You’re not alone if looking at all of your PPC analytics makes your head spin. But what if there was a magic number that could tell you if your efforts are doing their job — producing sales and profits?
Online advertising is becoming increasingly difficult in the present environment. Advertisers want to know how PPC ads operate on different platforms because the average expenses involved vary greatly.
Although internet advertising is less expensive than traditional advertising, it is becoming increasingly difficult to reach people online. As a result, keeping lucrative ACoS or successful RoAS is critical to avoid losing money and keep your earnings intact.
But what exactly do they imply?
And how do I compute them?
This blog article will explain the distinction between these two indicators for Amazon e-commerce shops. Understanding these concepts will provide you with additional tools to help you effectively build your business and will offer you a better understanding of how to calculate the expenses of sponsored PPC advertisements while selling on Amazon. We’ll also show you how to use your profit margin in conjunction with either target ROAS (tROAS) or target ACOS (tACOS) to break even on your ad budget.
So, let’s get started.
Google RoAS vs. Amazon ACoS
To begin with, let’s understand the difference between these two metrics and what purpose they serve.
Google Uses RoAS
What is RoAS? It stands for Return on Ad Spend. This advertising statistic is relatively new to the Amazon market, although it has long been utilised in the off-Amazon internet advertising sector.
Consider ROAS to be the return on investment of your pay per click advertising budget.
Calculating RoAS is required if you are advertising or selling online to measure the efficiency of your marketing activities. RoAS is calculated by dividing the revenue from advertising by the total advertising spend.
Google, on the other hand, defines RoAS indirectly using measures such as conversions/cost or All conversions/cost rather than directly through RoAS.
Google Ad RoAS = Conversion Value / Cost
If you want to calculate as a percentage, multiply the value by 100 and add a ‘%’ symbol at the end.
For example, if you generate $100 revenue in sales from $25 advertising spend, then your return on the ad spend is 4X or you can say your RoAS is 400%.
Amazon uses ACoS
ACoS stands for Advertising Cost of Sales. This is the percentage of your sales that you spend on advertising.
Consider this the slice of the pie (your overall sales) that you spent on advertising.
ACoS is a critical indicator for measuring Amazon PPC campaigns. Amazon ACoS assesses the effectiveness of Sponsored Product Ads. It is computed as :
ACoS = (Ad Spend/ Ad Revenue)*100
Essentially, all you’re doing is taking your ad spend and dividing it by the sales generated by the ads.
For example, if you had $1000 in sales and you spent $300 on ads to generate those sales, that would be a 30% ACoS.
We are simply taking the $300 in spend dividing it by our $1000 sales.
Are ACoS and RoAS related?
While the formulas may differ, ROAS and ACoS serve the same purpose: to determine whether or not your ad campaigns are profitable.
Another difference is that Google refers to it as ‘expense,’ whereas Amazon refers to it as ‘Ad expenditure.’
Furthermore, Google’s ‘conversion value’ is comparable to Amazon’s ‘sales.’
This results in ACoS = 1/RoAS.
What is Good RoAS and Good ACoS?
A ‘good’ RoAS is determined by your industry or company model, which may differ from the general average. Operating expenditures, general business/account health, profit margins, and a variety of other factors all have a significant impact on RoAS. Perhaps 4:1 is a good starting point for RoAS.
For example, the RoAS standard is $1 ad expenditure for every $4 revenue.
As previously stated, this standard varies per industry. While few organisations with a benchmark RoAS of 10:1 can remain profitable, some businesses require a RoAS of 3:1 to be profitable.
Smaller profit margins suggest that companies must keep advertising expenditures low. Businesses with high-profit margins, on the other hand, may exist with a low RoAS.
There is no such thing as excellent ACoS. A decent ACoS value is determined by your product’s advertising techniques, cost structure, and PPC metrics. Your ACoS may be high in the early stages of your PPC advertising. However, you may reduce your ACoS over time and based on your advertising objectives.
Amazon’s ACoS varies depending on the category in which you sell. To determine the performance of your PPC advertising, you must measure your profit margins.
What is the product profit margin? How do we calculate it?
The profit margin or gross profit margin for a single product is the ratio of profit to revenue. Profit can be defined as the value of a sale minus the cost of manufacturing the item sold.
Product Profit Margin% = ((Sales value – Costs Involved) / Sales value) 100
Let’s use an example to figure out your product’s profit margin. Manufacturing, shipping, and other charges will differ if you are a reseller or private label merchant.
If you sell a product for $200 and your costs per unit are $120, your profit margin is ((200-120)/200)*100 = 40%.
We can calculate the break-even point for ACoS and RoAS now that we have the product profit margin.
Calculate break-even RoAS and ACoS
We now have all of the information we need to determine how much we can spend on advertising to break even on each sale or conversion*.
To avoid losing money by buying ads, our ad spend for a sale should be no higher than the profit from that sale.
We make money when:
profit on the item sold >advertising cost to get the sale
That is basic logic to grasp, but to express this idea to ad engines, we must translate it into the vocabulary they employ. That means we need to return it to ROAS and ACOS.
This is simple to say but difficult to understand with the Amazon and Google jargon.
So, let’s break it down.
What is break-even ACoS and RoAS?
With ACOS If you know your margin, calculating break-even is a piece of cake. The figures must be the same.
- If ACOS is lower than the product margin, we make money.
- If ACOS is higher than the product margin, we lose money.
Because ROAS and ACOS are inversely proportional, our break-even point on Google is when is (product profit margin)-1. That is the product margin divided by one.
- If ROAS is lower than 1 / product margin, we lose money.
- If ROAS is higher than 1 / product margin, we make money.
Finally, both RoAS and ACoS will inform you how profitable your PPC advertisements are. Knowing these formulae is helpful, but you must also learn how to use them in different situations. Understanding them will allow you to break down your business progress towards reaching new heights.