Among the many performance indicators of CPC advertising, ACoS is the most important. It reflects the sales proportion of bidding advertising, which means the seller’s sales cost. Putting aside the operation strategy, theoretically, the lower the ACoS indicator, the better. After all, the less cost, the more profit. So how to calculate ACoS?
1) ACoS upper limit
The calculation formula of ACoS = advertising expenditure/advertising revenue x100. For example, if ACoS is 20%, it means that for every $100 earned, you need to pay $25 (only considering advertising expenditure). What is the upper limit of ACoS? The upper limit is the seller’s break-even point, that is, the profit margin. Let’s take the “Messenger Bag” as an example. The cost of the product is $7, the product is sold for $30, and the Amazon fee is $5.
Our pre-advertising profit for each sale is $18. If we put all of this $18 into advertising to get orders, then our advertising expenses account for 60%, which is our ACoS upper limit. Simply put, if the sales ratio is higher than 60%, we lose money; if the sales ratio is lower than 60%, we make money.
2) ACoS target
Of course, for sellers, we certainly do not want to implement the ACoS strategy to achieve zero profit, so we have to set our target ACoS, that is, TACoS, under the standard of the ACoS upper limit.
For example, 60% (ACoS) -40% (TACoS) = 20% (TPM). Among them, 40% is the target ACoS, and 20% is the target profit margin.
3) CPC bid
With TACoS, we can calculate the target bid of CPC. The calculation formula is as follows:
CPC＝single advertising revenue xTACoS=order amount/click volume xTACoS-order amount x conversion rate/order volume xTACoS＝average order amount x conversion rate xTACoS.
So, CPC＝average order amount x conversion rate xTACoS. For example: if the average order amount is set to $30, the conversion rate is 7%, and the target ACoS is 0.25, the target CPC is $0.53.