Understanding Average Cost of Sale (ACoS) for Amazon Ads

Amazon Ads provide retailers with an easy path to visibility but if they aren’t managed correctly, they can quickly turn profitable products into major money losers.

The easiest way this happens is through retailers misunderstanding the main performance metric of Amazon Ads – ACoS which stands for Average Cost of Sale. It calculates spend as a percentage of revenue to help advertisers figure out what is and isn’t working but where many retailers make a mistake is confusing it with ROI and using that to incorrectly measure and optimize campaigns.

ACoS in its most basic form is (Cost of Ads/Gross Revenue) and here’s an example of how it works:

Let’s say you have a product that sells for $40 and you have campaigns that are driving sales for it at $30, $20 and $10 per sale. ACoS for the three campaigns would be: 75%, 50% and 25% respectively because you are spending that percentage of revenue to drive sales.

In the example above you may choose to pause the campaign driving sales at 75% of revenue because it’s high but in reality they could all be unprofitable. Let’s take a closer look.

ACoS is a poor metric as it is closer to ROAS (Return on Ad Spend) which measures whether your ad dollars are returning more in sales. An ACoS under 100% in theory is profitable but that’s because you’re not factoring in wholesale/manufacturing cost ad Amazon fees which can take huge chunks out of your revenue.

This is exactly why when working with clients on Amazon, we create our own version of ACoS called True ROI or TROI as we call it.

Here’s how we calculate then apply it to campaigns: Going back to our first example let’s say you sell an item for $40 on Amazon that costs you $20 to produce, package and send to a fulfillment center. Let’s say that Amazon then takes another $7 to fulfill and send to customers leaving you with a $13 profit.

In the 3 scenarios above, only one campaign would be profitable and even then it’s returning a ROI of just 1.3. That’s how something that looks good at first glance with ACoS can be barely profitable and that’s a mistake many sellers are making when running their ads.

When we work with our Amazon clients we make sure to have True ROI for every single product so that we get the most out of our ads vs spending money on unsustainable campaigns. If you’d like to learn more about what our team can do for your Amazon business, contact us today.