Choosing Your Ideal Target ACOS
If ACOS is Amazon Ad’s single most important metric, Target ACOS is Amazon Ad’s single most important benchmark. Without one it’s like throwing darts without a board. You need to know what you’re aiming for.
Aside from having the best acronym in advertising, your target ACOS (TACOS for short) also sets the stage for your advertising strategy, and can vary from product to product, as well as shift over time for the same product as your goals change.
Launching a new product and trying to get reviews? Trying to maximize profits? Both of these require a different approach with Amazon Ads to be most successful.
In this guide we’ll discuss what a target ACOS is, why it’s important, and strategies to choose your ideal target ACOS over your product’s lifecylce.
What is a target ACOS?
To understand what a target ACOS is, first let’s define ACOS.
ACOS – Advertising Cost of Sales. The % of how much you spent in ads in relation to the revenue you generated from them.
It’s calculated by dividing your total ad spend by your total revenue (not royalties) generated from ads. If you’re more familiar with ROAS (return on ad spend), ACOS is simply the inverse of that.
$200 Ad Spend / $1000 Revenue = 20% ACOS
$1000 Revenue / $200 Ad Spend = 5.0 ROAS
Your target ACOS is exactly what it sounds like: it’s the ACOS that you’re trying to hit. It’s the benchmark you compare your actual ACOS to in order to make smarter campaign decisions.
Why is a target ACOS important?
Having a target ACOS is crucial to running a well optimized campaign. Without a target, you’re making ad optimizations aimlessly and haphazardly. If you’re basing your optimizations on “gut feelings” and not data for what is or isn’t a good ACOS on any given day, not only are you wasting the data you paid for, you’re far more likely to take more emotional, less optimal actions on your campaigns.
Your target ACOS should be a reflection of, and based on, your goals for your products. When you translate your goals into a target ACOS, you can ensure your campaign performance is aligning with your goals, and if it’s not you can take data-based actions to get them in alignment. You’ll have a benchmark to measure your keyword and campaign performance against your larger product and company goals. And if it can be measured, it can be managed.
When your actual ACOS is above your target ACOS, you know you need to bring you costs down. You can then take the appropriate actions, such as lowering bids or adding negative keywords to your campaigns. And likewise if your actual ACOS is below your target ACOS, you can take actions such as raising your bids or placement adjustments.
Having a target ACOS also opens up additional performance benchmarks when you combine it with your conversion rate data and average order value (AOV, the average selling price of your product). Using this data you can calculate your ideal cpc to compare to your actual cpc:
Target ACOS * AOV * Conversion Rate = Ideal CPC 25% * $20 * 10% = $0.50 Ideal CPC
This gives you a benchmark for how expensive your average cpc can be based on the campaign or keywords performance, and a better sense to adjust your bids accordingly.
Choosing the right target ACOS
Now that you know what a target ACOS is and why it’s important, let’s look at how to dial in on your ideal ACOS.
The first step to finding your perfect target ACOS is to calculate your breakeven ACOS. The breakeven ACOS is the point in which your ad spend is equal to your profit margin percentage. You don’t make any money, but you don’t lose any money either.
To calculate your breakeven ACOS you first need to know all of the costs you incur when someone buys your product on Amazon. This might include Amazon seller fees, shipping, cost of goods, or any other related expenses when your product is sold.
Let’s say you’re selling t-shirts on Seller Central that cost $20 each. Amazon charges you $3 in fees per unit sold and your cost of goods for each shirt is $11. Your profit is $6 for each shirt sold.
($20 Sale Price) – ($3 Amazon Fees) – ($11 COGS) = $6 Profit
Next take your profit and divide it by your sale price to get your profit margin.
$6 Profit / $20 Sale Price = 30% Profit Margin
This profit margin is also your breakeven ACOS.
$6 Ad Spend / $20 Sale Price = 30% ACOS
This breakeven ACOS will act as a benchmark to set your ideal target ACOS. Like a benchmark for your benchmark.
Once you have your breakeven ACOS, knowing what your goals for your product are makes it easy to set up your target ACOS. Do you want to get more orders? Maximize profit? Get more reviews? Maybe a little of each.
Depending on your goals, your target ACOS will fall somewhere on a spectrum that we call your bidding strategy. On one end of the spectrum is an aggressive bidding strategy with higher target ACOS. On the other, conservative bidding strategy with lower target ACOS.
The further you are on the aggressive side of the spectrum, the more you value orders over the expense to get them. The further you are on the conservative side, the more you value profit over
Your breakeven ACOS would be considered to be on the slightly aggressive side of spectrum.
Launching a new product
Getting more reviews
Ranking your product
Gaining impression and market share
Competing for highly competitive search terms
Faster data collection
In an aggressive bidding strategy, you’re allowing for a higher ACOS which generally means higher bids. This leads to more impressions and clicks, which leads to more sales and reviews faster, which leads to better search term rankings.
This is the ideal strategy if you’re trying to get more orders, reviews, or increase rank for your product as fast as possible. This makes it ideal for launching new products in order to generate reviews and rank quickly, or for products that aren’t getting steady organic sales.
Generally speaking, the more aggressive your target ACOS, the more clicks and orders you’ll get, which also means the more you’ll spend to acquire each order. This makes an aggressive strategy more suited to higher budgets, or those that are willing to lose money on each order to accomplish another goal such as getting reviews, impression share, or increased rank.
More clicks and more sales also means more data to work with. You need enough data in order to make decisions on your campaigns and keywords with confidence. Aggressive strategies collect this data faster allowing you to optimize your campaigns at a faster rate.
If getting more impression or marketshare through increased ad placements, or competing for highly competitive search terms is your priority, you’ll typically end up on the aggressive side of the spectrum. Achieving this goal often means needing to outbid your competition, leading to high, and at times even unprofitable keywords – leaving you no choice but to have a very aggressive strategy you wish to compete for these search terms.
Maintaining search ranking
A conservative bidding strategy is pretty much the exact opposite of an aggressive strategy. Having a lower ACOS generally means lower bids and cpc’s, meaning more profitable ads. But this comes at the cost of few impressions and clicks, which means fewer orders and reviews.
This makes a conservative bidding strategy ideal for products that are mature and getting lots of organic sales, and you want to maximize profits on your ad spend.
Getting fewer orders means you won’t be able to rank as effectively as possible. A conservative bidding strategy can be useful to maintain the ranking of your products, but this will largely be dependent on the amount of competition for the search terms you’re targeting. Generally the more competition, the higher the cpc’s a search term will require to win impression share. If the competition is too great you may not be able to get the number of orders needed to maintain your product ranking with a conservative strategy, and could even lose ranking on certain keywords.
Since a conservative strategy goes along with lower bids and emphasizing profitable ads, it can also be ideal if you have a lower ad budget to work with.
Now that you’ve determined your product goals, you should have a pretty good sense of what side of the spectrum you should be on. Next you’ll need determine how far on the spectrum on either side you’ll be. Should you be more or less aggressive? Middle of the road?
To get a better sense of where on the axis you should land we go back to our breakeven ACOS. This is the benchmark we use to dial in our target ACOS.
The difference between your breakeven ACOS and your target ACOS is the profit margin on your ads.
Breakeven ACOS – Target ACOS = Target profit margin 25% Breakeven ACOS – 20% Target ACOS = 5% target profit margin
This means whenever you get a sale from an ad, you make 5% in profit from the sale. If your target ACOS is above your breakeven, it’s simply a negative profit margin.
25% Breakeven ACOS – 30% Target ACOS = -5% target profit margin
Use this to determine how much, or how little profit you need or can endure while still meeting your primary product goals. If you can stand to breakeven or lose money on your ads in order to rank your product or get reviews, you can be more aggressive with your target ACOS. Likewise if you need to have a greater level of profit from you ads, you’ll need a more conservative target ACOS.
Changing your target ACOS
Over the lifecycle of a product your target ACOS will change as the goals for your products change overtime.
In the beginning of a product’s lifecycle, it has no reviews and it’s hardly getting sales. Not as many people by products with low or no review counts. You want to get as many reviews as quickly as possible, making profit isn’t the primary goal. So you run a very aggressive bidding strategy with a large portion, even majority, of your orders coming from paid ads.
Overtime your product matures – you get more reviews and organic sales start to become a larger percentage of your orders. It’s not quite as established as your competitors yet in reviews or rank, but you don’t want to lose money on ads anymore. You bring your target ACOS down to your breakeven points. Still a little aggressive so you can keep chipping away at your competitors, but your target is no longer unprofitable.
After some time you now have a mature product. It’s a powerhouse for it’s search terms, there’s no competitors close to your sales volumn, and a majority of the orders are organic sales. You now want to maximize the profit from your ads so you move to a conservative bidding strategy.
Later you notice your product’s sales start to dip. There’s new competition that’s outranking you, winning prime advertising placements, and siphoning off your sales. You want to take their ad spots away from them and reestablish your ranking so you move back to and aggressive bidding strategy.
Your target ACOS may change many times over the course of it’s lifecycle, just make sure that your target ACOS aligns with your overall goals.
Your target ACOS is one of the most crucial components to running well optimized ad campaigns. It’s a reflection of your larger goals, giving you a target to aim for and a compass for what actions to take to optimize your ads towards meeting those goals. Armed with your breakeven ACOS and established product goals, you can use your breakeven ACOS to dial in your ideal target ACOS and make smarter decisions on your campaigns.