If you are an Amazon seller, chances are that you will have heard about ACoS and ROAS because they are important when determining how much does advertising cost on Amazon.
But what do they mean?
And how can I calculate them?
This blog post is all about understanding the difference between these two metrics for ecommerce stores on Amazon. Understanding these terms better will give you more tools to successfully grow your business and have a better idea of how to calculate the costs of sponsored PPC ads when selling on Amazon.
Definitions of These Important Metrics
ACoS – Advertising Cost of Sales. This is the percent of your sales that you spent towards ads.
Think of this as the slice of the pie (your overall sales) that you spent towards ads.
ROAS – Return on Ad Spend. This advertising metric is a little newer to the Amazon world but has been used in the off-Amazon online advertising world for a long time.
Think of ROAS as the return on investment of the dollars that you are spending on pay per click advertising.
These two metrics are basically cousins of one another and are dissecting the same data and allowing you to understand your costs from two different vantage points.
Now let’s get into how to calculate them…
How to Calculate ACoS on Amazon
Amazon ACoS Formula:
(Advertising Spend) / (Sales from Advertising)
Basically really all you're doing is you're taking your ad, spend, divided it into the sales you got from ads.
For example, if you had $1000 in sales and you spent $300 on ads to generate those sales, that would be a 30% ACoS.
We are simply taking the $300 in spend dividing it by our $1000 sales.
Let’s think of our ACoS like a slice of a pie chart. And so how big is the slice of the pie that is devoted to the ads.
The complete pie is what you're bringing in sales-wise, and ACoS is how much of that pie is going to ads.
In our example, we are taking a slice that is equivalent of 30% of our pie.
What are TACoS for Amazon PPC
And then you've probably heard people sometimes refer to TACoS which yes, could be crispy or soft, but different type of tacos here…
In this case, TACoS is your total advertising cost of sales, and the difference here is that we are talking about your ad spend divided by your total sales (regardless of whether or not those sales came from ads).
So in my earlier example, if you had $1000 in sales that came from ads and you spent $300 to generate those sales from the ads, and we ended up with a 30% ACoS.
($300 ad spend) / ($1000 sales) = 30% ACoS
Now let’s say during that same time period, we generated a total of $2,200 in sales (including both sponsored product ads and organic sales).
We would take $300 that you spent on ads and divide by the $2,200 in total sales.
That would calculate as about a 13.6% TACoS.
Using our pie analogy, we are splitting up our more holistic pie that includes total sales from both organic and advertising sales and we have a slice that represents 13.6% of that pie for our TACoS.
Just keep in mind that when looking at the reports that Amazon is showing you, they're talking about just your sales from advertising, from the campaigns you’re running in Campaign Manager in Seller Central.
How Amazon Sellers Can Calculate ROAS
ROAS is basically just an inversion of ACoS.
With ROAS instead of looking at the amount ads represent as a slic of a pie, you’re determining for every dollar you put in, how many dollars are you getting out in sales.
Amazon ROAS Formula:
(Sales from Advertising) / (Advertising Spend)
So for example, let’s take the math we used earlier and calculate ROAS.
We will use the same $300 in ad spend that generated $1000.
Then this time, we would divide $1000 in sales by our $300 in ad spend to get a ROAS of 3.33.
($1000 sales) / ($300 ad spend) = 3.33 ROAS
That means that for every dollar we spent on ads, we generated $3.33 in sales.
Think of your ROAS as your return on investment (ROI) of ad dollars. This is similar to how you might look at your return on investment in terms of inventory, but in this case you are looking at investment in attention and exposure from your ad spend.
Now, the interesting thing is because there, as you saw, the variables are really just the same.
We’re simply looking at them from a different angle using different ratios and algebra, so to speak.
So if you know one, you can figure out the other. Let’s show you how….
If You Know Your ACoS, You Know Your ROAS (and vice versa)
Because they are calculated using the same variable and just slightly different ratios, if you know your ROAS, you know your ACoS.
And if you know your ACoS, you know ROAS, as all you do is you take each of them and you divide it into one.
To calculate one, you just divide the other into 1.
Let’s say we know our ACoS and want to figure out our ROAS. We would take 1 divided by you ACoS to get our ROAS.
ROAS = 1 / ACoS
For example, if we had a 25% ACoS, we would take 1 divided by .25 which would equal 4. That means that an ACoS of 25% is the same thing as a ROAS of 4.00.
And vice versa, a ROAS of 4.00 is the same as a 25% ACoS.
Now let’s use our ROAS to calculate our ACoS. We would simply take 1 divided by you ROAS to get our ACoS.
ACoS = 1 / ROAS
Let’s say you have a ROAS of 5.00 and want to figure out your ACoS.
You would take 1 divided by 5 which would equal .20, and making that decimal a percentage you now have an ACoS of 20%.
Using these Number to Optimize PPC Campaigns on Amazon
Hopefully this also makes sense. So the interesting thing is that as you start learning some of these numbers, you start realizing that a lot of these numbers are really just looking at different data points from a different angle.
These numbers help you figure out how much to spend on Amazon PPC campaigns and how much are your ads costing you.
As you start getting more in depth on that, then you're able to do more kind of dissecting looking things a certain way.
And I think sometimes like a lot of things in life, if you just look at things at a different angle, you start seeing things differently.
If you are thinking of ways to improve your ACoS, to put it simply, you are looking to get more sales from less costs so that your percentage decreases.
Whereas you want the ROAS number to be higher, and more sales (relative to ad spend) means you want to increase ROAS on Amazon (which means a higher number is a good thing).
If you're looking at things from the standpoint of the pie chart (i.e. ACoS) as a percent of sales, then you're gonna look at things one way.
You might ask yourself how much space do I have to pay for the ads in my margins?
Then with ROAS you're looking at things for every dollar I put in, how many dollars am I getting back? And how do I get more dollars to return to me since my return on ad spend is essentially my return on investment of ads essentially.
Again, we are basically taking the same information, but just looking at it from a different angle.
Pinterest users: Check out this pinnable image…
Continue the Learning…
You may be saying to yourself, what is a good return on ad spend or ACoS?
To take this information to next level, it is important to understand your margins, and in this video, we will share with you how you can better understand how your margins are critical to understanding your ACoS and making smart choices with PPC.
Click here to learn how to evaluate whether or not you have a good ACoS…
