percentage.
There are times when a higher percentage may be justified like during a period of expansion and growth, and some clients want to hold a certain figure consistently throughout the year with only some variance.
Understanding how Blended ACoS works gives you a much better figure to measure the overall influence of advertising on the account.
If you have your numbers available, we recommend checking and keeping track of your Blended ACoS and see where you stand and how it changes over time.
Attributed vs Overall Revenue
Our last of the “big three” metrics is one more simple percentage calculation: what percentage of overall sales are attributed to advertising revenue.
Ideally, advertising sales make up roughly a quarter to a third of overall revenue, with too high of a percentage indicating that the business is too reliant on advertising to generate revenue and too low meaning that the business may not be advertising enough and therefore missing out on exposure and revenue.
So for example, let’s say that overall sales are increasing and your percentage attributed to advertising is holding steady.
That means ad sales are also growing, and in proportion to overall growth. This is a good indication that advertising is contributing.
But if your attributed sales are increasing and yet your client’s organic purchases are staying flat or even decreasing, that means your ad sales could be taking the place of client’s organic purchases.
Tracking your attributed percentage lets you know when to update and change advertising strategy to not get too reliant on ad spend.
If your percentage of attributed sales is over 35% you should consider carefully what role advertising plays in your business, and if it’s more than a majority of your overall sales the business is relying too heavily on advertising.
This may be due to:
- Overbidding on top volume keywords which can lead to your organic results being put in 2nd place behind ads.
- Under optimized listings that don’t stand out on the search results or other pages, and overly rely on visibility coming from advertising traffic.
Putting these three Amazon PPC metrics together
Knowing only these 3 metrics we can assess the health of advertising as it relates to the business overall.
Let’s run through a few real-world scenarios that we’ve encountered with client accounts:
Amazon Account #1
Blended ACoS: 8.5%
Attributed vs Overall: 33%
This is a healthy account.
Assuming the product margins are higher than 26% not only is advertising making a profit, but it’s raising the visibility of the products and stimulating sales which helps keep the Amazon flywheel turning. This means that organic orders make up the vast majority of sales.
All percentages are within acceptable ranges and should be closely monitored to see if they start trending in the wrong direction.
Amazon Account #2
Blended ACoS: 17%
Attributed vs Overall: 52%
This account is too reliant on advertising spend.
Despite having a low and likely profitable ACoS %, this business is paying for the majority of their sales and maybe spending a fortune doing so.
If a competitor decides to raise their bids in a hyper-aggressive fashion, this business could see their ACoS percentage increase very quickly or lose a lot of visibility and see their revenue drop substantially.
They need to find ways to move away from advertising dependence.
Amazon Account #3
Blended ACoS: 0.8%
Attributed vs Overall: 15%
In this account, advertising is drastically underutilized. These numbers are from an actual account that we recently did an audit for.
Their overall organic sales were strong and steady in this same marketplace, yet they had barely even tried to use advertising to increase their visibility and contribute to better sales velocity.
The minimal advertising they did have was largely spent against branded terms which while profitable (look at that ACoS!) were not doing much to help them rank against high volume or relevant keywords, and were only reaching a small segment of shoppers who already know their brand.
It’s important to understand and track these 3 metrics to maintain a top-level understanding of advertising account health.
Hope you found our article helpful. If you did, feel free to check the rest of our articles on Amazon PPC campaigns and Amazon ACoS.
If you are a beginner, take a look at our detailed guide into the jungle of Amazon PPC to get yourself started the proper way.