![]() It’s easier (and less expensive) to retain a customer than acquire a new one. No one wants to spend so much on advertising that they make a loss - unless they have a very good reason - which brings us on to how Customer Lifetime Value (CLV) changes the game. In a competitive market, it’s hard to win bids and always make these numbers work. The problem is that PPC ads can be expensive. The greater you can make that gap, the higher your end profit margin will be, and the more money your business will make. On a very basic level, you need to make sure that your ACoS is less than your pre-advertising profit margin. A RoAS of 4x is an ACoS of 25%.Īnd if your cost of goods sold was $60 - then your break-even ACoS would be 40% ($40) - because your profit margin is 40%. If you have $25 ad spend and revenue of $100, then your ACoS would be 25%. If your ACoS exceeds your pre-advertising profit margin, you’ve passed your break-even point.įor example: If you generate $100 in sales from $25 of ad spend, that would be a return on ad spend of 4x (or 400%). Gross Profit - this is your revenue minus COGSīy dividing “Gross profit” by “Revenue” you get your profit margin.Cost of goods sold (COGS) - the amount of money it takes to source/produce your products.Revenue - the income you earn from selling your products.To calculate profit margin, you need three data points: ![]() Or, put another way, it’s your break-even ACoS. Whatever your pre-advertising profit margin is for a given product is the maximum amount that you can spend on advertising and still turn a profit. Your break-even ACoS is the tipping point between a profit-making and a profit-losing campaign.Įffectively, your break-even ACoS corresponds to your profit margin. But, by itself, it doesn’t provide any insight into the most important KPI: profitability. If you're curious about benchmarking and RoAS on Amazon, check out our article - What’s a good RoAS on Amazon? Working out your break-even pointĪCoS is a popular metric to measure the success of Amazon PPC campaigns. ACoS, however, provides a straightforward way to gauge the profitability of a campaign - making it great for understanding your break-even point. It also makes it easier to compare these results to other marketing activities. Marketing experts use RoAS as a metric because it shows the effectiveness of ad spend. Why are there different terms? The answer comes down to point of view. ROAS (Return on Ad Spend) tells you how much money you earn for every dollar you spend on advertising. ACoS shows how much you spent on ads to gain a dollar from attributed sales. It’s important to note that ACoS is the inverse of RoAS (return on ad spend). We go into this in more depth in our ACoS strategy guide, but the basics are all you need to understand how this relates to your break-even point. However, a more useful equation uses CVR (conversion rate) as a single metric, giving you the following: Ad spend can be considered as cost per click (CPC) times the number of clicks, and revenue as the number of orders times the Average Order Value (AOV). The lower the ACoS, the more profitable your ads.Īlthough ACoS is a pretty simple metric, it’s based on a range of interdependent and distinct metrics. The higher the ACoS, the less profitable your ads. How to calculate ACoSĪCoS is ad spend divided by ad revenue (expressed as a percentage). ACoS increases when spend grows faster than revenue and goes down when revenue grows more quickly than spend. What is ACoS?įor every dollar you earn through advertising, ACoS shows how much of it was spent on advertising. However, a more sophisticated view (including CLV - customer lifetime value) can give you a competitive advantage in PPC bids, while still delivering profitable outcomes.īut first, we need to cover the basics. We are going to explain these to you - starting with how to get ACoS in the first place. There is a pretty simple set of steps you need to take in order to identify your break-even ACoS for any given product. Simply put, it’s the amount that you can spend on advertising and still break-even given your product margin.īreak-even ACoS is a target - rather than an active measurement - against which you can compare your actual ACoS or RoAS. If you want to ensure a profitable Amazon business, you need to calculate your break-even ACoS.
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