Breakeven ACOS on Amazon - What you need to know
You've seen ACoS (advertising cost of sale) at the bottom of your Amazon ad reports. You might not know what it means or how it's calculated. But if you're running ads on Amazon, you should understand this metric and how to use it to optimize your campaigns. In this post, I'll explain ACoS and the difference between it and your breakeven ACoS in detail.
First things first: What is Amazon ACoS?
Very simply, Amazon ACoS is just the amount you spend on ads for each dollar that you make in revenue. It can be calculated with the following formula:
ACoS = Total ad spend / Total sales
ACoS is expressed as a percentage. For example, if your ACoS is 25%, then it means that you spent $25 for every $100 that you made. Easy, right?
Here's that calculation again with the above numbers
ACoS = $25 / $100
$25/ $100 = 0.25 (25%)
Put a pin in that calculation for now, as we’ll come back to it later.
Your ACoS depends on your sales volume and profit margin.
Your Amazon ACoS is not an absolute number, and it varies by product. The reason for this variation is that sales volume has an impact on both components of your ACoS equation: cost-per-sale and average order size.
What is Breakeven ACoS?
Now that we've briefly covered ACoS and you've worked out what your ACoS is, you might be wondering "is that a good or bad number?". There are plenty of articles out there showing you what a good ACoS is by industry, but we at Nozzle would argue that an ACoS is neither good nor bad by itself. While ACoS can be a useful metric, on its own, it doesn't really tell you anything about your profitability.
Enter breakeven ACoS. This metric can help you understand what you can afford to spend on advertising and still profit. Put another way, your breakeven ACoS is your pre-advertising margin. Understanding your breakeven ACoS will allow you to set a Target ACoS for your products, which means you can create an effective marketing strategy that remains profitable.
How to calculate your breakeven ACoS (with examples)
To calculate your breakeven ACoS you will need to know:
1) all of the costs involved in selling your item, including warehousing, manufacture, shipping and Amazon costs - this is your item cost, or cost of goods sold (CoGS)
2) the actual sale value of your ASIN (or product)
How to calculate your breakeven ACoS on Amazon:
Breakeven ACoS = (Sale value - CoGS) / Sale value
So, if we sell our item for $100, and all of our costs and fees are $25, then our calculation is
Profit margin = ($100 - $25)/$100
$100 - $25 = $75
$75 / $100 = 0.75
Breakeven ACoS = 75%
Comparing your ACoS to your breakeven ACoS
OK so now we should be armed with our first two figures, we can finally figure out whether our ads are profitable or not. And happily, this is a pretty simple case of wanting your breakeven ACoS to be a higher percentage than your ACoS, as this means that you are still profiting from advertising. If your ACoS is higher than your breakeven ACoS, then it might be time to take action as you’re likely to be losing money on ads.
Breakeven ACos > ACoS = your ads are profitable
Breakeven ACoS < ACoS = your ads are not profitable
In our earlier examples, we calculated that we had an ACoS of 25%, and a Breakeven ACoS of 75%. Great news for our fictitious store, because we’re actually being pretty conservative with our ad spend compared to our profit margin!
Breakeven ACOS can be flexible.
There are two things you need to know about ACoS and breakeven ACoS: they’re moving targets and should be flexible.
It’s a moving target because it depends on the cost of goods sold, which can change significantly over time.
For example, if your costs go up or down while your sales volume stays steady (or vice versa), then you'll have to adjust your ACoS accordingly so that they're still consistent with one another.
When we talk about “flexibility” in this context, we mean the ability for you as the business owner or manager to make changes in response to changing conditions—like those described above—without having those changes affect other aspects of your business plan in undesirable ways or cause any other unintended consequences.
Breakeven ACOS is a moving target.
As you can see, Breakeven ACOS is a moving target. It will continue to be a moving target as long as your sales volume and profit margin change.
However, there are some ways to make sure that doesn't happen:
- Make sure that you do not over- or under-forecast your sales volume by more than 10%.
- Keep an eye on your actual breakeven ACoS for each product line, and make adjustments when needed.
For a longer-term view, and to mitigate the day-to-day changes of CoGs and sales volumes, you can incorporate your customer lifetime value calculations to plan your Target ACoS over a longer period of time.
In the above screenshot from Nozzle analytics, if you wanted to break even on the first purchase, your breakeven AcoS is 62%. However, if you can wait, say, 6 months, that increases to 99% as some of those customers will have bought again, meaning a Seller has more “breathing room” in the AcoS.
Breakeven AcoS should not be confused with a target AcoS - Sellers don’t want to just break even - they want to make a profit! The target ACoS is a personal decision each seller needs to make given the circumstances of the business (cash flow, margins, etc.). We regularly see the breakeven ACoS being adjusted by 15% - 25% to get to a target ACoS for instance.
So, there you have it! Your breakeven ACoS is simply your pre-advertising profit margin, and knowing this figure will give you much more confidence in assessing your marketing budget in the short and long term. While you can’t always predict what your ACoS will be, you can start to set sensible targets for your ad budget. Hopefully, this post has helped shed some light on this important metric so that you can use it to guide your marketing decisions and make sure that they are effective—and profitable!
Sources: What is a good ACoS on Amazon: Benchmarks across industries (Sellics)
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