As a brand owner, each of Amazon’s advertising cost metrics are meaningful to understand how the advertising dollars spent generate revenue against a specific campaign:
- in percentage
- in dollars
- against total sales
These metrics allow you to see beyond whether the sales needle has moved by giving detailed hard numbers as they relate to the return on your advertising investments. The results provide an understanding of sales impact, overall business next steps, and making changes to where future advertising dollars are allocated.
In this article, we will be looking at ACoS, RoAs, and TACoS which you can also learn from Amazon’s brief overview for sellers here.
ACoS
Advertising Cost of Sales or ACoS is the amount spent on advertising for every dollar of revenue. To calculate the percentage, determine the sales generated as the result of a campaign and divide that by the amount spent then multiply by one hundred.
Formula:
Ad Spend ÷ Ad Revenue x 100 = ACoS %
Example:
$100 Ad Spend ÷ $500 Sales x 100 = 20% ACoS
Knowing the formula is simply not enough to make a final determination to gauge effectiveness. Other factors necessary are the Amazon Pay-per-Click (PPC) metrics. An overview is available here:
- Bid – the maximum amount paid when a keyword leads to your ad.
- Impressions – the number of times the ad was seen.
- Clicks – the amount of actual clicks on an ad.
- Click-through-rate (CTR) – the percentage of consumers who saw the ad and clicked on it which can be calculated as clicks divided by impressions.
- Cost-per-click (CPC) – the cost of a click in a campaign is determined by the total ad spend divided by the number of clicks.
- Conversion rate – number of orders divided by the total number of products listed.
These data points also contribute to the ability to confidently evaluate the impact and value of the advertising cost of sales.
The next step would be knowing the gross profit margin for the same product, then deduct the ACoS to come to a final number. In the end, this metric is used to calculate how much was spent on advertising but keep in mind, it is not reflective of the new buyers who have been directed to your brand.
Having access to a marketing professional who’s familiar with the business objectives is valuable when interpreting ACoS as acceptable rather than a standard range or percentage.
RoAS
Return on Ad Spend or RoAS, is similar in theory to Return On Investment (ROI) and provides similar information while using a different lens. It calculates the actual amount in dollars earned compared to the investment in advertising.
Formula:
Amazon explains RoAS, “…divides the dollar amount produced in sales by the dollar amount spent on advertising (total sales / total spend). It is simply an inverse of ACoS, so RoAS = 1/ACoS,” (sellercentral.amazon.com).
Example:
$500 / $100 = $5.00. For every dollar spent on advertising, $5.00 in revenue is earned.
TACoS
Total advertising cost of sales, also known as TACoS, examines all goods sold, including those not advertised, to evaluate how your ad spend compares to total sales. Every organic sale is part of the total sales calculation.
Formula:
Ad Spend ÷ Total Sales x 100 = TACoS %
Example:
$100 Ad Spend ÷ $5,000 Total Sales x 100 = 2% TACoS
This data provides key information including:
- A means to calculate overall profitability of advertising
- A metric for comparison between organic sales and advertised sales
- Gauge the impact of advertising by account or individual products
Analyzing upward or downward trends in TACoS requires additional information as in the case of ACoS. Since the calculations include all products sold, the percentage of TACoS compared to ACoS is typically lower. If this is the case, your overall brand may be growing while a new product launch needs time to produce high sales numbers.
Adjusting
Every new campaign needs time to grow and flourish before producing meaningful and measurable results.
The key value of having various metrics available is to allow the seller to make smart ad spend adjustment decisions. Based on those metrics, a seller can examine which products either need more focus, if low gross profit margins dictate the need to make a shift, or if the organic buying climate for an entire group of products changes due to consumer need.
So, how am I doing?
Ultimately, the metrics, their meanings, and formulas can only provide a partial answer to your question, “How am I doing?” The first step is to identify business goals and whether the metrics obtained from ACoS, RoAS, or TACoS are relevant. Every rule has exceptions —the following list are examples of when advertising spend metrics are not the best indicator of success:
- Boost sales and profits
- Clear out old inventory
- Raise organic seller ranking
- Increase results in keyword searches
- Strengthen brand awareness and branch out your business
- Compare to benchmark results
- Introduce new products
When reviewing data around ad spend beyond total sales numbers and truly determining if a particular campaign has met the objective, it is not always a matter of plugging your results into the formula. Further, the length of time a campaign (several weeks is usually ideal) has been active prior to taking any readings must also be a factor.
Contact our marketing professionals to learn how we can support all phases of your business’s e-commerce and digital sales with a personalized plan that includes the use of the right metrics to measure effectiveness and success.
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