If you use Amazon Advertising (formerly Amazon Marketing Services, or AMS) advertisements to sell media (such as books or video games) or other products (electronics, toys, clothing, office goods, etc.) you are no doubt familiar with the Amazon Advertising dashboard. It presents many metrics, but one of the most interesting is ACoS, or Average Cost of Sales. Here’s an example from my own dashboard, showing the ACoS for Amazon Advertising campaigns for Lean Media and other titles that I publish:
ACoS is supposed to reflect the success of a campaign, showing advertising expenses vs. sales over a given time period. Consider the following campaign:
- 300 ad clicks
- 10 sales
- $20 product
- Gross sales = $200
- AMS costs = $90
ACoS is ad spend divided by gross sales, so the ACoS would be 45%. It looks OK when put into a spreadsheet and generate a comparison chart:
The problem with this number, is it reflects Amazon’s gross sales against your expenditures. In other words, it not only includes your revenue, it also includes Amazon’s revenue, which might be 30% or more of the gross!
ACoS vs. ACoN
I created two other metrics to evaluate the success of my campaigns. The first is ACoN, or Average Cost of Net. “Net” is the net revenue from Amazon, or the amount remitted from Amazon to your company’s account for the sales of products.
For example, if you sell something on Amazon for $10 and Amazon takes a 30% cut, your company will net $7 (assuming you don’t have a distributor or some other middleman handling revenue and taking their own cut).
Let’s break down ACoN, using the same example from earlier.
- Gross sales = $200
- Amazon’s cut = 33%
- Company gets = $134
- AMS costs = $90
ACoN equals ad spend/revenue. This is the result:
So you’re spending $90 to get $134 from Amazon. Not bad, but …
There’s still a problem. What about your company’s costs to produce the goods – COGS, operational expenses, and other costs?
My company produces books and other printed media, so my costs are wrapped up in printing, packaging, design, and royalties. Marketing is also a big cost, but let’s assume that Amazon Advertising costs are separate. ACoN is a useful number, but it fails to account for the company’s costs of production, which may be significant.
For this reason, I use a third metric: ACoP, or Average Cost of Profit. Here’s how it works, using the same example:
- Revenue = $134
- Cost of goods sold = $59
- Profit = $75
ACoP = Ad spend/Profit, so this is the result:
In other words, Amazon Advertising costs are greater than the profit derived from the sales of those 10 items. An ACoP of more than 100% indicates a money-losing Amazon Advertising campaign. This is a markedly different conclusion than what ACoS might show. Based on the high ACoP, it’s time to recalibrate the campaign by lowering costs or using better ad copy, or consider ending the campaign.
A few other notes:
- Via a comment left by Ricardo from Reedsy (see below) ACoP is less useful for ebook sales.
- ACoP requires calculating costs. I use an estimate based on production and other costs, which I plug into a Google Sheets spreadsheet to calculate both ACoN and ACoP on a monthly basis. A sample is shown in the video below.
- For ACoP, accountants might quibble over the inclusion of sunk costs or expenses outside of COGS, while others might want to factor in time or the intangible benefits of brand exposure. You can alter the criteria used to derive profit, or create a new metric, as you please.
- The ACoN and ACoP metrics can be used for other online ad campaigns (Google AdWords, Facebook ads, etc.) or traditional advertising, but some work will be required to get the right data into a spreadsheet.
- ACoP and ACoN can also be used as Lean Media feedback to evaluate (and later improve) things like Amazon Advertising ad copy, cover design, or other creative and design elements that are displayed in an AMS ad.
Video presentation – Amazon Advertising: ACoS vs. ACoN (and ACoP):