Ever since we started offering Amazon Advertising support back in spring 2018, we always go through the same conversation with customers who are interested in having their Amazon Advertising optimized with us – what are the goals they want to achieve, what metric is the most important to them and what are their overall expectations. More often than not, the one metric that continues popping up in these conversations is ACoS. It’s the metric the majority of sellers and vendors we talk to are focused on most.
Why is that? A quick Google search showed a fair bit of blog articles, whitepapers, and other materials listing ACoS as one of the most important metrics to take a look at.
Now, we’re not trying to say it’s not important – it is, for oh-so-many reasons – but it’s not the metric and the only metric to keep an eye out. To get an accurate sense of the advertising performance, ACoS needs to be reviewed in its relation and interaction with volume. Yes, ACoS talks about profitability (margin), but usually low ACoS (high margin) goes along with lower volume (number of sales / attributed revenue), which might not be the business result the sellers are after in the end. What we would like to offer as the answer is the profit metric, which takes into account profitability and volume in the most meaningful way.
How does Profit Maximization work?
Going straight into all the practicalities of the model, we first need to calculate the gross profit before ad spend. There are two formulas available for this, to accommodate the 2 fulfillment channels: FBA and FBM.
Both formulas above consider price, VAT and COGS, but things change a bit when calculating the Amazon fees, as each of the two fulfillment channels has a different formula behind them. For FBA we see we’re taking Amazon Referral Fee Rate and Amazon Fulfillment Fee, while for FBM we need to consider the shipping cost as well. This might look a bit intimidating right now, but if you take a peek into this Google Sheet, you’ll see it’s much easier than it seems at first glance.
In the Profit is the new ACoS Google Sheet we have a fictional practical example from the apparel industry that we want to sell on Amazon Germany. You can see in the first part of the table that that’s where we put in the base data – VAT, COGS, and everything related to the Amazon fees.
As a note, Amazon fees are available in the Amazon Seller Central knowledge base, so you should be able to find them for whatever category you’re in.
In the second part of the table we add in the price we want to sell the item at, and calculate the referral free. Fulfillment fee and shipping cost are fictional as well. But, once we have all of this information, we can calculate the gross profit for both FBA and FBM.
Now, this formula doesn’t have to be used for a single set of variables. If you’re playing around with repricing, you can apply the same formula for your minimum and maximum price, so you can define your minimum and maximum gross profits to make sure you never stray off the path you want to follow. Of course, the same can be applied for different marketplaces so you can accommodate for different Amazon fees, as these vary between marketplaces and currencies, as well as taxes.
Once you run this formula, you’re ready to go on to step two.
This is where things get a bit trickier in the sense of effort needed. In this next step we need to calculate the profit after ad spend, since we can’t really ignore the cost that is ad spend for an accurate profit calculation. But, we all know ad spend is dynamic and can vary from day to day. True, there’s the daily budget that caps it, but it might not always be reached. Or the cost per click for a specific day might look very different from one day to another with the same budget.
So, in the formula below you can see a number of things that Amazon already provides and that you can download from Amazon Seller Central – you can see the number of clicks and the cost per click, or CPC, as well as conversion rate. You also see we’re including the gross profit we just calculated. But there’s an enigma there you won’t find in your reports – bid. This one you need to start tracking manually, and it’s essentially the maximum you’re willing to pay for a click to sell a specific product as you set it in Seller Central. And because the bid can change, you need to run this formula for every bid you’re working with, considering the different variables relating to it. Again, the theory might sound daunting, but the practice is quite simple.
In our fictional apparel example, we now have the price, date and gross profit, since we calculated all of these in the previous step. We manually add the bid at which we were trying to sell the product on each of the days, and map the clicks, conversion rate and cpc for those days, which we can get from Amazon Reports. (As a note, if you’re not too certain about how to get these reports, the Seller Central University has a few excellent courses that guide you through the necessary steps.)
This gives us the numbers necessary to calculate the profit.
Before we move forward, let’s take a moment to review this from an ACoS and Profit perspective. We now have the Profit calculated, and from the same numbers, we can calculate ACoS. We can clearly see that the maximized profit doesn’t necessarily correspond to the ACoS of 20% which seems to be the preferred goal across the globe. In fact, the ACoS of the max profit in our example is the highest out of the 4.
Which actually leads us to the final step of this model – selecting the best combination of variables that maximize your profits and work towards your overall business goals. This will help you identify your ‘profitcows’.
Now, we saw before that the ACoS of the combination that maximizes your profit the most is the highest, but this option might not be optimal for you for whatever reason. However, by running these numbers you can at least evaluate more than a simple ‘I want my ACoS to be 20%’ option and give yourself a bit of wiggle room to consider things from a different angle and find more than one path towards success on Amazon Advertising.
Before we move on, there is one thing I’d like to emphasize, which is that here we have an example of 4 days. You might be tempted to think this is enough, because of all the hard work that went into getting this far. However, online advertising is a never ending game and you need to be running these numbers again and again because what works today might not work next month, due to competition or customer behaviour.
Can I do this myself?
In a word, yes. With a few basic Excel tricks up your sleeve, a lot of time and several Seller Central tweaks, so you can get product level data, and make sure you always have sufficient budget to keep your campaigns running, you can absolutely give this a go.
However, there are better, or, at the very least, more time-efficient ways to do this. Machine learning and automation can take the load off you and do these same calculations in a split of a second, freeing you up so you can focus on other important aspects of your strategy and business.
At Adspert, we’d be thrilled to work with you on your Profit Maximization, helping you get the biggest bang for your buck. And the best part? If you only want to run a test on a small number of campaigns, that can be done, while you can still optimize all other campaigns for a number of other goals, like ROI, Cost per Month, Cost per Conversion and, of course, ACoS.
As one of the most disruptive online marketing SaaS startups, Adspert automatically manages campaigns by leveraging our state of the art machine learning solutions. By identifying high-performance keywords and adding them to the campaign automatically or manually, Adspert aims to reach our customers’ goals every moment of every day, while maintaining full transparency of every change and decision.