ACOS (Advertising cost of sales)

How to calculate ACOS

Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website, and they run ads on Instagram, Facebook, TikTok, and YouTube. The drink brand also sells cases of the drink on Amazon. Amazon advertising is paid placement on Amazon itself. When someone searches 'electrolyte drink' or browses similar products, the drink brand can pay to appear as a labeled ad above or beside the organic results (the unpaid listings). The usual format is Sponsored Products: Amazon's ads that sit on search results and product pages and promote a specific listing.

Attributed sales are the orders Amazon decided the ads caused, inside an attribution window (how many days after a click still count). A 1-day window and a 14-day window produce different advertising cost of sales (ACOS) numbers. In May the drink brand spent $4,000 on Sponsored Products. Amazon credited those ads with $16,000 of drink sales. 4,000 divided by 16,000 is 0.25. Written as a percent, that is 25% ACOS.

ROAS (return on ad spend) is the same ratio flipped: $16,000 divided by the drink brand's $4,000 Sponsored Products spend is 4, or 4x. Advertising cost of sales (ACOS) asks 'what share of credited sales went to ads?' Return on ad spend asks 'how many sales dollars per ad dollar?' Amazon sellers speak advertising cost of sales. Most other paid teams speak return on ad spend.

Why ACOS matters

Amazon teams live on advertising cost of sales (ACOS). Break-even advertising cost of sales is roughly your margin after product cost and Amazon fees. Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, and they also sell cases on Amazon. If the drink brand keeps 30 cents of every dollar once the drinks and Amazon's cut are paid, it can spend up to 30 cents on ads per dollar of attributed sales. That is a 30% break-even advertising cost of sales. At 25% on the $16,000 Amazon credited to the $4,000 Sponsored Products spend, the attributed sale still has 5 cents left. At 40% advertising cost of sales on the same $16,000 of sales, ad spend would be $6,400, which is more than the $4,800 of margin. The ads would lose money on those orders, before returns.

Average order value (AOV: revenue divided by the number of orders, which tells you how large a typical basket is) sits underneath the sales number. If a case is $40 and Amazon credited 400 cases, that is the drink brand's $16,000. A higher average order value (a larger typical basket, for example a two-case bundle) can make the same 25% advertising cost of sales (ACOS) more comfortable, because each credited order carries more dollars.

How to read ACOS

A low advertising cost of sales (ACOS) on branded search is not a victory lap. Branded search means people typed the drink brand's name into Amazon. Those people were already looking for that sports drink. The Sponsored Products ad (Amazon's labeled listing ad) took credit for a sale that might have happened anyway. Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, and they also sell cases on Amazon. Read the drink brand's 25% advertising cost of sales with TACOS (total advertising cost of sales: all ad spend divided by all sales, including organic orders that no ad got credit for) so organic lift is in the picture. Organic here means unpaid Amazon listings, not ads.

Do not starve a launch because advertising cost of sales (ACOS) looks ugly in week one. A new flavor has no reviews and no organic rank yet. Organic rank is where the unpaid listing sits in Amazon search. Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, and they also sell cases on Amazon. The drink brand's first two weeks on a new SKU (stock keeping unit: one product listing) often sit above the 30% break-even advertising cost of sales on purpose, then the percent falls as the listing starts ranking on its own.

Common ACOS mistakes

These mistakes show up when a drink brand that sells cases on Amazon treats branded-search advertising cost of sales as the health of the whole account.

• Treating branded advertising cost of sales (ACOS) as the account's health. Branded search means people typed the drink brand's name. Those Sponsored Products ads (Amazon's labeled listing ads) will always look cheaper than ads on a generic phrase such as 'low sugar sports drink.'
• Ignoring TACOS (total advertising cost of sales: all ad spend divided by all sales, including unpaid orders), then wondering why total sales are flat. A pretty 25% advertising cost of sales (ACOS) on the drink brand's $4,000 Sponsored Products spend, sitting on a shrinking organic business, is not a win.