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Corona Recovery Package: How does the VAT reduction affect advertising KPIs?


What Amazon Sellers and Vendors have to consider from 1 July 2020

In June, the German government decided on a temporary reduction in value-added tax in order to strengthen the economy during the ongoing corona crisis. As a result of the reduction of the value-added tax, the profit margins of many retailers are changing and also the advertising-related KPIs such as advertising revenue and ACoS. For this reason, the relevant KPIs must be evaluated differently.

Which changes of the value added tax are we likely to face?

From 01.07.2020 the value added tax rate will be reduced from the standard 19% to 16% for a period of 6 months. The discounted rate will be adjusted from 7% to 5%. The original regular tax rates will apply again from 01.01.2021.

In the following we would like to illustrate the effects in 4 scenarios, which result from whether you want to reduce the gross sales price - or not - and whether you use the Amazon VAT calculation service or not:

1 | You keep the selling price the same

 1a | You do not use the value added tax calculation service from Amazon 

In this scenario you leave your gross sales price the same to your end customers. A lower VAT rate entails that your profit margin changes positively.

Let's consider the following example: You sell a water bottle for €20 on Amazon using the FBA Fulfilment Network. In this case, the calculation of your profit margin with different VAT rates could look like this:

  VAT 19% VAT  16%
Sales price (gross) 20€ 20€
Sales taxes payable 3.19€ 2.76€
Purchase Price (net) 4€ 4€
Amazon Sales commission of 15% 3€  3€
Amazon FBA Fees 3€ 3€
Profit in € after deduction of all variable costs 6.81€ 7.24€
Profit margin 34.1% 36.2%

While your break-even margin, which you previously used as your reference when setting your target ACoS, was 34.1%, now you have a 2.1% higher margin and therefore more room in terms of your ACoS:

 👉 You maintain your previous ACoS target and are now slightly more profitable than before. 


 👉 You adjust your ACoS target to reflect your new margin.

💡 This scenario has no immediate impact on your performance KPIs, as your advertising revenue is displayed as gross by Amazon and your gross sales price does not change.

4 Amazon Advertising Scenarios

4 Amazon Advertising Scenarios

 1b | You use the Amazon sales tax calculation service: 

If you keep the sales price the same and use the Amazon tax calculation service, your advertising revenues are shown as net. In this case, Amazon automatically calculates the net sales on the basis of your gross sales prices and the current legally valid VAT rate. 

If your sales price remains unaltered and your VAT is reduced at the same time, then the ACoS shown by Amazon will first improve, because now you have more (net) revenue and thus a better cost/revenue ratio with every single euro you spend on advertising.

 👉 Your ACoS will decrease.

 👉 Cost/Revenue relation is improving.

For example: 

Before the change, you sold a bottle on gross sales price of €20 per piece. This corresponds to a net sales price of €16.81 each. Let's assume that your advertising expenses are €1. Your ACoS would therefore be 5.95%. 

After the change, you will have a higher net revenue of €17.24 due to the lower tax per gross sale of €20. At the same costs, your displayed net advertising revenue per sales will increase. Your ACoS improves to 5.8%. 

What does this mean for ADFERENCE users?

👉 If your target ACoS remains the same, we will see a better performance and we can increase the bids to generate more revenue. 

2 | You reduce the gross sales price

 2a | You do not use the Amazon sales tax calculation service 

Another possibility would be for you to pass on the VAT savings to your customers and thus offer more competitive prices.

In the following example we take your net sales price as a basis and calculate your margin with the new VAT. 

  VAT 19% VAT  16%
Sales price (gross) 20€ 19.50€
Sales price (net) 16.81€ 16.81€
Sales taxes payable 3.19€ 2.69€
Purchase Price (net) 4€ 4€
Amazon Sales commission of 15% 3€ 2.93€
Amazon FBA Fees 3€ 3€
Profit in € after deduction of all variable costs 6.81€ 6.88€
Profit margin 34.1% 35.3%

A reduced sales price means that you have to pay less value added tax to the tax office and also pay less sales commission at Amazon. Therefore, the profit margin increases. However, you should keep in mind that other variable costs are independent of the sales price.

With the higher profit margin, you now have a little more room when it comes to optimizing your Amazon Advertising campaigns.

 👉 The profit margin decreases. 

 👉 Your break-even ACoS increases. 

Previously, your goal was to control your break-even ACoS, but now you set a target of 34.1%. By reducing the sales price according to the 16% sales tax, your new break-even ACoS would be 35.3%. Thus, you would have to increase your target to 35.3%.

The relevance of your advertising KPIs are changing

With the same number of conversions, the advertising revenue purchased decreases because the gross sales price becomes lower. This leads to an apparently poor ACoS for the same advertising costs. At the same time, the relative margin of your product has changed, so you can afford a 'worse' ACoS.

What does this mean for ADFERENCE users? 

The advertising revenue shown in the PPC campaigns will be lower if the bids remain the same, although your margin per sale will increase.

 👉 If your ACoS target remains the same, our tool reacts by lowering the bids in order to continue to achieve your 'old' ACoS target.

 👉 Of course you have the possibility to expand your target ACoS and adjust it according to your higher relative margin.

2b | You use the Amazon sales tax calculation service 

Margin per unit increases as shown in example 1a). The net sales price does not change. You have just entered a lower gross sales price on Amazon. Since your advertising revenue is displayed net and does not change, there is no direct influence on the significance of your advertising KPIs. 

👉No direct influence on advertising KPIs. 

 👉Through the increased margin, your campaigns are now a little more profitable with the same goal. 

What does this mean for ADFERENCE users?

You can leave your targets as they are and be happy about the increased profitability. Or you can adjust your ACoS target accordingly to drive even more traffic. 


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