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Amazon PPC Controlling – Data drives decisions

When William Edwards Deming famously claimed, “Without data, you’re just another person with an opinion, ”Amazon was still “just” a river in South America. Amazon may now be a global marketplace, but the essence of his statement still rings true and is very much applicable when it comes to Amazon PPC marketing.

Yes, we know: most sellers aren’t overly enthusiastic about reporting, but transparent and actionable results mean the difference between great campaigns and dismal ones, between success and failure. This article will discuss the 10 most important performance figures in Amazon PPC controlling and the factors that influence them. If you’ve ever wanted to take the guesswork out of a sudden decrease in your sales or an increase in cost, or better understand your campaign performance reports, this article is for you.

General Structure

To measure cost, sales and profitability reliably, we just need 10 Key Performance Indicators (KPIs).
While profitability is what Amazon sellers are naturally most interested in, we actually look at it last because, just as the saying goes: “Fall in love with the process, and the results will come.”

Amazon KPIs in Detail

To help you understand each KPI, we’ll discuss their definitions, influencing factors and improvement strategies in detail.

Cost KPIs

 

1. Ad Spend

The ad spend is the product of the total number of clicks and the average cost per click (CPC). When we are analyzing a PPC account, the ad spend is what we look at first. Why? Doing so helps us get a feel for the scope of the marketing activities. And, it’s thereby essential to consider the total ad spend relative to the size of the product portfolio. As the bid management process requires data, each SKU should generate a meaningful number of clicks per day. If you aim for at least 30 clicks per SKU and day and we assume an average cost per click of 30 cents, your benchmark ad spend is:

Benchmark ad spend = Number of SKUs * 30 clicks/day * 30 cents/click = Number of SKUs * 9 USD/day

2. Cost per Click (CPC)

Your average cost per click is influenced by a number of factors:

  1. Keyword selection (fat head vs. long tail)
  2. Keyword relevance
  3. Competition
  4. Average product price in the respective product category
  5. Average profit margin in the respective product category

By downloading the bid recommendations Amazon provides, you can reliably put your own bids into perspective. For what percentage of your keyword set are your bids high enough?

Before increasing your bids, please keep in mind that increasing your bids does not only result in more (expected) traffic, but also in a higher ACoS and, consequently, lower profitability.

Sales KPIs

 

1. Impressions

Your PPC sales funnel starts with ad impressions, so when your focus is on growth, increasing ad impressions should be a priority. The factors influencing your ad impressions include:

  1. Keyword selection
  2. Search volume of the individual keywords
  3. Relevance – Does Amazon consider your product relevant for the keyword?
  4. Bid
  5. Campaign budget

Many sellers increase their bids to generate increased ad impressions. If your resources are finite, you can compensate by investing more time: you could research additional (relevant) keywords and integrate them into your product data. By generating more traffic via a larger set of keywords, your expected ad impressions increase without increasing your average CPC and ACoS.

2. Click-Through-Rate (CTR)

The CTR may be one of the most underestimated KPIs as sellers pay for clicks and consequently think they can ignore their CTR. That approach is wrong because the CTR signals relevance. As Jeff Bezos has said in multiple interviews, the key to success for Amazon is putting customers first. As customers click on products they like, a higher CTR reflects a better shopping experience. Consequently, Amazon has an incentive to drive more traffic to high-CTR products.

The factors influencing your CTR are:

  1. Product image
  2. Product title
  3. Product price
  4. Customer reviews – Total number of reviews and the average rating
  5. Prime status
  6. Ad position

As the ad position can only be influenced indirectly, your focus should be on the other five factors.

3. Clicks

Clicks are the product of the total number of ad impressions and your average click-through-rate. If you want to drive more traffic to your product detail pages, you should focus on the underlying factors influencing these KPIs.

4. Conversion Rate

While a comprehensive discussion of conversion rate optimization would be beyond the scope of this article, questions worth answering on this subject include:

  1. Is the product – and all key product features – portrayed in the product images clearly and in a recognizable form? For example, if you’re selling a backpack, do your product images show the shoulder straps, all compartments and the zipper?
  2. Are relevant product features described and explained in the bullet points and/or in the product description? For example, indicate whether your backpack offers standard or waterproof compartments.
  3. Might your customers have possible concerns that discourage them from making a purchase? For example, if you’re selling food supplements, you should address effectiveness and tolerability.
  4. Is the product reasonably priced when compared to key competitors?
  5. Do you have positive customer reviews and do they reference product quality?
5. Conversions

“Conversions” is simply a synonym for “total number of orders” and it is important to emphasize that we are referring to the number of orders, not the revenue these orders generate.

The formula is:

Conversions = total number of clicks * average conversion rate

If you want to increase your order volume, work on the factors influencing clicks and conversion rate. You should prioritize your conversion rate, as increasing your conversion rate not only increases your conversions but also improves your ACoS.

6. Average Basket

The average basket can be easily calculated by dividing the revenue your ads generated over a certain period of time by the total number of orders that generated the revenue. Factors influencing the average basket are:

  1. Product price
  2. Average number of products (unique SKUs) per order
  3. Average product quantity

As the absolute profit margin regularly increases in the product price, breakeven is often more easily achieved for higher-priced products. When the product price is below $20, having high conversion rates is the key to profitability.

7. Sales

The sales formula is:

Sales = conversions * average basket

To increase your sales, reconsider the factors influencing the total number of clicks, the conversion rate and the average basket.

Profitability KPIs

 

ACoS

The ACoS (Advertising Cost of Sales) is calculated by dividing your ad spend by the attributed sales. While cost is pretty straightforward, attributed sales are actually a little more complicated as it might seem, as Amazon reports six different sales KPIs. The two differentiating features of these sales figures are:

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

We discuss the ACoS in detail in this article and address how you can use the breakeven condition to calculate your individual maximum ACoS.

Understanding your KPIs, how they are calculated, and how to interpret the data they provide to drive your decisions is the essence of Amazon PPC controlling.

Looking for more detailed advice on your Amazon KPIs or your Amazon campaign performance reports? Please feel free to contact us or leave a comment below. We are always glad to help.

 

 

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.

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.