calculating-bids-and-marketing-spendings

Bid Management – How to calculate the economic value of a click on Amazon?

Bid management is the process of answering an extremely important question:

How much are you willing to pay for a click?

To be honest with you, we don’t really like the terms “cost per click” (CPC) or “pay per click” (PPC) because they distract from what we’re really after. The “click” is not what’s valuable to you. What’s valuable is the customer’s attention.

Let’s look at how you win that attention. The purchase process all your customers go through (whether consciously or un-consciously) is:

  1. Identification of problem or need
  2. Information gathering and determination of alternatives
  3. Assessment of alternatives and consideration of trade-offs and risk
  4. Purchase
  5. Post-purchase evaluation

Step 2 is absolutely essential to your Amazon sales. A customer can only decide to buy your product once she or he discovers your product while searching for alternatives. The ability to create attention at this precise moment in time is what makes Amazon Sponsored Products so powerful.

The uncomfortable truth is: Some sellers want to “force” users to pay attention … with high marketing budgets and high bids. In the long term, though, this strategy is doomed to fail.

What sets successful Amazon sellers apart is the ability to predict—with accuracy—the customers for whom your product is relevant and what earning the attention of those customers is worth.

Let’s illustrate this concept with two examples.

Example 1: Relevance is tricky.

Let’s assume you are manufacturing premium sunglasses. It seems straightforward to add the keyword “sunglasses” to your manual targeting campaign, but are your premium sunglasses really what the clients are looking for? At the time we wrote this post, the top 50 search results on Amazon.com for the keyword “sunglasses” had an average product price of $15.20. Sure, quality does not always have to be expensive, but this price point is nevertheless an early indicator that customers’ purchase preferences might differ from what you are offering, so the fact that a keyword is relevant to your product does not mean that your product is relevant to the customer searching for the keyword.

Example 2: Even if the product is the same, markets can be very different.

What if you are selling a product in both the UK and the US? Your keywords might be the same, but is your willingness to pay for a click the same as well? Most likely the answer is no and here is why:

  1. You might sell the product at a different price and you have different costs of doing business, such as customs, taxes, and shipping costs, all of which affect your profit margin.
  2. Consumer preferences differ and, consequently, your conversion rate differs between the two countries as well.

To make a long story short: We need a structured, scalable and reliable process to evaluate consumer attention and to quantify your willingness to pay for a click. That’s what the bid management process is really about. So let’s look at the numbers.

Advertising Cost of Sales (ACoS) – The starting point:

Our starting point for the bid management process is the ACoS formula, which is:

ACoS = Ad Spend / Attributed Sales

For example, if you’ve invested $100USD in your marketing and you’ve generated $400USD in sales, your ACoS is 25%.

The ACoS is important for two reasons:

  • It helps assess your ads’ profitability. In the example above, if your profit margin is 20%, your ads wouldn’t be profitable yet at an ACoS of 25%.
  • As we will see later on, the ACoS is the key strategic parameter in our bid management formula

With these two reasons in mind, let’s talk about the two numbers that make up ACoS in a bit more detail:

The Ad Spend is pretty straightforward: it’s how much money you spend on your Amazon PPC advertising.

But “Attributed Sales” is a bit more complicated because Amazon provides six different sales figures. The two differentiating features of these sales figures are:

  1. Attribution window (1-day, 7-day, 30-day)
  2. Same-SKU-sales vs. total sales

So, which value should you use in calculating? That depends on what you want to measure. We discuss this question in this article in detail.

Calculating your bids – Breaking down the formula:

calculating-product-prices

To calculate your willingness to pay, let’s break down the formula further and rewrite it:

ACoS = (CPC * Clicks)/Sales

Your Ad Spend is your average Cost Per Click (CPC) times the total number of clicks. The difference between bid and CPC is:

  • The bid is your maximum willingness to pay for a click
  • The CPC is what Amazon charges per click

As Amazon cannot charge more than you bid, the CPC is by definition smaller or equal to your bid. We can therefore replace CPC with bid and rearrange the formula to solve it for our bid:

Bid = ACoS x (Sales/Clicks)

How to use the bid management formula

Now that you know the formula and how to calculate your bid, what should you do with this information? You can easily extract your sales and clicks data from the “Sponsored Products Keywords Report” which you can generate using these steps:

  • Log in to the seller central
  • Go to “Reports” / “Advertising reports”
  • Change “Report type” to “Keywords”
  • Adjust “Report period” as required
  • Set “Data Unit” to “Total”
  • Click on “Create report” and “Download” after the report has been created. This can sometimes take a few minutes

In the report you can find:

  • Your keyword in column E
  • The total number of clicks in column H
  • The attributed sales in column N, “7 Day Total Sales ($)”

The only remaining variable is now the ACoS.

ACoS, the key strategic parameter

Earlier we noted that the ACoS is the key strategic parameter in Amazon PPC bid management, and now you can see why.

  • A higher ACoS leads to a higher bid, which increases your traffic and thereby your expected sales. So, a higher ACoS leads to more revenue growth.
  • With a lower ACoS, your bid will be lower and, consequently, your average cost per click decreases. Ultimately, the lower ACoS parameter increases your profitability

Different strategies, different results – and which one you choose depends on your particular business goals. Here, a single parameter enables you to prioritize between revenue growth and profitability. To learn more about matching these goals to the stages of the product lifecycle, read our article about PPC strategy.

With the bid management formula at hand, we can now discuss two features Amazon provides: “Suggested bids” and “Bid+”.

Bid Recommendations – Amazon Suggested Bid:

You can find the suggested bids in the seller central using these steps:

  • Log in to the seller central
  • Go to “Advertising” / “Campaign Manager”
  • Click on your “manual targeting” campaign
  • Select one of your ad groups
  • Now click the “Keywords” tab
  • The displayed table now contains column “Suggested bid”

Amazon actually provides three data points:

  1. Suggested Bid Range Start
  2. Suggested Bid
  3. Suggested Bid Range End

These three data points refer to the 25th, 50th and 75th percentiles and consequently give you a feeling for the market price of a keyword.

So, what do you do with this information? Should you just click on “apply?” The short answer is no. The market price of a keyword has no impact on your willingness to pay.

If the suggested bid is lower than your calculated bid, you’ll generate traffic and the average cost per click will be below your bid. Your ACoS will be below your maximum, so the traffic the keyword generates meets your profitability goals.

If the suggested bid is higher than your calculated bid, you usually generate little to no traffic with a keyword. But that is all right. The keyword is simply too expensive.

Let’s be brutally honest before we wrap up. Many sellers “fight” with extremely high bids for page 1. Does that make sense? It doesn’t, and here’s why. If you’re paying more than your calculated bid, your marketing is not profitable. Additionally, those keywords are usually high search volume (fat head) keywords that can easily dominate your total marketing spend. You can easily avoid these expensive mistakes with bid management based on reliable campaign performance data.

Premium Bid Adjustment – Bid+

Let’s talk about Bid+, which is an “Advanced Setting” in the “Campaign Settings.” By enabling Bid+, you’re allowing Amazon to internally increase your bid up to 50%. We do know that this feature seems to be a tempting shortcut for growth but, based on the reasons we laid out in the formula, we don’t recommend you use it.

If you determine that reach is more important than profitability, you should simply increase the ACoS parameter in the bid management formula to have transparency and control over your bids.

 

Looking for more detailed advice on your Amazon PPC bid management? Please feel free to contact us or comment below. We are always glad to help.

three_seasons_forest

Understanding Seasonal Influences on your Amazon PPC Marketing

Does seasonality affect the performance of your Amazon Sponsored Products campaigns?

Put simply: yes, it  does. Your overall performance is the result of your keyword-level performance and individual keywords, in fact, can perform very differently over the course of a year. In this article, we’ll talk about the seasonal factors that affect your campaign performance and the specific actions you can take to turn seasonal fluctuations into an competitive edge.

What is seasonality?

So that we’re all on the same page, let’s start by defining what seasonality means. Seasonality is simply a regular, predictable pattern in your data. It’s a periodic fluctuation caused by, among other reasons, the weather or the holidays.

Let’s illustrate seasonality using an example. Using Google Trends and searching “swim trunks” shows us there is seasonality at play. Not surprisingly, demand for swim trunks is higher in summer than in winter, and the peak is often in late June. You can infer that with summer in full swing, more shoppers are searching for swim trunks during this period of time. Conversely, demand is lowest in the winter, with the valley in late November.

orange swimtrunk summer beach

Socks give us another great example for keyword seasonality. Most of us wear socks everyday, but there is in fact a peak in demand. When? Spoiler alert—in December. In the weeks leading up to Christmas, Google Trends tells us, keyword searches are 2.5x over the long-term average.

If you sell swim trunks or socks, chances are that you’re aware that there is some product seasonality. How would you want to take advantage of these fluctuations for your seasonal bid management? To answer that question, let’s take a look at the math.

Ad impressions, conversions, and seasonality

As Amazon sellers, our conversion funnel has three main steps:

1. Ad Impression

Customers search for products and whenever your ad is shown in the search results, you are generating an ad impression.

2. Clicks

When a customer clicks on your ad she or he will be taken to your product detail page.

3. Conversion

When the customer adds your product to the shopping cart and completes the purchase, you are generating a conversion. Therefore, ad impressions are the first key performance indicator (KPI) in Amazon PPC marketing.

The question we have to focus on, then, is: Do fluctuating ad impressions have an impact on PPC performance and on our ACoS?

To answer that question, we need to do the math. We’ll start at the bottom of the funnel.

ACoS = cost / attributed sales

Cost is the amount of money you’re investing into your ads, and attributed sales are the sales you generated with those ads. By that we mean the sale that occurred after someone clicked on one of your ads and then bought one of your products as a result.

The next step is to dig deaper into the factors influencing cost and attributed sales:

Cost = average CPC * number of clicks

The average cost per click is the average price you have to pay, when someone clicks on one of your ads after searching for a specific keyword and “number of clicks” is the total number of times users clicked on one of your ads over a specific time period. In the campaign manager of the Amazon Seller Central, you can change the analyzed time frame by clicking on the “date range” drop down menu at the upper right side.

Attributed sales = conversions * average basket

Conversions are the number of orders you generated, and the average basket is the amount of money your customers are spending on each order.

Understanding this, we can rewrite our ACoS formula:

ACoS = (average CPC * number of clicks)/(conversions * average basket)

Conversions equal the number of clicks times the conversion rate—the probability that your customers placed an order after seeing one of your ads.

As a side note, while “conversions” sounds pretty straight forward, this is actually not the case. In the reporting data, you can find six different conversion figures as Amazon differentiates three attribution windows and same-SKU vs. total sales. You can read more about this topic in our article about the ideal ACoS..

Heading up to the top of the funnel, we can now rewrite our formula again, backing into the calculation for the number of impressions at the top. The number of clicks equals the number of ad impressions multiplied by your click-through-rate (often abbreviated: CTR).

So, the average:

ACoS = (average CPC * impressions * CTR) / (impressions * CTR * CR * average basket).

Now, remember your math fundamentals. Because impressions are both in the numerator and denominator, you cancel them out. Same thing with CTR. Yes, theoretically we could have saved this calculation step and cancel out “clicks” directly, but the goal was to show, that search volume (ad impressions) does not have an impact on your ACoS.

Your keyword-specific ACoS formula now becomes:

KW ACoS = (average CPC)/(CR * average basket)

So what does this formula tell us? What, as sellers, can we do to optimize our seasonal PPC marketing?

Keyword selection

With this formula, we can calculate a keyword-specific ACoS. As your overall ACoS is really the weighted average of all keywords, you now understand how crucial keyword selection is. Although there can be correlation between similar keywords, you’ll generally find an advantage by adding more relevant keywords to your manual targeting campaign.

Average basket

You’ll be wise to actively manage your average basket – your product prices – because it has such an impact on your ACoS. If you offer sales, discounts, and coupons, your average basket declines, and your ACoS increases. If you’re selling your products at a lower price, your ads could become less profitable. Therefore, it is very important to coordinate your campaigns and promotions. Are they in line or are they contradicting each other?

Bid management

Managing your bids also influences your conversion funnel. Remember in our formula, there are just four variables: ACoS, average CPC, conversion rate, and average basket. Conversion rate and average basket can be calculated with your campaign performance reports. You can find them in the seller central by clicking on “Reports” > “Advertising Reports”. Set the report type to “Keywords” and then generate the report by clicking on “Create report”. Maximum ACoS is a parameter you should set strategically based on your sales and profitability goals. Therefore, there is only one variable in our equation: the average CPC. So we can use our formula to calculate our willingness to pay for a click and calculate keyword-specific bids purely performance-based.

Bid = maximum ACoS * CR * average basket

Analyze conversion rate seasonality

Your conversion rate seasonality is not the same as sales seasonality! Conversion rate really is the key variable in the formula above. If you can anticipate an increase in your conversion rate, you can increase your bids. If done correctly, your profitability will remain unchanged while the increased bid enables you to gain market share. I can not stress this enough: The more precisely you can predict seasonal conversion rates, the more significant your competitive edge.

And this is it: One formula, four specific actions you can take.

Do you have questions, or would you like us to check your current campaign parameters? Please feel free to contact us or comment below. We are always glad to help.

 

shopping cart with boxes on a laptop

How your next Amazon product launch can benefit from PPC campaigns

Competition on the Amazon marketplace is increasing—after all, for many online shoppers, the platform is their first (and often only) stop. Despite the fierce competition, however, you and your new products still have a good chance for success. For your launch to be prosperous, it’s absolutely necessary to set up an effective Amazon launch strategy so you’re thoroughly prepared when you start selling.

There are a lot of aspects for you to consider, and a lot of questions you might have. These can include:

  • What makes a good product? How should I price mine?
  • When and how should I start with my first Amazon PPC campaign?
  • Does a lack of reviews affect my campaigns negatively?
  • How should I set my default CPC and budget in the beginning?
  • I’ve received this message: “Your offer is not eligible for advertising.” What does it mean?

This article will walk you through the aspects of an effective Amazon launch strategy.

You’re a smart seller—you’re already reading and researching, after all, which is how you’ve arrived here. So let’s assume you’ve already done your homework and created a really good product. Let’s also assume you already know how to price it right, because creating a good product and pricing it optimally is the foundation of strong marketing and sales. If you’re still doing your homework and are looking to answer questions on products and pricing, we highly recommend you delve into our article about PPC strategy

If you already have a desirable product and know how to price it properly, let’s talk about marketing and address some of the other questions related to starting Amazon PPC campaigns.

When and how should I start with Amazon PPC?

Many sellers aren’t sure if they should start with PPC campaigns right after launching a new product. They wait and see how organic ranking, customer reviews, and sales develop within the first days and weeks. Some also try to experiment with prices, lowering them to match some of the cheapest offers on the first result page in an effort to generate sales and influence organic rankings.

If you’re seeking early success, the “hope and pray” approach is not going to yield what you want. As an entrepreneur, you likely prefer to set and execute a strategy that will create long-term growth and profitability for your product. After all, “hope and pray” is not a strategy – it’s a default position.

That’s why we advise you start with your sponsored product campaigns right away. You won’t have any page visits and you won’t have good organic rankings, but those metrics will change with time with a good Amazon PPC launch strategy.

Learn in the aboved mentioned detailed article about how to set your Amazon PPC campaigns properly at the beginning of your product launch. You’ll find concrete information on how to set your default CPC, your campaign’s daily budget, and what ACoS you should target in this early phase of your product life cycle.

Should I start my PPC campaigns even though I don’t have product reviews?

Many sellers wonder if it’s advisable to start with Amazon Sponsored Products ads when their products don’t yet have reviews. Sellers fear that conversion rates won’t be good enough for them to hit their performance targets.

Is profitability your primary goal? If so, you’re right to wonder. Conversion rates tend to increase with the quality and quantity of your product reviews—up to a certain point. Having little to no reviews definitely negatively impacts your profitability.

Remember, though, that profitability is only one part of the equation. Total reach is another important metric relevant to your success on Amazon. Reach depends on the keywords—or search queries—that Amazon considers your product relevant to. Next to product data, transaction history has the most impact on this relevance evaluation. Through your Sponsored Products ads, you can get this initial traction for relevancy.

Keeping in mind that your product will not be profitable right away, we advise you to be willing to make this initial investment in your Amazon PPC launch to generate reach and relevant data. Why? In the long term, you’ll be better positioned to optimize your campaigns and your listing with the data generated by your early PPC campaigns. This reach will help you generate sales and earn reviews—and this effort together helps you attain sustained profitability.

How do I set my default CPC and daily budget?

As you prepare for your Amazon PPC launch, you’re probably wondering how to set your default CPC and daily budget. For answers to these questions, we suggest you read our PPC strategy article. You’ll find detailed suggestions to guide you. For more information about setting the right campaign budget and managing your total advertising cost, please read our post about Amazon PPC cost.

What does “Your offer is not eligible for advertising” mean?

If you’ve received this message, you’re not alone. But you’re probably wondering what it means and what you should do.

You are receiving this message, because you currently don’t have the Buy Box. This is actually not necessarily something to be concerned about. This is a safety feature that ensures you benefit from the sales your ads generate. If you don’t have the Buy Box, your ads do not generate impressions, clicks—or cost. Knowing that your ads will not generate any costs when you run out of inventory is good to know, right?

If you do have inventory, you should check your Buy Box Percentage in Seller Central. Simply go to “Reports” > “Business Reports” > “Detail Page Sales and Traffic by Child” item. The column “Buy Box Percentage” contains the information you are looking for.

amazon seller central buy box percentage

If your Buy Box Percentage is below 100%, there are most likely other sellers offering the same product and consequently you are sharing the Buy Box. In this situation, the “error message” just indicates that you currently don’t have the Buy Box, but that could change at any moment. Simply check your campaign statistics in 1-2 days again, and you will most likely see your first results.

If your stock level and Buy Box percentage don’t explain the message, please check the following:

  • Do you have a new seller account?
    If you created your seller account less than three months ago, you are generally not eligible for winning the Buy Box. If you have a personal account manager, he or she might be able to help you.
  • Does your product have missing or incorrect listing information?
    Suppressed listings are not eligible, and if your listing is missing important information or contains incorrect information, yours may be suppressed. Fix this problem by editing the field containing the suppressed listing alert. You can do that via the “Manage Inventory” page, which you can find by hovering the mouse over the “Inventory” menu button in the Seller Central.
  • Has your product been removed from inventory?
    Ads are not eligible for impressions if the products associated with them have been removed from inventory. This can also be checked by clicking on “Inventory” > “Manage Inventory.”
  • Is your product listed in an advertising-restricted category?
    Some product categories require approval or are generally blocked from advertising. Examples for products prohibited from sale are fireworks, certain chemicals, and illegal products. Products in the following categories are restricted and the seller has to be approved by Amazon: beauty, alcohol, and erotic items. Some categories are only restricted for specific periods of time, for example toys from November to January. The approval process for each category can vary, so it is best to investigate via support of your Amazon Seller Central and apply there for your required category.

Do you have more questions on this topic, or would you like to discuss your own ideas? Looking for more detailed advice on running profitable PPC campaigns to ensure your sustained success on Amazon? Please feel free to contact us or comment below. We are always glad to help.

planning amazon acos strategy

What is the ideal ACoS for my Amazon PPC campaigns?

As an Amazon seller, one of your most important KPIs is your ACoS. What is the ACoS, and what do you need to know about it?

In this article, we will help you understand your Amazon ACoS as well as how your industry and product lifecycle might affect your target ACoS. But before we dive into the details let’s talk about the definitions and the pitfalls many sellers are not aware of.

What does ACoS stand for?

ACoS stands for Advertising Cost of Sales and is simply calculated by dividing your marketing cost by the revenue generated by your ads.

ACoS = Advertising Cost / Attributed Revenue

When people speak about their ACoS, they are usually referring to the ACoS of a particular campaign or their overall ACoS. If you want to be more precise, you can calculate your ACoS more granularly at the ad group, product ad, and/or keyword level.

As you can see, the definition of cost is fairly straightforward:

Cost = Number of Clicks * Cost Per Click

But “attributed revenue” is a bit more complicated because Amazon provides six different sales figures. The two differentiating features of these sales figures are:

  1. Attribution window
  2. Same-SKU-sales vs. total sales
Attribution window:

Understanding the attribution window is important for helping determine revenue. The attribution window is the maximum time between a click and an order. Amazon provides data on three different attribution windows:

  • 1-day
  • 7-day
  • 30-day

So, which value should you use in calculating? That depends on what you want to measure.

  • Measuring direct response
    Do you want to know if your customer made a purchase after clicking on your ad? Then you want to measure direct response, and you should select the 1-day attribution window, since people have short attention spans – especially when it comes to online shopping.
  • Measuring economic value
    Are you more interested in knowing the economic value your ads created? Then you should select the 7-day or 30-day attribution window. The 30-day is the maximum attribution window, so the 30-day revenue reflects 100% of your measurable sales. On average, the 1-day attribution window is 75% of those sales and the 7-day window is 90% of those sales.

In case you are curious, the reported revenue in the campaign manager of Amazon Seller Central uses the 7-day attribution window.

You can probably see there are good arguments for choosing each of the attribution windows. Consequently, there is no right or wrong value—or choice. What you do need to keep in mind is that your target ACoS should be defined based on the attributed window you’ve selected. How does this work?

If you’ve chosen a longer attribution window, you are associating more sales (ultimately) with the same cost, and so your ACoS will be lower. Given a longer attribution window, the defined maximum ACoS should be lower. On the other hand, if you’re using a shorter attribution window, your ACoS will be higher. See how that works?

Same-SKU vs. Total Sales

Let’s talk about the other aspect mentioned above. Amazon differentiates between Same-SKU Sales and Total Sales. To illustrate how this works, whenever a customer orders one of your products after clicking on one of your ads, the revenue is attributed to your total sales.

If the customer orders the exact product advertised, the revenue is only attributed to your Same-SKU sales. If your customer, however, orders a different product variation, the sale is not attributed to your Same-SKU sales. If you have a lot of product variations, you have to understand that your Same-SKU sales are just a tiny fraction of your total sales. This is very true, for example, in apparel products—because often you have an array of different sizes, colors, and styles of product.

So which value should you choose? That depends. If your goal is to sell a specific product, thereby managing your inventory and avoiding long-term storage fees, you should work with the Same-SKU sales. If you instead want to measure the created economic value, you should work with the Total Sales number.

One mistake sellers often make is in interpreting the ACoS of new campaigns. When sellers create new campaigns, they are quite often shocked by their very high ACoS. There is no need to be shocked; just be sure you’re not misinterpreting the ACoS. As Amazon states in the documentation, all campaign performance data is usually reported within 48 hours. After those 48 hours your advertising cost is known, but what about the attributed sales? As mentioned above, the Seller Central calculates with the 7-day attribution window, so after 48 hours, your attribution window is still incomplete. As a result, your ACoS will be much higher than expected. Let’s illustrate this with an example: say you want to interpret the traffic generated on January 1st. In this case you would have to wait until January 10th (January 1st + 7-day (attribution window) + 48 hours (time Amazon takes to provide all data)) to have reliable data.

Importance of ACoS

 

Why is the ACoS so important? Its primary function is to measure the efficiency of your PPC campaigns. Reducing advertising cost or increasing PPC sales leads to an increase in marketing efficiency – and a lower ACoS. Additionally, the ACoS indirectly represents the profitability of your paid advertising.

You might be wondering if it makes sense to compare your ACoS to the ACoS of other sellers. In short, the answer is no.

Why? Your ACoS very much depends on your product category, your corporate goals (whether those goals are about growth or profitability) and the efficiency of your campaign management. These factors differ radically between sellers. To show you how and why, let’s compare.

Brand-dominated categories require a specific strategy. For example, perfumery is dominated by traditional brands that often distribute their products via retailers. Retailers usually have an EBIT of around 7% and, consequently, their marketing budget is very limited. Additionally, consumer behavior around keywords is specific. Consumers are searching for specific brands and brand-related keywords and, because of this, keywords have a fairly high conversion rate. With a limited budget and low click prices, ACoS is usually very low – around 3%.

Private label product categories offer sharp contrast. Let’s consider garlic presses, for instance. Traditional brands’ market share is comparatively low, and the net margin of direct-to-consumer sellers is significantly higher. Because of this, click prices and ACoS are much higher as well. ACoS in this category might be 25% – far higher, but perhaps profitable and strategically desirable.

Calculating your maximum ACoS

Instead of sniffing around, you can benchmark on your own. To calculate your individual maximum ACoS, we have to start with the breakeven condition. Your marketing is breakeven when your cost per order equals your net profit margin.

              Cost Per Order = Net Profit Margin

The cost per order is total marketing cost divided by the number of orders generated:

              Cost/Attributed Conversions = Net Profit Margin

Net-Profit-Margin is the gross order value reduced by all non-marketing costs. Exclude the marketing cost from the net profit margin, as our goal is to calculate the maximum cost we can generate in order to be breakeven. While your individual cost structure might differ, a good starting point is:

Net Profit Margin = Gross Product Price – VAT – purchase Price – packaging Costs – shipping Costs – transaction Fees

Here is a breakdown of the costs:

  • The gross product price is what the customer pays for your product, including the shipping costs the customer pays.
  • VAT is the value added tax.
  • The purchase price is the net price you buy the product for. For manufacturers, the purchase price equals your production costs.
  • Packaging costs are the costs for product package (if not part of the purchase price) and repackaging.
  • Shipping costs are the costs for shipping the product from the warehouse or fulfillment center to the customer. If you are using Fulfillment by Amazon (FBA) shipping costs equal your FBA fees.
  • Transaction costs are the Amazon Referral fees

We can now rearrange the break-even condition in order to calculate the maximum ACoS:

Cost Per Order = Net Profit Margin

Cost / Attributed Conversions = Gross Product Price – VAT – purchase Price – packaging Costs – shipping Costs – transaction Fees

We multiply this by (1/Average Basket):

(Cost / Attributed Conversions) * (1/Average Basket) = (Gross Product Price – VAT – purchase Price – packaging Costs – shipping Costs – transaction Fees) /Average Basket

Now (Cost / (Attributed-Conversions* Average-Basket)) equals (Cost / Attributed-Sales) which is our ACoS formula.

ACoS = (Gross Product Price – VAT – purchase Price – packaging Costs – shipping Costs – transaction Fees) /Average Basket

The average basket differs from the gross product price when customers regularly order quantities of more than one or when they regularly order multiple products. As long as this is not a major concern, you can simplify the formula:

ACoS = (Gross Product Price – VAT – purchase Price – packaging Costs – shipping Costs – transaction Fees) / Gross Product Price

As the average basket is by definition larger than or equal to the gross product price, the simplified formula is a “conservative estimate” and consequently often contains a safety-profit-buffer.

Going back to breakeven, what does this mean? If your Sponsored Products ACoS equals the calculated maximum ACoS, your ads are breakeven. You don’t lose money and you don’t earn money with your ads. Seeking profitability? Reduce your maximum ACoS by multiplying with a factor of less than 1.

Your goal will depend on where in the product life cycle stage your product is. You could be aiming for profitability or for generating reach and awareness, and it all depends on your place in the cycle. If you’re launching a new product, it is wise to make an investment in the beginning of your PPC campaigns—and be prepared to take losses for some time—to generate valuable data that will drive long-term growth and profits. To learn more about PPC strategy according to your specific product life cycle, you can find our strategy blueprint here.

You will find many of the mentioned topics in this article also in my video about bid management process. For example: How to define your ACoS, the six different sales figures, total sales vs. same-SKU-sales and much more interesting information.

Do you have questions, or would you like us to check your current campaign parameters? Please feel free to contact us or comment below. We are always glad to help.

Man standing on top of a mountain watching the sunset

Amazon PPC Strategy

As you consider launching your product on Amazon or seek to be more successful on the platform, you might find yourself with more questions than answers, including:

  • What makes a good product?
  • How should I price my new product?
  • How much should I bid for a click?
  • How do I determine my maximum ACoS?
  • How should I set my campaign’s daily budget?

The goal of this article is to provide a “strategy blueprint” to help you answer these questions (and more), especially as they relate to your Amazon PPC strategy and your goal to optimize Amazon PPC campaigns. The article offers Amazon PPC tips and answers to questions commonly asked by sellers. Before we start, though, let’s discuss two important questions:

What makes a good product?

A good product has unique features, ones that are observable and relevant. If you are selling dog food, you are selling a product to a decision maker (the dog’s owner), and the taste of the food isn’t directly relevant. You’re reading this article to learn something, so while we know it’s not a topic for polite discussion, we’ll be honest anyway. What dog owners usually observe is: How is my dog’s digestion—what’s the texture, frequency, and quantity? Is my dog emptying his bowl? Does he develop skin or fur problems after consuming this food?

Don’t worry. This article is not about dog food. It is about asking the right questions. Those include: Which product attributes are observable? Which attributes are valuable to the decision maker? What price premium is a customer willing to pay for the additional benefit(s) my product offers?

How should I price my product?

Short and sweet: not too cheap. We are not big fans of price leadership, as it often leads to a negative spiral. Low prices lead to low profit margins and lower product quality. Why? You won’t earn enough to invest in research and development and, consequently, your products won’t have unique features that separate you from the competition.

When you are the quality leader, on the other hand, you build high-quality products with unique features and benefits. Added customer value enables you to charge a higher price and generate higher margins. With those higher margins, you invest in your marketing, create brand awareness, and build a sustainable business.

If you’re an Amazon seller, your Amazon Sponsored Product strategy is one of your main marketing tools. To help you find the right default bid and maximum Advertising Cost of Sale, and set the campaign’s daily budget, it’s important to understand the product life cycle.

Product life cycle and Amazon PPC strategy

 

There are four stages in the product life cycle: introduction, growth, maturity, and decline. To determine which specific stage your product is in at any given point, you must consider the metrics of both revenue and profit development. The length of a product’s life cycle is closely related to its product category. For example, smartphones clearly have a shorter life cycle than office supplies because of rapid iterations and developments in technology, design, and user experience.

So what are the specifics in each stage of the product life cycle? And how should you use them to optimize your Amazon PPC campaigns?

Introduction stage:

In the introduction stage, a new product is introduced into the marketplace. You are typically starting at zero page visits and zero sales, so the goal is to generate some initial traffic and sales. To generate this traction, you should:

1. Set a high default CPC

A typical average CPC is in the range 30 to 40 cents, so at launch it is advisable to set the default CPC to 60 to 75 cents. If your product category is very competitive or if your product price is more than 100USD, you could go even higher, but the maximum CPC shouldn’t be more than 1.5USD. Be aware that a high default CPC usually leads to a high average CPC and, consequently, a high ACoS. While the focus of the introduction stage is on reach—not profitability—you shouldn’t be too aggressive. Be sure to consider the net margin of your product and your financial resources.

2. Set a high max. ACoS

The max. Advertising Cost of Sale is the key variable in the bid management process, and it is high when it is close to (or even higher) than your profit margin.

3. Set a reasonable daily budget for your campaign

Remember, the goal is to generate meaningful traffic, which means more than 50 clicks per SKU per day. To calculate the required daily budget, multiply your average CPC by the number of clicks you want to generate.

Many sellers set an extremely aggressive default CPC (~2USD) while setting the daily budget very low (10USD). These campaigns generate just a few clicks per day at a bad (very high) ACoS. With just a few clicks per day, you won’t have the reach to generate meaningful sales. Don’t make this common mistake. If your budget is very limited, reduce the default CPC to ~0.3. Yes, this will reduce your expected reach, but you can counteract this (up to a certain point) by adding more relevant (long-term) keywords to your manual targeting campaign.

The same strategy applies to Product Display Ads, Headline Search Ads, and external traffic sources such as Google, Facebook, Instagram, and others. Try not to dance at too many weddings at once, especially when you’re a beginner. Instead, focus on Amazon Sponsored Products initially and use the performance data you generate to create much more efficient Headline Search and Product Display Ads further down the road.

Growth stage:

In the growth phase of the product life cycle, quality leadership products usually face limited to no competitors. Because of this, the focus for your Amazon PPC strategy should be on further increasing your traffic and sales, while also selling your product at a healthy price. Doing so will help you ultimately optimize Amazon revenue. What does success mean concerning your PPC parameters?

  • The default PPC should be above average but not extremely aggressive.
  • Regarding max. ACoS, your goal should be at least breakeven; generating your first profits is even better.
  • Manage your campaign’s daily budget carefully. Check your daily ad spend. When the defined budget limits your reach, increase your budget but remain reasonable. Conversion rates and keyword market prices (CPCs) fluctuate, so even if your campaigns are profitable today, they might not be next week. Your campaign’s daily budget provides a safety net that limits your losses in case your KPIs deteriorate.
Maturity stage:

As a product matures, it attracts more competition. Initially, your market share—and revenues—may be unaffected, but as similar products are introduced, your product pricing will come under pressure. To continue generating profit, it’s crucial to bring efficiency to your marketing. With a mature product, your Amazon Sponsored Product campaigns should:

  • Have collected sufficient click-data so that the majority of your traffic is generated by keywords for which you are managing your bids by performance.
  • Decrease your default CPC so that keywords with insufficient data for the bid management process are, on average, profitable nevertheless
  • Manage your target ACoS based on your sales and profitability goals. While it can be hard to sacrifice sales for profitability, the focus has to be on profitability in the maturity stage.
Decline stage:

At this point, you must either innovate your product or create a completely new one. No matter your chosen strategy, your goal is to initiate a new product life cycle. The two most common options are:

  • Relaunching your product with new variations in color, taste, size, ingredients, or technology
  • Expanding by launching your products in new markets. If you are selling in Europe, you can sell your products in Germany, Spain, France, Italy and the United Kingdom. If you are selling your products in North America, you can sell your products in the United States, Canada and Mexico.

Portfolio strategy: where the magic happens

In this article, we focused on managing a single product and its Amazon PPC monitoring. The true magic, however, happens when you are selling many products. To build and manage a diversified product portfolio, you might want to consider demand seasonality, the macro trend, each product’s expected life cycle length, and the current life cycle stage of each product. When you optimize Amazon PPC bids over the course of the life cycle, you also achieve optimization of your target ACoS and increase Amazon revenue.

 

Do you have ideas or questions or would you like us to check your current campaign parameters? Please feel free to contact us or comment below. We are always glad to help.

 

money growing out of soil

Amazon PPC Cost – How much should I spend for my Amazon PPC campaigns?

When you’re setting up your first Amazon PPC campaigns, it’s sometimes easy to feel lost in all the parameters—especially at first. You’ve probably asked yourself:

  • How much will my Amazon Sponsored Products cost?
  • What should I set as my budget for Amazon PPC?
  • What if my budget is limited? How can I get the most for my money?
  • How much traffic do I need?

Let’s begin with the last question, as sellers often underestimate the importance of this question or—worse—do not answer it for themselves at all.

How much traffic should my Amazon PPC campaigns generate?

Let’s be honest: PPC optimization is “just” about processes, and those processes require data. Every single ad impression, click, and order generates crucial data and consequently, your focus should be on generating as much (relevant) data at the beginning of your PPC campaigns as possible.

Why should your goal be generating more data? From a mathematical point of view, more data is always better. The reason is that the conclusions you can draw from a large data set are more reliable. With more data comes more reliability, because you’ve captured variability and trends over time. For example, when your ad generated a single click and that single click (randomly) led to an order, your conversion rate was 100%. Is this measured (empirical) conversion rate the same conversion rate you would expect after 100 or 1.000 clicks? Probably—no, definitely not. The real challenge is that the expected conversion rate is difficult to predict. We need actual campaign data to become better at predicting conversion rate over time, as well as other relevant campaign data.

But before you get overly excited, there are your resources to consider. As every click costs money, “more and more data” ultimately means “more and more cost.” Because you don’t have unlimited funds, theory has to become practical when it comes to data and your Amazon PPC cost.

The real goal of generating data is to collect “enough data to start the bid management process.” If this is the goal, how many clicks do we need per keyword? If we assume a conversion rate of 4%, and we want to generate enough clicks so that we can expect two orders, we have to generate 50 clicks (2 / 0.04 = 50).

As a typical cost per click (CPC) ranges from 30 to 40 cents, your expected investment per keyword and SKU is 15-20 dollars. When you have a lot of products and a lot of keywords added to your manual targeting campaign, we are quickly speaking about quite a significant investment.

So, naturally, the next question is:

How can I save money when I have a limited budget for my Amazon PPC marketing?

Tip #1

Focus on your top sellers. Do not run ads for all products right away. By reducing the number of advertised products, you are reducing the total investment while still generating relevant data to optimize your Amazon PPC performance. With a focus on just your top sellers, you can use the following formula to calculate your required initial investment:

Total Investment = Number of products * number of keywords * average cost per click * 50 clicks

There’s another reason we suggest focusing on your top sellers. These products typically have much better click-through- and conversion-rates, which reduces your cost per click and increases the revenue you can expect per click. Your Amazon Advertising Cost of Sales is calculated by:

ACoS = cost / sales

As you can see, lower cost and higher sales leads to a lower ACoS, so top sellers tend to be more profitable.

Tip #2

Invest time into your keyword research to find more relevant long-tail keywords. Long-tail keywords have a lower monthly search volume and tend to have lower click prices. Lower CPCs reduce your total investment and, given a certain budget, enable you to get more clicks (and thus more data) from your budget.

What should I set as my budget for my PPC campaigns?

With the calculated total investment at hand, we can now set the campaign’s daily budget, which is one of the key campaign parameters.

Let’s discuss Amazon PPC cost vs. budget for a moment, so the differences are clear. It’s important to note that the campaign’s daily budget is different from the total cost in two respects:

  • Time dimension
    Total cost has no time dimension, while the campaign’s daily budget is the maximum cost per day. If you have a capital constraint, you can simply reduce the campaign’s daily budget and thereby spread your investment over a longer time period. You’ll still generate data, but it will trickle in more slowly in this case.
  • Multiple campaigns
    Because you typically have more than one campaign, the total cost has to be divided among your campaigns.

What about if you are running both auto-targeting and manual targeting campaigns? If so, you might think the intuitive approach would be to simply give both campaigns the same budget, but that’s not necessarily ideal. Here’s why: when you set up new campaigns, the auto-targeting campaign usually generates more traffic (cost) at first. The goal for the manual targeting campaign is to help Amazon realize that our product is relevant for a large variety of search phrases (keywords). For this to happen, Amazon needs time (data) to realize that relevancy.

As we will explain in another article in greater detail, you should analyze daily which search queries generated traffic for you. Then, add those search queries to your manual targeting campaign as keywords, and add those keywords to the negative keywords (exact match) of your auto-targeting campaign. Over time, you will block more and more keywords in the auto-targeting campaign. Consequently, traffic and cost will shift towards the manual targeting campaign. It’s ideal to regularly check and adjust the generated cost and the defined budget of your PPC campaigns.

A big difference between Amazon and Google, Facebook, Instagram is this: Generating traffic on Amazon is part of the challenge, and as a result your actual Sponsored Products campaigns’ cost is usually much lower than your defined budget. It can be tempting to set a very high budget, but you should be careful.

Here’s why: ideally your campaigns are very profitable. When this is the case, more cost means more profit. However, click prices and conversion rates fluctuate, and profitability can be volatile. A campaign that has been profitable in the past can become unprofitable. To limit your risk, use the campaign’s daily budget for Amazon PPC campaigns as your safety net. This requires a calculated balance—the budget should be high enough that it doesn’t restrain your campaign’s growth, but it should be set low enough to limit your losses when your campaign’s performance deteriorates.

Growing our Amazon business is why we all get up in the morning. From experience, though, we know you’ll sleep much better knowing that you have a safety net in place. You’ll be set up for success when it comes to your Amazon PPC marketing.

Do you have ideas or questions or would you like us to check your current campaign parameters? Please feel free to contact us or comment below. We are always glad to help.