Advantages and disadvantages of both KPIs
In Amazon Advertising you can pursue different performance strategies: ACoS ("Advertising Cost of Sales") or CPO ("Cost per Order"). ACoS is the key figure of choice when it comes to viewing advertising costs in relation to sales, or is it? For many sellers and vendors, CPO is also one of the important metrics. Which one is the better KPI for you?
What is ACoS on Amazon Advertising?
ACoS means "Advertising Cost of Sales" and is a metric for measuring advertising efficiency. ACoS shows the ratio of advertising costs to advertising sales and can be viewed in the Amazon Advertising platforms – Seller Central and Advertising Console.
Amazon sellers who want to improve the performance of their Amazon PPC campaigns usually start by looking at ACoS values of their campaigns. With Amazon ACoS, you can effectively track how high the advertising expenses are in relation to the revenues. If the ACoS target of the advertising campaign has been accurately defined in advance, you can draw conclusions about its profitability.
Amazon ACoS basically answers the question of how much you spend for each click, and how much you earn in return?
ACoS = Ad Spend ÷ Ad Revenue x 100
For example: Suppose that you achieve 15€ sales with the keyword "sneaker white" with the advertising costs of 0.75€, then your ACoS is 5%. That means you have invested 5% of your revenue in advertising:
ACoS = €0.75 advertising expenses ÷ €15 sales x 100 = 5%
The higher Amazon ACoS is, the more expensive are the ads for this product and the more has to be invested in advertising relative to the generated sales. The lower Amazon ACoS is, the lower are the advertising costs in relation to the sales.
The Break-Even ACoS describes the point at which your ads start to run profitably. As long as ACoS is below your product margin after all the costs such as manufacturing and shipping costs and all other costs are deducted from the advertising revenue, you don’t expect any losses. If you aim to make a profit with your ads, you should define a target ACoS that is below your break-even ACoS.
You can find more information about Break-Even ACoS below.
The Advantages of ACoS
ACoS takes into account all revenues generated by advertising: If certain advertised products and keywords are very good at generating high revenues after a click (e.g. by creating a higher number of purchases or selling additional products), you will optimize your PPC campaigns to invest more in these products and keywords than in others: You will then achieve higher revenues per conversion/order in total than other product and keyword combinations.
What is CPO on Amazon Advertising?
Amazon CPO ("cost per order") is another key performance indicator in Amazon Advertising. It represents the advertising costs in relation to the sales generated. If you optimize your campaigns to CPO, you follow the performance strategy of generating as many orders as possible at the defined cost per conversion (in this case, the conversion represents the order).
You cannot view CPO directly in Amazon Seller Central or in Amazon Advertising Console, but you can easily calculate it by yourself. For CPO, the total costs incurred are divided by the number of orders placed:
CPO = total costs for advertising ÷ number of orders
In the strict sense, this means that all click costs incurred for the advertisement in the given period are divided by the orders in the same period.
Back to our example: Assuming that the click costs for the keyword "sneaker white" are 75€ in the considered period. With the 100 clicks, 25 orders were generated. In this case, we end up with 3€ for CPO.
In PPC optimization, CPO is usually calculated on the basis of pure click costs. In a broader sense, however, transaction costs, packaging costs, shipping costs, return costs, etc. are also included in the calculation of CPO. In this way, CPO can accurately reflect the actual expenses for a sale.
A great advantage of CPO is its explicitness: a low CPO is always a reliable indicator for a successful campaign.
The Advantages of CPO
CPO is clearly the more robust indicator: Regardless of the number of sales generated per order, CPO remains constant. This means that positive or negative sales outliers cannot whitewash CPO of your PPC campaigns or you do not have to worry about a short-term decline of sales per order.
In addition, CPO is an absolute figure that does not sugarcoat anything and gives you the costs per order in actual euros. If, for example, as a retailer, you pay 10€ per order, this is unmistakably clear. With a relative figure like ACoS, 5% absolute can mean very much or very little absolute cost.
CPO can be considered as a broad figure and is, therefore, much more flexible than ACoS: In addition to the advertising costs, you can include all other variable and fixed costs of your products in CPO.
What are the possible disadvantages of the two metrics?
Which of the two key figures do you have to keep in mind when evaluating the success of your Amazon Advertising campaigns?
ACoS refers to Amazon Advertising costs
It is important to keep in mind that Amazon ACoS refers purely to the advertising costs and does not reflect other factors such as the actual margin for the product and running costs apart from the advertising costs. So in reality, campaigns with a lower ACoS can result in higher costs for a seller or vendor and in the end a lower profit.
Setting Target ACoS for each product
You can work around this problem: As a holistically thinking Amazon seller and vendor, it is essential to keep an eye on the total costs for each product. This works best if you set an individual ACoS target for each campaign or each product.
The best practice for this: A granular campaign structure allows you to measure and to analyze products and margins individually.
CPO is static
By optimizing based on a single CPO, you neglect the different revenues you generate per keyword-product combination: Some combinations can lead to significantly higher sales than others.
Both metrics have their justification and each has strong advantages. You can try to minimize the respective disadvantages of each metric as much as possible:
👉If you want to run your Amazon PPC campaigns according to ACoS targets, you should definitely try to include as many variable and fixed costs for each generated sale in your ACoS targets. ACoS should always be considered in relation to the optimization goal for the campaign and the product.
👉On the other hand, if you plan your campaigns according to CPO targets, you should take a close look at the product-keyword combinations in which the advertising revenue per order is permanently higher or lower than the account or campaign average. Here you could then invest more or less and adjust your CPO goals accordingly.
ADFERENCE offers optimization strategies according to ACoS or CPO targets and manages to get the maximum out of each strategy. So we have the right strategy for you in any case.