Understanding the metrics that underpin successful Amazon advertising is paramount for businesses aiming to achieve profitability. In this blog, we will demystify three pivotal metrics – ACoS (Advertising Cost of Sale), TACoS (Total Advertising Cost of Sale), and CLTV (Customer Lifetime Value) – exploring their interconnections to optimise your Amazon advertising strategy for enduring success.
ACoS (Advertising Cost of Sale): ACoS measures the effectiveness of Amazon pay-per-click (PPC) advertising campaigns. Calculated as a percentage, it compares the expenditure on PPC campaigns with the corresponding sales revenue:
ACoS = Ad Spend ÷ Ad Revenue * 100
For instance, a campaign with a £100 ad spend and £500 ad revenue would yield a 20% ACoS.
£100 (Ad Spend) / £500 (Ad Revenue) * 100 = 20% (ACoS)
Determining Your ACoS Target: Selecting the appropriate ACoS target hinges on factors like profit maximisation or visibility enhancement during product launches. While many Amazon sellers target an ACoS of 15-30%, it’s crucial to grasp your Break-Even ACoS. If your ACoS exceeds your profit margin, your advertising yields losses; conversely, a lower ACoS than your profit margin means gains.
TACoS (Total Advertising Cost of Sale): Unlike some platforms, Amazon’s Paid and Organic traffic are intricately linked. Effective organic ranking relies on sales conversions tied to keywords, facilitated by traffic driven through advertising. TACoS measures ad spend relative to an Amazon seller’s total sales revenue, amalgamating ad-generated and organic sales for a holistic view of ad performance and business profitability.
Leveraging TACoS for Strategy: Vital to remember is that Amazon’s organic ranking thrives on a strategic PPC campaign. As organic rankings improve over time, campaigns should be adjusted accordingly. Continuous monitoring of performance is key, as the impact of changes might not be immediate but gradually evident over subsequent weeks or months. A tight watch on organic ranking against PPC adjustments is paramount.
CLTV (Customer Lifetime Value): CLTV profoundly influences both ACoS and TACoS determinations. It represents the projected revenue derived from a customer’s entire engagement with a business. Understanding whether your product encourages repeat purchases or ongoing accessory sales is pivotal. Delve into repurchase percentages, buying frequency, potential transition to subscription services, and average customer lifetime value to shape customer acquisition and advertising strategies.
Aligning CLTV with ACoS and TACoS: Suppose a brand foresees a customer making five purchases annually. Adjusting Customer Acquisition Cost to reflect this multi-purchase value is logical, warranting a robust initial customer acquisition investment. Though the first sale might seem unprofitable, profits manifest in subsequent purchases. This underscores the significance of prioritising customer retention for lower ACoS, contributing to improved TACoS.
A Holistic Approach to Amazon Advertising: Amazon Advertising is a cornerstone of your overall Amazon business strategy. In the digital realm, instant outcomes are often expected, influencing short-term decisions. Yet, considering the interplay between paid and organic rankings on Amazon, we must embrace a long-term perspective, factoring in a multitude of elements that impact our business’s holistic success.
By unravelling the intricacies of ACoS, TACoS, and CLTV, businesses can forge a more effective Amazon advertising strategy. These metrics aren’t isolated figures; they weave together to determine profitability and guide strategic decisions for the enduring prosperity of your Amazon presence.