August 1, 2019How To
Calculating your Average Cost of Sales goal is one of the most important steps that you need to take as a seller when you’re getting started.
Why is it so important to consider your ACoS?
Your ACoS will let you know if your business is profitable. Making sales is important, but you have to take into account the costs of shipping and running your business.
There are also factors to consider depending on the history of your seller account. In this article, we will break down the different levels of ACoS you should aim for to set yourself up for long term success on Amazon.
ACoS Calculation Formula:
ACoS is calculated from a simple mathematical formula involving the costs of running your business.
[(Product Price – Amazon Fees – Cost Of Goods Sold) / Product Price]
Cost of Goods Sold (COGS) includes several costs that could apply to your business such as Procurement costs, Production costs, Taxes and duties, Listing fees and Inventory storage fees and costs.
Once you know all these costs and fees, and the price that you’ll be selling your product for, you can calculate your breakeven ACoS and proceed to our recommendations below.
New Sellers: Higher ACoS and More Sales
If you are brand new to selling on Amazon, getting your first sales are very important. As a reminder, Amazon uses the Amazon A9 algorithm for ranking products that is dependant on many factors.
One of the most important for a higher ranking is your sales velocity. This is how often people are purchasing your product when they come up in a search.
There are two factors to increasing your sales velocity that you can control with excellent Pay Per Click management. You want the keywords that you’re advertising for to be a great match with the product that you’re selling and you want to have a higher bid on these keywords so that your ad comes up before other products for the same search term.
As a result, new Sellers will want to have a more aggressive ACoS goal. While you will be spending more in the short term, the long term boost in your paid and organic rankings will be worth the spend and you’ll be able to rise above other sellers to dominate your niche!
In addition to a higher Sales Velocity, more sales will also help you get more reviews. Sellers that have at least 5 reviews also see a ranking boost from Amazon. More sales will mean that you’ll have a greater chance of a person having a great experience with your product and leaving a positive review.
Summary: New Sellers will want more sales to boost ranking. To achieve this, you can set an ACoS goal above your Breakeven ACoS
Breakeven ACoS: Balance Growth and Profit
Many sellers, new or experienced, want to improve their sales rank but not at the cost of losing money on a sale with a higher ACoS. This is a more conservative option, but it will allow you to still grow while keeping your finances steady.
If you’re in this position, you will want to set your ACoS goal at your breakeven point that you calculated above.
Furthermore, you may have a goal to make sales profitable so you have more money that you can use to reinvest in your business.
If this is the case, in addition to the ACoS percentage that you calculated above, subtract your profit margin. For example, if your Breakeven ACoS is 50% and you want a 10% profit margin, your Target ACoS is going to be 40%.
Ideas for reinvesting profit could be for improving other areas of the A9 Ranking Algorithm. Once way that you can improve your conversions would be using professional services to improve your listing. Optimizing your title and description can make your product look more attractive to buyers and increase the chances that when a person reaches your page, that they’ll actually convert and buy your product.
Summary: Setting your goal as your Breakeven ACoS will keep your finances steady and still help you boost your ranking or reinvest in your business.
Lowering ACoS: Increasing Profit and Account Efficiency
For sellers who have been managing their account and have a great ranking but are not as profitable as you’d like to be, taking control to lower ACoS can be a great way to put more money in your pocket per sale.
Lowering ACoS will have you focus on more profitable and efficient keywords. Often, there are keywords that are costing you a lot of ad spend, but for one reason or another are not converting to sales. Additionally, there can be keywords that cost so much to bid on that they will always be above your target ACoS and should be removed to reach that goal.
Through both of these methods, there is a risk of decreased volume at first, but if each sale is more profitable, you’ll be able to reinvest in more ad spend.
An account that is steadily at a lower ACoS has a great foundation, and then can be scaled up because you know that each sale will be profitable.
Summary: Lowering ACoS can decrease volume at first, but will set you up to grow a larger and more profitable Seller Account in the long term.
Conclusion of Leverage ACoS in Amazon Advertising
ACoS is one of the most important factors on your Amazon Seller account to understand first, and once you know this you can start taking steps to reach it.
Don’t want to calculate your ACoS on your own? Email firstname.lastname@example.org for a tool to calculate your Breakeven ACoS for you!