Amazon’s advertising revenue is expected to hit 64 billion USD by 2026.
Safe to say, your advertising investments are contributing to Amazon’s growth. But are these investments contributing to your own growth?
Amazon helps you answer this question by providing you with many metrics that can help you track the success and ROI of your advertising campaigns.
One of these metrics is the ACOS or Advertising Cost of Sales.
ACOS is one of the numerous acronyms occupying the world of Amazon advertising and making it excessively confusing.
In this blog, we will explain what ACOS is, whether you should consider it while tracking your ad performance, and how you can optimize it.
What is ACOS?
ACOS shows the ratio of money spent on ads vs. the amount generated via sales that came through those ads. In simpler terms, ACOS tells you how much you spent on ads to earn a dollar from the ad-attributed sales.
ACOS is expressed in percentage and calculated by dividing ad spend by the amount generated in sales and multiplying it by 100.
So, if an advertiser spends $50 in ads and generates $200 in ad-attributed sales, the ACOS can be calculated as:
($50/$200)*100 = 25%.
This metric helps advertisers gauge the effectiveness of their Amazon advertising campaigns and guide their efforts toward what may be more profitable in terms of ad investment.
ACOS vs ROAS vs TACOS
ACOS measures ROI.
ROAS measures ROI.
And TACOS also measures ROI.
So, what’s the difference?
You already know from above what ACOS reflects, right? So, we will start by explaining what ROAS is.
ROAS, or Return on Ad Spend, and ACOS measure the same thing – ad spend relative to money generated from sales. But ROAS presents this information a bit differently from ACOS.
ROAS shows how much you earn for every dollar you spend on ads. As opposed to that, ACOS shows how much money you pay for every dollar that you earn in sales. In short, ROAS tells you about returns, while ACOS is about costs.
TACOS, or Total Advertising Cost of Sales, on the other hand, is slightly different. It takes into account all the sales generated in a given time (organic + ad-attributed) unlike ACOS, which considers the revenue that comes from ad-attributed sales only.
Importance of ACOS and Should You Bother with It?
You may have seen advertisers fretting over ACOS.
Why is this metric so important?
ACOS helps advertisers track the performance of their advertising campaigns (in some cases) and helps them allocate their ad spend more effectively. By tracking ACOS, advertisers can (in some cases) determine whether their advertising spend is producing a positive return or not.
This metric can (in some cases) inform advertisers of their most cost-effective strategies and consequently help optimize the ad spend.
Tracking ACOS, however, may not always be important. Hence the parentheses.
Whether or not you should bother with ACOS depends on your advertising goals. If your campaign goal was to generate more revenue from ad-attributed sales, then yes – you should look at the ACOS to determine how effective your campaign has been.
But there are instances when an ad campaign generates non-monetary results. That’s when ACOS may become irrelevant.
If your campaign is focused on the upper or middle part of the funnel and aims at driving metrics like awareness and consideration, then you might experience high ACOS, but your campaign might still be effective as it may be driving the metrics that you were aiming to drive.
So, fret over ACOS only if your campaign is focused on sales revenue.
What ACOS Should You Target?
There is no magic number when it comes to ACOS. Your target figure depends on several factors, including your advertising goals, industry, company, profit margins, etc.
But, generally, ACOS below 25% is considered a good ACOS. And anything above 40% is high. So, you should aim to align your ACOS accordingly.
One standard advice is to start with a high ACOS, figure out what works, and gradually lower it to reach the desired target. Don’t set too high standards at the beginning of your campaign, or you may lack significant exposure in an effort to meet your low ACOS goals.
How to Optimize ACOS?
Optimizing ACOS is an iterative process. You start with a figure, which might be higher than the ideal value, and run ads to figure out your most powerful ad strategies. Once you have narrowed your strategies down, you can lower the ACOS and continue until you have streamlined your campaign.
Here’s how you can work on improving your ACOS:
Improve Keyword Research
An outdoor products brand wanted to reduce their ACOS, that was floating somewhere around 35%. They identified a problem within their keyword strategy – their keywords weren’t very relevant. As a result, the brand had high ACOS and low conversions in some campaigns.
They paused these campaigns and obtained a bunch of high-performing keywords by running Sponsored Product ads. Then they used these relevant and promising keywords to run their Sponsored Brand and Sponsored Display campaigns.
As a result of a renewed and more relevant keyword approach and a couple of other strategies, the brand’s ACOS got down to 10%, its conversion rates doubled, and ad-attributed sales increased 5x.
Keywords play a… well, a key role in shaping your ACOS value. Irrelevant keywords may expose your ad to an irrelevant audience and earn clicks that cost you ad spend but contribute nothing in return. This may inevitably increase the ACOS and lead you to spend more on ads than you generate in sales.
So, find and use relevant and high-performing keywords to make sure your ads get to the right audience, and a significant number of clicks that you pay for contribute some value to your business.
You can find relevant keywords by using Amazon-specific keyword research tools, Amazon’s search engine, and through analyzing your competitors on the platform.
Work On Your Ad Copy
Including high-performing keywords may take your ad to the right audience, but these ads will drive the desired results only when they get clicks. And your ads will get clicks when a solid ad copy accompanies them.
So, test and refine your ad copies to increase relevance and improve CTRs.
Optimize Your Product Listing
When a customer clicks on an ad, your bid amount parts your wallet. Now you have to try your best to generate a return on this click. And the best way to do that is to optimize your product listing for conversions.
Here are a few tips on how you can do that:
Include all the relevant and important information about your product.
Share the benefits, not just the features of your product. For example, “boosts nail and hair growth” instead of “this supplement contains pure iron” for an iron supplement.
Use bullet points in your product description.
Upload high-quality product images that clearly show your product from multiple angles and in various settings. Consider including lifestyle images as well.
Try and get as many product reviews as you can.
Price your products competitively.
Consider including A+ content.
A conversion-optimized listing may help you pull more sales, which may help lower ACOS.
Manage Your Bid Amount
How much you bid on your keywords also plays an important role in determining your ACOS.
You might be tempted to bid low to meet your low ACOS targets. But that might not be a good idea as this may decrease your total impressions, reduce the number of interactions your brand has with its target audience, and the ad may fail to generate an appropriate amount of sales volume.
First, set a starting ACOS value – which can be higher initially. Then multiply your order value by your conversion rate and divide it by the 1/ACOS. This will give you a base bid value to begin advertising with.
The Take Away
ACOS is a critical metric to track when working on enhancing the performance of your Amazon advertising campaigns. However, please note that this is not the only important metric that can help you understand how well your ad campaigns are doing.
So, don’t prioritize and track ACOS for all your campaigns. Instead, choose to obsess over it only when trying to drive increased sales through an ad campaign.
Don’t set impossibly-low ACOS targets. Start with a high value and optimize as you go.
Bid on relevant and promising keywords. Optimize your ad copy and product listing. And finally, work on choosing the right bid amount. All of this will help you lower your ACOS if that’s what you are looking for.
At Accrue, we help clients across industries build a strong marketplace presence, choose the right KPIs, and implement strategies that drive them.
Need to talk about marketplace strategy? Consult with our ex-Amazon ecommerce expert today.