The Ultimate Guide to Achieving Your Target ACoS on Amazon

If you’ve done any amount of research on selling on Amazon as a third-party seller, you know the rules. You must keep your product cost low, stay below the 40% threshold for Enhanced Calculation Inventory, and keep your shipping costs low.

You need to know those three things about producing a profitable product, right? Well… not exactly. While those are all important factors when it comes to selling on Amazon as a third-party seller, there is much more to be successful with your business strategy.

It’s not as simple as looking at markup and shipping costs alone. Achieving a target average cost of sale (ACoS) is one of the most difficult aspects of selling on Amazon as a third-party seller.

This guide provides an in-depth look at what you need to do to achieve your target ACoS on Amazon. Learn how to hit your target ACoS on Amazon by following this guide.

What Is ACoS and Why Is It Important?

ACoS stands for “average cost of sale”. This is a metric used to calculate the profitability of your product sales. ACoS is calculated by dividing the total cost of goods associated with a sale by dividing it by the number of sales.

The metric can be applied to any business or product, but it is most commonly used for third-party sellers on Amazon. The ACoS metric is important for third-party sellers on Amazon because it determines whether or not you are making a profit with each sale.

Amazon’s metric for profit is 40% gross margin, so you must ensure that your ACoS remains below that number. In most cases, 40% is an unreachable goal. This is why many third-party sellers struggle to turn a profit.

Limiting Factor for Third Party Sellers

One of the first things to consider when calculating your ACoS is the limiting factor for third-party sellers. This term refers to the maximum amount of money you can invest in your product.

The limiting factor depends on the inventory sourcing strategy you decide to use. Wholesale sourcing, for example, has a much lower limiting factor than private labeling.

Inventory sourcing strategies like retail arbitrage (RA) or private labeling often lead to products that are expensive to make. RA products often come with a hefty price tag, whereas products for private labeling often come with a hefty price tag.

If you plan on using this inventory sourcing strategy, be prepared to spend a lot of money on your products.

Different Types of ACoS Calculation

There are two types of ACoS calculations: Amazon’s standard calculation and ACOS Enhanced. While both calculations take the costs of goods into consideration, there are some key differences between the two.

ACOS Enhanced uses a more complex algorithm than ACOS Standard. It includes more factors when calculating profit and uses a larger profit margin. When you use the ACOS Enhanced calculation, Amazon allows you to discount your product’s price by up to 15% without affecting your ranking.

ACOS Standard is the default calculation method for third-party sellers on Amazon. It is used when you don’t choose to use ACOS Enhanced.

This calculation method is much simpler than ACOS Enhanced and only considers your product’s cost. It does not take into account any other expenses besides COGs. This means ACOS Standard will produce a lower profit margin than ACOS Enhanced.

Working out ACoS is simple:

You can calculate it by performing these things:
To determine your total ad spending, multiply your total revenues by your total ad spending.
Divide your total ad spending by your total sales. To determine your ACoS, divide the result by 100. ACoS stands for “ad cost divided by sales.”

Let’s use an example to demystify this formula.

Suppose you spend $20 to advertise your products, which subsequently generate $60 in sales.

To calculate ACoS, divide 20 by 60 and multiply by 100. ACoS is a measurement of how much you spend for each dollar you earn. It is calculated by dividing the amount you spend on advertising by the amount you earn.

If you have a profit margin of 30%, ACoS should be lower than your project margin. If you spend $30 on advertising rather than $5, the formula would be 5 divided by 60 and multiplied by 100, yielding an ACoS of 8.3%.

If your profit margin is 30%, you would still keep 21.7% of each sale for your business.

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Amazon Fee Calculation

The Amazon fee is the cost of selling your products on Amazon’s marketplace. This fee is calculated based on a percentage of your sales.

The third-party seller fee is calculated as a percentage of your sales revenue. The percentage of revenue taken as a fee varies based on the product type and category.

The third-party seller fee is based on a percentage of your sales revenue. The percentage of revenue taken as a fee varies based on the product type and category. There are two ways to calculate your Amazon fee: manually and automatically.

Manually calculating your Amazon fee is very straightforward. You simply select the product type and category for each product, and Amazon will display the specific fee.

Automatic Amazon fee calculation is useful when you have many products in your inventory. The fee calculation will automatically apply to each product in your inventory.

Returns and Order Cancellations

The cost of returns and order cancellations is a metric that is often overlooked. This is the cost associated with customers returning products or canceling their orders.

If customers do not want the product they ordered, they have the right to request a refund. Sometimes, customers may also decide they do not want the product and cancel the order.

Returns are not a bad thing. Amazon encourages its customers to return products, even for no reason. While it may seem bad to have customers returning products, the truth is that it is a good thing.

Order cancellations are a part of Amazon’s strict return policy. A customer has the right to cancel their order for up to 24 hours after purchasing it. This means that for up to 24 hours after an order has been placed, the customer can cancel it and receive a full refund.

Inventory Loss Caused by Shipped Units

This metric takes into account the inventory loss caused by the shipped units. This is the cost associated with the products used to fulfill customer orders.

This metric is calculated by taking the COGs of the products used to fulfill orders and dividing that number by the number of units shipped. The metric is important to consider when calculating your ACoS because it reduces the overall profitability of your sales.

The fewer units you have left over after fulfilling your orders, the less money you will have left in your profit margin. Taking too many products out of your COGS and using them to fulfill orders can be disastrous for your ACoS.

4 Tips for Lowering Your Amazon ACOS – A Simple Strategy to Improve ROI

As an Amazon seller, you know that your account performance is the ultimate decider of success. Your Amazon Cost of Sales (ACoS) measures just that — how much it costs you to sell something on Amazon.com.

It’s one of the most important metrics to manage as a seller because it directly affects your profitability and ROI as an Amazon seller. Unfortunately, many sellers are not happy with their ACoS on Amazon.

Many try different strategies like managing fulfillment or shipping prices, but in the end it comes down to optimizing your product listing and reducing your raw materials cost while still maintaining high-quality products. Here are some tips that can help you keep your ACoS under control:

Optimize Your Listing

Your product listing is the first thing that potential customers will see. If your product listing isn’t optimized, you won’t have a chance to convince them to click “add to cart.”

To start, ensure your product title, image, and bullet points are optimized to get the best click-through-rate (CTR) and conversion rate.

Your title should be short and descriptive so that customers can quickly understand your product.

Your bullet points should highlight key features and benefits of your product so that customers can quickly understand what your product is and why they should buy it.

Focus on the right keywords

Your product listing should focus on the right keywords that customers would search for when buying your product. You want to ensure your listing is targeting the right keywords so potential customers can find your listing.

If your product listing is targeting the wrong keywords, you won’t get any sales because potential customers won’t be able to find your listing. You can find keywords for your product listing by running a few different tools.

For example, Sellics Keyword Explorer allows you to search for keywords related to your product. The Amazon Keyword explorer lets you see how many searches a keyword gets each month and how competitive the keyword is.

You should also target long-tail keywords. Long-tail keywords are more specific and have fewer monthly searches than broader, more general ones. But they have higher conversion rates, so they are worth pursuing despite their lower volume.

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Optimize Page Content

Your page content is the area that not many Amazon sellers optimize. But it’s an important aspect of improving your ACoS.

Your page content should not only be optimized for the right keywords but also include your brand name, product features, and benefits of your product.

Optimize Your Titles

While your title and bullet points are what potential customers will see first, your title also plays a role in Amazon’s search algorithm.

The good news is that you can also optimize your title for Amazon’s search algorithm. To do so, make sure that your title has the most important keywords at the start.

Set the Right Bid Amount

Amazon’s priority is customer satisfaction. The company wants to ensure that customers always receive a good product and experience.

So if you’re not a trustworthy seller, you won’t be allowed to sell on Amazon. Amazon determines if a seller is trustworthy by looking at their ACoS. Amazon expects sellers to have an ACoS of 15% or lower.

Product Review Strategy

While a high review rating is not the only signal that Amazon uses to rank your product, it can significantly impact your product’s rank, especially if you are in a competitive niche.

There are a few ways to drive product reviews, but one of the best strategies is incentivizing reviews — but only if done ethically. Amazon discourages sellers from offering incentives just for a review (e.g. “leave a review and get $10 off your next purchase”).

You can encourage customers to leave a product review by sending them a special coupon code after purchase. You can also add a request for a product review at the end of your shipment confirmation emails.

Frequently Asked Questions

What is a good ACoS for Amazon?

The ACoS is the amount of money you earn after subtracting all costs from your revenue. The lower the ACoS, the better. To get an ACoS that is as low as possible, you need to take these actions:

1. Find products that are likely to sell well and have low competition.

2. Optimize your listings for these products to increase sales and visibility.

3. Use effective marketing strategies to drive as much traffic as possible to your listings.

4. Keep your costs low by using a dropshipper, using a cheap but effective marketing method like Facebook ads, or using other cost-cutting methods.

What should my target ACoS be?

Typically, an ad's ACoS should be less than its CPA, but this isn't always possible. The best way to calculate an ad's ACoS is to use the following formula:

ACoS = ((CPA - Avg.Cost)) / CPA The result of this equation will always be a negative number, as it is the cost you are trying to avoid exceeding. If your ACoS result is above 0, your ad's CPA is likely too high.

What is the difference between ACoS and ROAS?

ACoS stands for 'Average Cost of Sale'. It is a metric used in marketing and advertising that reflects the average cost of selling one product or service.

It is calculated as follows: ACoS = Total Revenue / number of units sold ROAS stands for 'Return on Ad Spend'. It is a metric used in marketing and advertising that reflects the return on investment from an advertising campaign. It is calculated as follows: ROAS = (Total Revenue - Total Ad Spend) / Total Ad Spend

Conclusion

Achieving a low ACoS is a major challenge for many third-party sellers. It requires careful planning and attention to detail.

However, it is essential for turning a profit. Amazon expects third-party sellers to achieve a 40% gross margin, but they allow us to achieve this using different strategies.

To achieve a low ACoS, you must be willing to invest a lot of time and money into your business. You must be willing to sacrifice profits in the short term to achieve long-term profitability.

Product reviews, proper page content, and setting the right bid amount are all aspects of improving your ACoS. And while each of these factors is important, they’re meaningless if you don’t first optimize your product listing.

Optimizing your product listing is the best way to improve your ACoS. Start by targeting the right keywords, using those keywords in your title and page content, and including many images.

Once your product listing is optimized, it’s time to optimize your Amazon FBA business strategy.

To become a successful third-party seller on Amazon, you must be willing to do whatever it takes to achieve a low ACoS.

Amazon PPC is our sole focus. It’s all we do. We’ve even worked on it for brands like Everlast. So if you want to team up and have us apply our playbook, we’re standing by and happy to discuss. Click the ‘Book A Call’ button for more information!