You sell on Amazon to make money. But if you’re focusing on advertising cost of sale (ACOS), you’re looking at the wrong metrics.
Every initial conversation I have with a new or potential client focuses on one thing: their goals. Their foremost goal more times than not is, “The lower the ACOS, the better.” I’m here to tell you that that is not always true. Actually, you shouldn’t be concerned with your ACOS, at all.
Amazon Advertising creates a “halo effect.” Essentially, that means that the more visibility – clicks, purchases, impressions, etc. – your products and brand get on Amazon, including visibility driven by advertising, the higher your organic placement will be on the search results page. The higher your organic placement gets on the search results page, the more organic (non-PPC) sales you will have.
For example, ever wondered how a company can afford to pay such high click costs on the broadest, most highly searched keywords on Amazon, such as “iPhone case?” It’s because they are willing to lose money on their advertising on that keyword in order to generate a larger halo effect, and earn an extremely high organic placement. Instead of focusing on their ACOS, they are looking at the bigger picture.
I refer to that bigger picture as the “effective ACOS.” Instead of focusing on total ad spend divided by ad revenue, you should look at total ad spend divided by total Amazon revenue. If you spend $20,000 a month on clicks and have $100,000 in ad revenue to show for it, your ACOS is 20%. However, if you spend $20,000 a month on clicks and have $200,000 in total revenue to show for it, your effective ACOS is 10%.
Since we know that Amazon rewards products that have more purchases, clicks, reviews, and impressions, why wouldn’t you focus on a metric that helps you maximize visibility?
In order to get a strong ACOS, you generally need to decrease bids, which limits your ability to profitably increase ad spend and almost always limits exposure – which in turn limits visibility. But when you target effective ACOS, your ability to spend more on ads in a profitable manner increases your visibility and brand awareness – which improves organic Amazon performance and increases sales overall.
Calculating the effective ACOS that makes sense for your business needs to be done carefully. To determine the percentage of total revenue you are willing to spend on advertising, take the following factors into account: profit margin, inventory levels, cash flow, and short- and long-term company goals.
Instead of thinking about how to make your Amazon ad spend as efficient as possible, start thinking about how you can become as profitable as possible. After all, isn’t that why you started your business?