Ch. 8: Optimizing ACoS and RoAS to Scale Your Amazon E-Commerce Business

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We’ve come to the final chapter of this ebook. By this point, you already know how to leverage Amazon PPC to boost your e-commerce business. You’ll have learned many tips and tricks on how to launch ad campaigns and how to make them effective and sales-generating. To round things off, let’s talk about scaling your Amazon business.

What Does Scaling Mean in Business?

Scaling, in a nutshell, is making sales grow while keeping costs down. It is realizing your business’s capacity for growth by pumping resources to where they can generate the highest growth. In the Amazon PPC setting, scaling means increasing your ad spend and maintaining a positive return on your investment.

Notice that we’re talking about profits, not just conversions and sales. Profit is the income left over when you deduct the costs of running a business from the total sales revenue. It is money that you can use to scale your campaigns and further grow your business.

To scale your business on Amazon, we can break down the profit-generation goal into these three:

  1. Generate more sales
  2. Increase profits
  3. Gain more capital

We have touched on strategies on how to generate more conversions, which theoretically will lead to all of the above, in the earlier chapters. But we will now focus on two things that will guide your journey to business growth: Advertising Cost of Sale (ACoS) and Return on Ad Sale (RoAS).

ACoS: Set Limits to Avoid Loss

While discussing the indicators of unprofitable keywords in Chapter 5, we stressed the importance of calculating your break-even ACoS. Let us review the equation:

Break-Even ACoS = Profit Margin ÷ Price Per Unit

price per unit: how much you’re selling the item for

profit margin: price per unit – cost per unit

*Cost per unit is the sum of the materials, manufacturing, shipping, and FBA costs. It’s how much you spend to produce or buy stocks of the product you’re selling.

Let’s also review the rules of thumb regarding ACoS in relation to sales and exposure:

  • The higher the ACoS, the higher the exposure
  • The lower the ACoS, the higher the sales

Following these two rules, raising your ACoS target is necessary if you want to promote your product. Doing so increases your ad spend budget, allowing Amazon to show your ads to more potential buyers.

To be clear, however, lowering the ACoS target doesn’t guarantee more conversions and higher sales. A low ACoS is an indicator of high sales, not its cause (review Chapter 4 on why setting a low ACoS target all the time isn’t a wise PPC strategy). Having said that, setting a low ACoS target can still benefit your campaign; it prevents you from overspending on ads and exceeding your break-even point.

Setting ACoS limits requires a balancing act. You’ll want it high enough that your ads appear to your target audiences, and low enough that you don’t spend too much on ads and lose money in the process.

There are exceptions, of course. If your goal is purely to promote a product, you can set your ACoS goal to 100%. It means you’re not expecting sales for that particular ad campaign run. If, however, your goal is to generate revenue, keep set your ACoS goal below your break-even point.

So, how do you determine your ACoS sweet spot? Set a goal (exposure vs. profits) and choose the strategy that brings you closer to fulfilling it.

Recommended Strategies:

  • Aggressive campaign (ideal when launching an ad campaign for the first time): Set Max ACoS to Break-Even ACoS
  • Conservative campaign (appropriate for products that are already selling): Set Max ACoS to lower than Break-Even ACoS
  • Conservative campaign with a pre-determined profit (e.g., if you want to keep 10% of profits): Subtract 10% from your Break-Even ACoS and input the difference as your PGN’s Max ACoS

On the Zon.Tools platform, you can change your PGN’s threshold settings right away without using the Threshold Builder. Determine your Target Max ACoS based on the strategies above and enter it into your PGN settings.

Zon.Tools Menu > Campaigns > click on Settings icon > on Rules tab, enter your new Target Max. ACoS

RoAS: Discover Your Earning Potential

RoAS is similar to ACoS in that it explains the relationship between your advertising spend and profits. The difference is that ACoS highlights the cost while RoAS sheds light on profits.

RoAS = Sales Revenue / Ad Spend

ACoS = Ad Spend / Sales Revenue

The rule of thumb for the RoAS is this:

  • The higher the RoAS, the higher the revenue

The RoAS isn’t a requirement in the Zon.Tools platform; your PGN campaigns and the software’s auto-management features can run without it. However, it is still necessary because it is a gauge for judging your campaign’s performance.

Finding the break-even point is also necessary for identifying your target ad spend returns because it is essentially your Minimum RoAS.

Let’s put that information into context.

Suppose you’re selling an item for $20 each and the cost per unit is $9. Reviewing the equation for the Break-Even ACoS above (profit margin: price per unit – cost per unit), you will have a profit margin of $11.

This is your break-even point. It means that if you spend less than $11 on ads, you will earn a profit; but if you spend more than $11, you’ll lose money. This gives us the following break-even equation:

Break-Even RoAS = Price Per Unit ÷ Profit Margin

Using the scenario above, we can calculate the Break-Even RoAS and ACoS as:

Break-Even ACoS: Profit Margin 11 ÷ Price Per Unit 20 = 55%

Break-Even RoAS: Price Per Unit 20 ÷ Profit Margin 11 = 1.81

Input these values into your PGNs so they will maximize your advertising funds to increase visibility, click-throughs, conversions, and sales.

This is how you use the ACoS (or RoAS) to set your limits at the ad group level. Now let’s take things further and take a look at the ACoS (or RoAS) at the account level to get a more accurate measure of how well you’re earning on Amazon.

Using RoAS as a Metric for Scaling

If the goal is to grow your Amazon business, then you need to step back and look at the bigger picture. Consider this: a low-performing PGN could offset the revenue from a high-performing PGN. Likewise, a non-converting ad group could be negligible if all other campaigns, plus organic sales, are picking up the slack.

It’s not worth the time to sweat the small elements that have a minimal impact on your overall income. So instead of dedicating much of your time and resources on improving one or two negligible campaigns, let Zon.Tools’ automatic features take care of them and turn them into healthy campaigns. In the meantime, look at your business from a broader perspective to know if and when your business is ready to go big.

So, how do you measure your overall RoAS?

You can apply the equation for the ad-group level RoAS at the macro level. There’s no need to go into the specifics; simply calculate your overall RoAS by getting the quotient of these two:

Macro RoAS = Total Account Sales ÷ Total Ad Spend

Let us establish the following:

  • RoAS that’s less than 1 means you’re at a loss. You’re earning less than $1 for every $1 you spend on ads.
  • The most common benchmark is 4 RoAS ($4 revenue for every $1 ad spend or a 300% return).
  • A reasonable PPC budget would be 10-15% of your total sales.

Aim to raise your RoAS to more than 4, and keep things that way for a considerable period so you can earn enough capital for scaling. There is, however, no cut and dry method to this; it will take time, dedication, and a combination of the conversion-boosting strategies discussed throughout the book to get your RoAS to where you want it to be.

What if, for all your efforts, your overall RoAS is still under 1? It could mean you’re spending too much on ads or you’re pricing your products too low.

PPC Boosts Organic

A good PPC performance can improve organic rankings and, by extension, organic sales. Amazon configured its algorithm, A9, to rank products based on conversion rates and sales velocity when showing organic search results. In other words, products that sell the most and the fastest get seen first.

This creates a classic chicken-and-egg scenario: your products need to be visible to sell, but they need to sell to be visible. And without PPC, a seller could be stuck in this cycle without gaining much headway in sales.

Finding out how well your PPC efforts contributed to your organic sales is crucial to scaling. Review your sales trends: how much were your organic earnings before you were doing ads, and how much are your organic earnings now that you have PPC ads running? Considering A9’s ranking behavior, there’s a good chance that your organic sales increased alongside your PPC sales.

Data Analysis: Use ACoS and RoAS to Gauge Growth

Now let us bring ACoS back into the discussion. Earlier, we talked about determining the Maximum ACoS and whether to go below or above it based on your goals. Let’s compare your ACoS to the macro level RoAS to find out if your ad investment is worth it.

Macro ACoS = Total Ad Spend on all your campaigns ÷ Total Profits from your PPC sales

Putting these the macro ACoS and macro RoAS side by side, you might discover that although your PPC ACoS looks to be at a loss, your RoAS is at 4 or higher. This means you’re hardly earning returns on your ads, but they gave your listings significant enough exposure that they increased your combined paid and organic sales.

Another scenario could be that your macro ACoS is well below break-even, but your RoAS is hovering between 1 and 3. This suggests that you’re not operating at a loss, but there’s a huge potential for you to earn more and increase your RoAS if you raise your ACoS some more.

Takeaways:

The discussion above can be condensed to the following key statements:

  • Your profit margin is your break-even point.
  • The Break-Even ACoS is your ideal Maximum ACoS.
  • The Break-Even RoAS is your ideal Minimum RoAS.
  • You earn money if you go lower than the Maximum ACoS / higher than the Minimum RoAS.
  • You lose money if you go higher than the Maximum ACoS / lower than the Minimum RoAS.
  • Your PPC efforts can boost your organic sales.
  • You need to look at both Macro ACoS and Macro RoAS to get an accurate picture of your sales performance.

Plan your ad campaigns within these rules, and you can accomplish the three goals we’ve set at the beginning of this chapter.

Zon.Tools, with its customizable thresholds that activate auto-campaign management features, can help maintain the profitability of your campaigns. This can lead to higher profits, which you can then maximize to grow your business further.


Also published on Medium.

Stefano Starkel

Stefano Starkel

Online Entrepreneur leveraging Google Adwords PPC since 2011 and Amazon Seller across multiple markets since 2014, he’s the strategist and ideator behind Zon Tools engines. He has participated and presented at several high-profile Amazon “PPC” Focused masterminds and events.

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