Every e-commerce seller’s main target is not only getting sales but also achieving sustainable profit for business existence and growth. To sustain growth and existence of business, Advertising plays a huge role and sellers/advertisers need to understand every aspect of advertising. For Amazon advertising, you not only need to know about What is Amazon Sponsored Ads but also you need to know about advertising campaign optimization. For total understanding of advertising in amazon or in any marketplace, you need to know every metric of advertising. In advertising, ACOS and ROAS are the most important metrics of all. Maintaining profitable ACOS or profitable ROAS is one of the most important factors to consider so that you don’t spend too much money and keep your profit at minimum/expected level.
What is Amazon ACOS?
ACOS (Advertising Cost of Sales) is a ratio between advertising spend and advertising sales. Simply if you just divide advertising spend by advertising sales, you will find ACOS. It is calculated as the percentage of amount of advertising spend to generate an advertising sale generated as below:
ACOS = (Advertising Spend/ Advertising Sales) *100
For example, if your advertising spend is $20 and advertising sale is $100, then the ACOS will be;
ACOS = ($20/$100) *100
= 20%
What is Amazon ROAS?
ROAS (Return on Ad Spend) is also the ratio between advertising spend and advertising sales. But, ROAS is just the opposite of ACOS. If you just divide advertising sales by advertising spends, you will find ROAS. It is also known as ROI (Return on Investment) It represents the amount of money you get from each dollar advertising spend. It is calculated as dividing advertising sales by advertising spends.
ROAS = Advertising Sales/ Advertising Spends
What Metric is Good? ROAS or ACOS?
Both ACOS and ROAS represent profitability calculations but in different ways. The purpose to calculate ACOS or ROAS is the same, to calculate whether the running advertisement is profitable or not. ACOS shows profitability in percentage but ROAS shows profitability in percentage, ratio or dollar amount. So, as ROAS is more flexible, ROAS presents a better overview.
What Should Be Target ROAS or ACOS?
Target ACOS or ROAS can vary based on product price, business status, business goal, product margin etc. This also varies in different stages of business lifetime such as new sellers or new items. In that case target ACOS or ROAS will be different from well established and renowned sellers.
If you are a new seller, your primary goal should be to get to the break even point at first. After successful launch, it will be better to focus on sales growth and higher profit. This ultimately helps you to get organic ranking and high-volume sales. In this case, Target ACOS must be at very low to stay in the breakeven point.
If you are an old or existing seller, it is important to set a target for higher sales volume to maintain business growth. As you have already organic ranking it will be easy to maintain good total sales with low advertising spending. In this case, Target ACOS can be at a moderate level to achieve a good amount of total and advertising sales.
How to calculate Target ROAS or ACOS?
There are some points to consider before you need to calculate your target ACOS. Those are:
- Product margins
- Shipping Cost and FBA Fee
- Amazon’s Referral Fee
Suppose you are a new seller on Amazon. Here, your product sales is $1000 and your overall product margin is 45%. Additionally, you have a total Amazon FBA fee with shipping cost $80. At last Amazon charges you a total 12-15% Amazon Referral fee.
Calculation:
$1000 sale x 45% product margin = $450 profit before Amazon costs
$450 profit minus $150 (amazon 15% Referral fee cut) minus $80 (shipping) = $220 profit post-Amazon cost
$220 profit divided by $1000 sale price = 22% break even ACOS or 4.55 ROAS
So, in this case, you need to maintain below 22% ACOS to get to the breakeven point. So, to profit you must get advertising sales and also maintain 22% or lower ACOS.
Final Thoughts
Setting target ACOS is crucial for setting up your advertising plan and strategies. If you are an existing seller it will be easy to maintain profitability with a little bit higher ACOS. But if you are new, you must be patient and maintain target ACOS to stay at the breakeven point. Once organic sales increase, it will be the time to grow your sales with moderate ACOS.
