Turning Break-Even ACoS into a Competitive Advantage in 2021
Amazon is more competitive than ever. With 9.7m Amazon Sellers worldwide, you have to find creative ways to stand out, build brand awareness and convert customers. Making the most of break-even ACoS is critical to achieving this.
Here, we are going to explain how to use break-even ACoS to your advantage. Specifically, we will look at how taking advantage of a CLV-adjusted (Customer Lifetime Value) approach to break-even ACoS/RoAS can change your perspective and improve your visibility on Amazon in 2021 and beyond. Let’s get started.
What is break-even ACoS?
To understand break-even ACoS you need to start with ACoS. ACoS (Advertising Cost of Sale) is the inverse of RoAS (Return on Advertising Spend) — check out our article on RoAS vs ACoS if you want to learn more about the differences. Basically, ACoS quantifies the amount you have spent on advertising to make a sale — represented as a percentage.
ACoS = Ad Spend / Ad Revenue
You can work out ACoS to see if specific campaigns and products produce positive returns. You can then increase or decrease budget, increase/decrease bids, pause campaigns. However, ACoS is not very valuable when taken in isolation. It needs to work with other metrics to get the complete picture of your campaigns, and a good ACoS strategy will often look more at ACoS trajectories than static ACoS snapshots.
Break-even ACoS is a compound metric that looks at ACoS in the context of your pre-advertising profit margin. Put simply, break-even ACoS is the total amount you can spend and still turn a profit selling that item. If you aim to make a profit with your ads, you will need to define a target ACoS (the ACoS figure you are aiming to hit) below your break-even ACoS.
Suggested reading: If you want to learn more about calculating your break-even point, check out our blog — How to Calculate Break-Even ACoS.
Why is break-even ACoS so important?
The starting point for evaluating and optimizing an Amazon PPC campaign is calculating your profit margin before the deduction of advertising costs. After that, you want to ensure the amount spent on advertising is within your break-even point — not greater than the amount of profit you're generating.
You need to know your break-even point on a product-by-product basis, a campaign-by-campaign basis, and as an average across your entire portfolio. While this seems fairly straightforward, it’s not easy to constantly out-bid the competition in a competitive market while still hitting your targets. Knowing your break-even point means that you are in a better place to walk this line, turn a profit and/or take tactical losses — for example, during the launch of a new product.
Fundamentally, break-even ACoS is so important because it allows you to quantify your ability to turn a profit while using PPC ads. Without it, you are likely to win bids that create a loss, and doing that without a specific reason is not a good business plan — to say the least.
Short-term vs long-term break-even ACoS
In your Search Term report generated in Seller Central, Amazon calculates your ACoS based on the assumption of selling a single product — it is focused on the first sale only. So, a standard approach to break-even ACoS would look to ensure that ad spend for a single sale does not exceed your pre-advertising profit margin.
Traditional competitors will typically focus on ensuring that they didn't exceed their break-even point on each individual sale. However, imagine if you could define your break-even ACoS based on not one product sale but several — over a given time period by the same customer. This is exactly what a CLV-adjusted approach to break-even ACoS seeks to provide.
For example, imagine you spend £10 on your ad to reap a £20 sale, it would seem that your ACoS is 50%. But, if we assume that the same customer makes three more purchases of the same £20, bringing their total spend to £80 — the true ACoS is 12.5%! Taking into consideration the CLV of your individual customers means you can devise a future-forward, long-term break-even ACoS strategy that is more accurate and effective than the short-term.
Why thinking long-term delivers a competitive advantage
A CLV-adjusted approach to break-even ACoS allows you to bid higher and win more sales, safe in the knowledge that one sale will lead to another by the same customer — delivering long-term profitability even if that first sale is made at a loss. This allows you to make far more aggressive bids on a regular basis, and introduce PPC tactics that most brands would only occasionally engage with on a far more regular basis. The challenge here is making an accurate CLV calculation.
Pro tip: Running short-term profit losses isn’t always easy for small Sellers that need to direct profits straight back into buying more inventory. However, with confident CLV calculations, taking on debt to free up cash flow becomes a responsible option — for example, looking at a three-month break-even projection based on CLV analysis.
Customer lifetime value (CLV) is the total profit per customer over the entire duration of your buyer-seller relationship. It helps you to understand your customers' real value. By knowing and exploiting CLV, you can accurately determine how much to spend — benchmarking your ACoS targets with the longer-term vision of profitability created by CLV.
The more accurately you can calculate CLV, the better it can be used. A CLV-enhanced perspective will give you an edge because:
- Selling to existing customers is simpler and more profitable than finding new ones.
- Retaining them is better for your bottom line than acquiring new customers.
- Knowing the total profit generated by a customer helps you put customer acquisition costs in context — which is exactly what break-even ACoS is all about.
Repeat purchases help drive down your customer acquisition cost (CAC). Then, you want your customers to move to organic sales to avoid extra advertising costs and reduce customer retention cost. The lowest-cost form of advertising is no advertising at all, with customers seeking you out rather than the other way round.
Suggested reading: CLV is a complex and challenging metric to calculate. At Nozzle, we help brands do just that with advanced AI/ML driven algorithms. If you want to learn more about our approach to CLV, check out our blog — Can CLV Calculations Ever Be Accurate?
How to use CLV-adjusted break-even ACoS to your advantage
Break-even ACOS is one of many metrics able to keep you ahead of the competition. The way this data is presented is just as crucial as the information itself. Wading through Seller Central reports is proof of how difficult and labor-intensive this can be.
Fundamentally, to be quantified and accessible, you need analytics tools to help you make sense of the data and still have time to put it to use. By presenting analysis in automated dashboards, you move straight to the insights that are needed and the action to be taken. Again, this is exactly what we help businesses do at Nozzle. However, there is still a question of how you can use this data to your advantage — even once it’s in your possession.
When addressing ACoS strategies, it boils down to three main areas:
- Maximizing sales
- Maximizing impressions
- Maximizing profit
The nature of Amazon means that these goals are not set in stone for a product or brand, and will change based on changing circumstances. For example, maximizing sales would make sense if you're launching a new product and want to support your organic ranking by increasing sales velocity. In this case, you might aim to exceed break-even ACoS for a short time.
Maximizing impressions would be important for building a brand. If you have a clear idea of customer personas and buying frequency, you can increase your ad spend still knowing your longer-term ACoS view will keep you profitable. You can also use this approach to better target ads for other products to grow a more valuable customer base.
Most brands can identify at least one competitor that can afford to out-bid them. The key to outmaneuvering a business with deeper pockets is to focus your investments on the things that count. A CLV-adjusted break-even ACoS will allow you to bring to bear more advanced PPC strategies, such as targeting keywords to improve organic ranking or to expand market share. Combined with a better understanding of your customers (and, therefore, suitable targeting options), you can win bids while keeping prices competitive and still turn a long-term profit.
To deliver any ACoS strategy, your PPC campaign management will require frequent and ongoing attention. This will include reviewing:
- What your target ACoS should be
- Campaign types, bids, ad placement
- Keywords, negative keywords and search terms
The aim is to move as many levers as possible to maximum effect. If you want to learn more about advanced PPC tactics, we’ve written a series of blogs, all of which are worth a read and all of which rely on a CLV-adjusted approach to break-even ACoS to execute properly.
- How to Use Amazon PPC to Increase Profit Margin
- How to Grow market Presence with Amazon PPC
- How to Use Amazon PPC to Drive Organic Results
Data and metrics are the secret to Amazon success
In the end, Amazon PPC metrics are math equations. You are taking each PPC metric, such as break-even ACoS, and looking for indicators that will affect your sales outcomes. At Nozzle, we combine AI and Amazon data feeds to provide that contextual information about your customers and trends — helping you jump from data analysis straight to data-driven action. We can provide PPC self-service tools and managed solutions, along with consulting services to get you up and running, and analytics software to deliver customer analysis above and beyond your competition.