Do you spend money on advertising on Amazon? Are you happy with the outcomes? Without a doubt, every single click, keyword, and ad dollar matters. You, then, are the most qualified seller to address concerns related to the ACoS, ROAS, and TACoS. But that’s not true. There is much more to know. How do you evaluate your PPC ad’s metrics—profit, revenue, and sales—and mold your ad strategies based on these metrics effectively? This is what matters.
Even so, sellers on Amazon continue to fail to effectively employ these advertising metrics. They even confuse themselves. In this blog, we’ll discuss ACoS, ROAS, and TACoS, which you may use to track the success of your Amazon ads while maintaining a reasonable budget. Although we had discussed them before in the blog on Amazon KPI metrics. But we’ll throw in some advice that’s served us well at eComFist in previous years.
Let’s get going.
What is ACoS (Advertising Cost of sales)?
The advertising cost of sale (ACoS) measures how much money you make for every dollar you spend on advertising. ACoS basically measures the advertising cost. The formula for determining this is as follows:
If your advertising cost of sale (ACoS) is low, that suggests you are spending less of your revenue on advertising, which is good news for your bottom line. In other words, a lower ACoS indicates more cost-effective advertising campaigns.
Why look at ACoS?
In order to get a clearer picture of how much of Amazon’s revenue is going toward advertising, ACoS is more widely employed. It’s a useful indicator if you want to see how much of your revenue goes toward paying for advertising. In most cases, a lower ACoS is a goal because it is indicative of greater efficiency and profitability.
Even if your organic sales are unstable, you can make deeper improvements when you look at ACoS (ad costs) in a more organized way. If your Amazon ACoS is strong, your organic sales will remain stable.
Keep in mind, too, that when we compare ACoS and TACoS, TACoS is far more important. In the TACoS section, we’ll get into the details of why that is the case.
What is a good percentage of ACoS?
Why would you even bother checking your Amazon ACoS percentage?
You want to know how successful your Amazon PPC advertising campaign is when you start it. Amazon sellers usually measure ACoS on a monthly basis. Keep in mind that a low ACoS is a sign of a well-designed advertising campaign.
- ACoS under 35% = Ad campaign strategy is good
- ACoS above 35% = Ad campaign strategy is rough
The above estimate is rough. Remember that ACoS is not fixed. Many Amazon sellers use a target ACoS of 15–25 % as a general target. Some businesses, especially those operating in highly competitive markets, can have ACoS percentages higher than 30% and still be profitable. Those sellers who have good margins, effective advertising, and well-known brands may see ACoS rates below 15%.
In a nutshell, ACoS ranges widely. There are numerous factors at play, such as profit margin, advertising goals, the competitive landscape, long-term strategy, trial and error, and so on.
What is ROAS (Return on Ad Spend)?
For your ease, just remember that ROAS is the reverse of ACOS.
So, return on ad spend (ROAS) measures how much revenue is made in comparison to how much is spent on advertisements. It basically shows your ROI, or how much you are getting from advertising. The formula for determining this is as follows:
If your Return on Ad Spending (ROAS) is high, that means your advertising is successful. In this case, a larger ROAS indicates more successful marketing efforts.
Why look at ROAS?
Likewise, Return on Ad Spend (ROAS) is important, especially when comparing the performance of various advertising platforms. This advertising metric is utilized more broadly in other e-commerce sectors than on Amazon. That’s why, Amazon recently introduced this metric.
However, new Amazon sellers who aren’t advertising experts sometimes lean more toward analyzing ACoS than ROAS. However, ROAS is more useful for larger brands, which are more concerned with understanding the return on investment (ROI) they are obtaining from ad spending. If your return on advertising spend (ROAS) is high, then your ad campaigns must be successful.
What is the relationship between ACoS and ROAS in Amazon advertisements?
Let’s take a look at the ACoS and ROAS relationships in an Amazon advertising chart before we go into how to strike a good balance between the two. If you look at the advertising chart below, you’ll see that regions with high ACoS also have poor ROAS. So, one is the inverse of the other.
Also, ACoS initially has a smoother shape with a wider base. However, ROAS shows more peaks, with large fluctuations both up and down. This means that ROAS swings more wildly than before. In this case, you’ll find that ROAS provides a far clearer visual representation of the data than ACoS does.
ACoS makes sense, though, if you’re looking to set monthly bidding targets and evaluate whether or not you’re on track. It’s more convenient to mention that ACoS is 35%; this is slightly above the norm; therefore, the bid should be reduced.
How to balance ACoS and ROAS
Finding the sweet spot between ACoS and ROAS in your Amazon PPC advertising is essential for maximum profitability. Let’s use an example to see how this works:
Let’s say you’re trying to sell something on Amazon, and the product details are as follows:
Suppose you’re selling a product on Amazon with the following details:
- Product Price: $30
- Cost of Goods Sold (COGS): $10
- Advertising Spend: $300
- Ad Revenue Generated: $900
- Total Revenue Generated (including non-advertising sales): $2,000
Now, let’s calculate ACoS and ROAS for this campaign:
ACoS = (Ad Spend / Ad Revenue) * 100
ACoS = ($300 / $900) * 100
ACoS = 33.33%
ROAS = Ad Revenue / Ad Spend
ROAS = $900 / $300
ROAS = 3.0
Your ACoS in this case is 33.33 %, which suggests that you are investing 33.33 % of your ad-generated revenue into your advertising efforts. Your ROAS is 3.0, which means that for every $1 you invest in advertising, you are receiving $3 back.
Strategies for striking the right balance
Let’s pretend you were aiming for a 25% ACoS and a 4.0 ROAS. However, under the current scenario presented above, your ACoS has increased to a greater 33.33% and your ROAS has decreased to a very low 3.0. You want to know what to do to strike the optimal balance between them so that you can successfully complete your intended goal.
You can reduce your ACoS by:
- Select more specific and relevant keywords
- Focus on high-converting keywords
- Create more compelling ad copy (Sponsored brand ad, Sponsored product ad)
You can enhance your ROAS by:
- Grow your product line, differentiate your products, or introduce related products.
- Spend more on ads that use effective keywords.
- Optimizing your product listings to improve conversion rates
If you are going to make any adjustments to your ad, keep an eye on your ACoS and ROAS and keep refining your strategies. Through trial and error, you will eventually achieve your target.
To sum up, in light of the previous scenario, you would like to maximize the efficiency of your advertising budget in order to increase your sales and boost your profitability. If you’re having trouble making progress toward your goals, an Amazon marketing agency may be able to help.
What is TACoS (Total Advertising Cost of Sales)?
Total Advertising Cost of Sales (TACoS). In contrast to ACoS, which merely takes into account sales that were generated through paid ads on Amazon, TACoS considers all sales revenue, both from Paid advertisements and organic sales.
Remember that revenue in the denominator not only includes PPC advertising revenue, but also all-in account revenues (from all advertising channels and organic growth).
TACoS usually focuses on the following
- profits for the company as a whole
- Keep an eye on how much your specific product is selling for in Amazon Seller Central, relies on advertisements.
- Consider the influence of advertising on your organic growth.
The Great Importance of TACoS
From TACOS, we can get the idea of cyclic increases and decreases in sales.
In a positive sales cycle, increased advertising expenses result in increased advertising sales, which in turn boost the organic ranking of a product and generate additional organic sales.
In the negative sales cycle, decreased advertising expenses result in decreased advertising sales, which in turn decline the organic ranking of a product and drop organic traffic and sales.
So, TACOS gives the bigger picture.
ACoS vs. TACoS? Which one is more important to analyze?
We recommend you focus on TACoS (cool acronym, right?) while your competitors put all of their energy into ACoS.
To get the most out of your Amazon PPC investment, you should analyze not just paid but also organic sales. Think of it as ACoS simply caring about what you have spent on ads that generate sales. In short, it only tells you how many sales are generated by ads (excluding organic sales).
With TACoS, however, you can see how your advertising budget is affecting total sales (paid and organic) across the board. So, why wouldn’t you consider your organic sales when evaluating the success of an ad, as PPC has been shown to improve ranking for relevant keywords, which in turn improves organic ranking for those terms?
So, in short, the total advertising cost of Sales is abbreviated as TACoS. Sure, it’s just ACoS with a ‘total’ included, but that one word makes all the difference.
Let me clarify this point with an example.
- Total ad spend: $500
- Ad Revenue Generated: $1500
- Total Revenue (including non-ad-generated sales): $5000
ACoS = (Ad Spend / Ad Revenue) * 100
ACoS = ($500 / $1500) * 100
ACoS = 33.33%
TACoS = (Ad Spend / Total Revenue) * 100
TACoS = ($500 / $5000) * 100
TACoS = 10%
Feel the difference
In the above example, ACOS is roughly 33.33%, which indicates that your major sales revenue was being spent on advertising, which would mean that you were losing money.
While the total advertising cost of sales (TACoS) is only 10% in this hypothetical situation. It shows that 10% of your sales are from paid ads and 90% are from organic sales; this is great!
To sum up, TACoS is a weighted average that provides a more complete picture of how your advertising budget relates to your overall sales.
And so, what do you think? Which metric are you planning to use when evaluating your campaign next time?
Why it’s (Uncomfortably) Important to Start with a High ACoS…
For new product advertising, PPC is akin to an up-front investment in market research.
Do not resist it. Recognize the initial ACoS hit as the “protection money” you must pay to operate on Amazon’s home soil.
What we mean is that it is impossible to predict which keywords will result in a sale when launching a PPC campaign for a brand new product. In Auto campaigns, Amazon can make predictions on your behalf, but you’ll still be shooting in the dark.
Another way of looking at it is as if you were trying to catch as many fish as possible instead of rocks and scrap metal by using a very large net.
The best places to fish, the ideal weather conditions, and the places to avoid are all things you learn with experience.
The truth is that Amazon values revenue. The greater your volume of sales, the higher you will appear in search results. It’s like a snowball rolling down a hill, except you have to pay to reach the top of the search results page.
Paid search advertising attracts buyers’ attention, which increases the likelihood that they will click “add to cart.”
This brings us full circle to yet another justification for TACoS’s importance. It explains how PPC can increase organic traffic and sales. We may not have access to the underlying data, but it seems logical that more people hearing about your product (through an ad) would be more likely to look for it online (leading to more organic sales). The snowball effect continues to gain momentum.
In contrast to ACoS, which solely tracks how much was spent on ads to generate revenue, TACoS takes into account the mutually beneficial interaction between paid and unpaid sales.
Here comes the disclaimer
Setting an ACoS target too low in the beginning increases the risk of prematurely removing keywords that may prove profitable down the road.
Simply put, you can skip or reject potentially effective keywords from your PPC campaigns if your ACoS goal is too low at the outset of your fishing/research. One more purchase could tip the scales from a high ACoS keyword to a low one.
Again, it’s best to just embrace the idea that you’ll need an ACoS that’s relatively high to begin with. Once you have a better idea of what works and what doesn’t, you can go back and refine your keyword bids. Until you have sufficient information, you cannot proceed.
ACoS vs. ROAS vs. TACoS: Which metric best measures advertising efficiency?
So, we have given all the details about ACoS, ROAS, and TOAoS. We made a detailed comparison about when to use ACoS and ROAS or ACoS and TACoS and why TACOS is the best metric overall for analyzing the PPC campaign’s effectiveness.
- Use ROAS for the visual representation of the ad and for getting an exact sense of how much you are generating from an ad.
- Use ACOS to get an idea of how much you’re spending on ads (just measure the spending from this metric, not the profitability).
- Use TACOS to get the bigger picture of an advertising campaign. Because this bigger picture gives the best idea about campaign profitability, sales generated from paid ads and organic ads.
If your “HOW” is still not clear, read the above blog thoroughly for a comprehensive understanding.
How can eComFist help?
We have mentioned in the TACOS section that Amazon PPC ads are the other name for expertise. If you are an expert, then you are successful at running PPC campaigns. The more you practice it, the more you get positive outcomes from it. This is why eComFist has been running campaigns for their clients since 2019. After giving so much time and energy to different sorts of campaigns, their Amazon advertising service is gaining popularity. Contact us for further consultation on your campaigns.
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