CEO of Urtasker.com, a full-service Amazon marketing agency helping brands grow both on and off Amazon.
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Selling on Amazon is a juggler’s act consisting of striking a balance between multiple factors. One of those factors that highly influences your conversions is advertising. Advertising on Amazon is often necessary, especially if you’re a new seller or launching a new product.
But are you doing it right?
You can find out by looking at your advertising cost of sales. This is a metric used to measure the effectiveness of your advertising campaigns by calculating your ad expenses as a percentage of the revenue generated from ads.
I see a consistently high ACoS and disproportionately low conversion rate as warning signs to take your advertising more seriously. As calculating ACoS is easy, a host of other factors may get neglected and the ACoS will remain high. In this article, I’ll discuss the exact factors that influence your ACoS and how you can bring it down.
Why Is Your ACoS Important?
Your Amazon ACoS is a useful measure to understand how your profits are being eaten up by advertising spend. After accounting for all product costs, overhead and ad spend, whatever remains of your product revenue is your profit. Hence, the more you can reduce your ACoS without losing out on necessary exposure, the more you can retain as profit.
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You can calculate your ACoS for a particular product or product group using the following formula:
ACoS = (ad spend ÷ revenue generated from ads) * 100
ACoS is also a handy tool to determine the break-even point for advertising expenditure, above which anything you spend represents a loss on the sale.
It’s fairly simple to calculate: Suppose you’re selling a product for $30, and you pay $5 in Amazon fees. The product cost including all the other overhead is $8. So, you have $17 as your profit before any ad spend. If you were to use the complete $17 to generate a sale, your ACoS will be about 57%, which means spending more will put you at a loss.
Deciding what is a good target ACoS for your specific business depends on whether you’re in a high or low competition industry, and on the life cycle of your product. As a rule of thumb, aiming for an ACoS of 15% to 20% is a fairly decent challenge. But your average can go up to 30% and more if you’re in a highly competitive industry.
Why Is Your ACoS High?
Bid amounts, impressions, click-through rates, cost-per-click, sales prices and conversion rates are some factors that contribute to your advertising strategy and the overall plan dictating your ad spend. If a single factor is not controlled, your ACoS will soon exceed your target.
The good news is that you can directly impact these by improving the quality of your ads (impressions and CTR), setting the right bids (CPC) and competing in a business with low competition and high demand (sales price).
Strategies To Reduce Your ACoS
Before you start, identify your objectives behind ACoS reduction. Optimization strategies will differ for, say, a new product launch and a low-converting product.
Once you have zeroed in on your target ACoS, you can start optimizing using the following strategies:
Optimize Your Ad Keywords
Keyword optimization is an iterative process that you need to implement to maintain an effective and up-to-date advertising strategy. Wrongly chosen keywords will hurt your impressions and conversions as you’ll end up wasting bids.
You should also leverage negative keywords to avoid ranking for keywords that are irrelevant to your product — optimizing both your ad spend and the quality of your impressions.
Obtain search term reports from Amazon Seller Central and run them through your own filter of analysis and data intelligence before so you can reap maximum benefits.
Since keyword selection is the most important part of advertising, you may benefit from partnering with an agency to avoid wasting money on ads and not getting results on your own.
Optimize Your Bids
Bidding the right amount on Amazon PPC, Amazon’s advertising platform, is a balancing act you need to master.
Identify your high-converting and low-converting keywords. Increase bids for the high-performing ones and reduce or pause bids on the low-performing ones. A combination of your current advertising strategy and seasonal trends can guide your CPC targets for a particular campaign.
But make sure you update your inventory according to your increasing bids. In case of poorly forecasted sales, your efforts to optimize ACoS will be wasted. Using AI-driven tools can help you forecast your sales and optimize bids accordingly.
Optimize Your Amazon Product Listings
A poorly written and shoddy-looking listing often means fewer sales. Remember, customers can’t touch or feel your product, so make your listings as trustworthy as possible, not just SEO-driven, especially when you want to bring ACoS down.
Use high-quality images and videos to showcase the value your products can provide.
Lastly, focus on Amazon reviews to build trust and brand reputation. A potential customer who hasn’t heard of your brand will need to see social proof to convert to a recurring one.
Have Patience And Trust the Process
Perhaps one of the most important strategies is giving enough time to all of the other strategies you’ve put in motion. No ad campaign you greenlight will show results before two to three weeks.
Your ACoS is likely to look abysmal during the first week of any new campaign. Wait until you have at least two weeks’ data or a month’s data before making any adjustments to the campaign.
It might seem daunting at first to optimize all of the factors affecting your ACoS. But with time and experience, your strategies will start taking shape and delivering results.
Once you have a handle on your keywords, bids and product pages, conversions will likely start to increase, bringing your customer acquisition cost down and allowing you to transfer some of your ad budgets elsewhere and grow your business even more.
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Author: Omer Riaz, Forbes Councils Member
