Amazon ACoS ACoTS and T-ACoS explained. Hey, my name is Daniel Anderson. And in this video, I'm going to explain these Amazon advertising concepts to you in a way you haven't had them explained to you before. I'm really going to break down the meaning of each, but most importantly, how to put them into practice and how to use these metrics to grow your business and make the most profit possible, which is ultimately what matters. So there's a lot of misconceptions around these concepts and even successful sellers, very few, actually understand how to use them in their business to really optimize - again for what's most important, which is profit. So be sure to watch this video until the very end, because that's when it's really going to click. And you're really going to understand now how to put these metrics into practice in your business.
You know, it's one thing to understand the theory and the formulas, but another thing is to actually know how to use these tools, to grow your business and get better results. So that's exactly what you're going to discover in this video. And many of my students have used these concepts now to get great results and see dramatic improvements in their paid advertising and sales and profits in general, in their businesses. So these concepts are truly proven to work, and I'm really excited to share them with you. So let's get started. Now, let's start with the very basics, you know, cause you need to start at the beginning. So I'm going to walk you through like a practical example here of how to put this into practice or use a hypothetical example to explain. So ACoS, that's ad spend divided by sales, right. So that gives us the number ACoS.
So let's take an example. So let's say, you know, each time you sell your product. That's 50 bucks and to generate one sale through your ads right now on Amazon, you're paying on average $10. This will give you a ACoS of 20%. So your ACoS would be 20% in this case, it's just 10 divided by 50, 20%. Now let's assume that each time you make a sale of your product, the gross margin is $15, so you make $50 and this is not counting in the ad spend for example. Now this would mean that basically your breakeven point, is 30%.
And so if we divide or not divide, but, um, yeah, if we do 30% minus
That gives us a 10% margin. Right. So, right now if this is you and your ACoS is 20%, and your break-even point on this particular product or this particular SKU is 30%, it means that directly on your advertising, you're making 10% as a profit, right. And a lot of sellers basically look at this metric, the ACS and that's it, right? So this is what they look at. And now they judge, you know, the performance and they think, you know, is this okay? Or should I lower the ACoS? Or should I actually raise the ACoS? You know, that's less common. Most sellers will think, is it okay? Or should I lower the ACoS? So many sellers will just think, okay, my ACoS is less than my breakeven point. So I'm, you know, making a profit on the ads. So that's okay. I'll just leave it be right.
Some sellers will think, well, I want to make more profit on the ads. So I'm going to actually lower the ACoS, right? So lower ACoS. Very few sellers, but some sellers will think, well actually, maybe I should raise the ACoS and that might be the right thing to do. Believe it or not, you know, it wouldn't seem like that's logical. Like why would I want to make less money on the ads? But what actually happens is you might make more money with a higher ACoS. So this is a big, a big concept to really wrap your head around because you want to have a clear understanding of what is good, what is bad? You know, what is positive? What is negative? So that's what I'm going to explain. I'm going to help you arrive at that point here. So, you know, we don't know what's what's best here, right?
It could be okay. We might want to lower it. They might want to raise it. Right. We don't know the answer just by looking at the ACoS. It's not enough. So ACoS is not a metric you want to optimize for in isolation because you haven't seen the big picture. Like you don't actually know just from the ACoS, what to do. Like you could do any of these things and it could be a bad thing. And you think it's a good thing. If you're just looking at ACoS especially if you think that the ACoS, will be a better, it will be better for your business. You know, you could be totally wrong on that if you're just lowering the ACoS and that's it. And a lot of, a lot of agencies and a lot of software actually looks at the ACoS as a primary thing, and that's sort of where it ends.
Right? But if you do that, you could really harm your results and end up making a lot less money even with a lower ACoS. Right. So let me explain. Now the next concept is the ACoTS. So, you know, ACoS stands for Advertising Cost of Sale. ACoTS stands for Advertising Cost of Total Sales, right? So this one is taking into account the bigger picture, more so than the ACoS. ACoC is really just campaign level, just the paid ads in isolation. ACoTS is paid advertising and organic sales, right? So it's all of your sales. But it's telling you, you know, what is the, like how big of a portion of your sales are paid versus organic essentially. Right? So let's take an example. So let's say that your total ad spend is a thousand dollars and your total sales are ten thousand dollars.
So this could be in a 30 day period. Now this would mean that the ACoTS, this is total ad spend divided by our total sales would be 10%. Why, you know, why, why is it that, you know, you're spending, um, let's say, okay. So this is the example, right? Your ACoS is 20%. And at the same time, your ACoTS is 10%. So why is that the case? You know, why are you spending, um, you know, $10 to make $50 in sales on average? So this could be, you know, 10 times that like a hundred bucks to make five hundred bucks in sales, just on your campaigns. Right. But why is it that your ACoS, is 20%, and then your ACoTS is actually lower 10%? Well it's because you've got organic sales, right? So the way it works on Amazon, which is different than let's say through Google PPC, is that, you know, your, your ad spend actually causes organic sales to a certain extent, right?
So if you spend money on advertising for, let's say every one sale you make through the ads, you will make another sale through organic. And this is because, you know, if you're running your ads on keywords that are indexed which a lot of sellers don't do, but you really should only run ads on keywords that are indexed first, because then you can actually have a positive impact from your ad spend on your organic sales. So it means that, you know, the keywords you're targeting get ranked better, and this then causes organic sales which, you know, we could call quote unquote, free sales. So when you take both into account, it looks different, right? So in this case, because, you know, we're spending a thousand on ads and we know what the ACoS is, you know, we can derive that the organic percentage of sales.
So the percentage of our total sales that are coming from organic instead of paid is 50%, right? So that's just simple math, you know, you can see that because the ACoS is 20%, right? So you can see ad spend is $10 sales are $50. So if the total ad spend is a thousand, the total sales are ten thousand, ACoTS is 10%, you know, that's, that's telling us that 50% of our sales are coming from organic. Right? So now the question again is what does this mean? You know, is this okay, is this, um, does this mean we should lower the ACoTs? Or does it mean we should raise the ACoTS? And again, based on this information, it's not enough, right? This is not enough to tell us what to do, because, you know, while 10% as the ACoTS is pretty good, usually for most products, you know, that's something that a lot of, you know, in a lot of cases we would be happy with.
It's still not enough to tell us what to do. So we had to take it a step further. And there's another metric, uh, which I'll explain here that will tell us, you know, what to do, basically. So, all right, so this is all true, right? So right now we've got a product with a 20% ACoS and the ACoTS is 10%, now, here is the third concept, the T-ACoS, or TACoS. So TACoS, the metric, uh, is your target. So this stands for target ACoS. So this is what you want your ACoS to be. And when you've got good systems for paid advertising on Amazon, you can literally set your ACoS and you can optimize to be at that AoS more or less, you know, you've got to give it a little bit of room for variance, right? But more or less, you're going to be at this ACoS, if you want to, cause you can optimize for whatever number, right?
So now the flawed thinking, which is that, a lower ACoS is better. It's not necessarily the case, right? Because if you do that, if you just drive your ACoS down, there's, there's a give and take relationship. So lower ACoS means less sales, right? That you can get at this cost. So you're willing to pay less each sale, which means you get less sales, but if you're willing to pay more, so you're willing to have a higher ACoS. You're going to get more paid sales. And remember, because there is a relationship between ad spend and organic sales. When you drive your ad spend up your organic sales are also going to come up most of the time. And this is a very important relationship to watch out for. You've got to really monitor this relationship very closely, because this is telling you ultimately, you know, what the impact of the ad spend is what the ACoTS looks like, right?
So back to the T-ACoS, the target. So because you can set a target, you know, you can control the ACoS and then you can look at what's happening. You know, when you, uh, spend more or less, on your ad spend, what's happening to the total, you know, what's the total impact. So, so let's say, and this is what we do. So when we launch new campaigns, uh, for a new product or an existing product could be this product, um, we want to basically cycle bulking and cutting on ads because to grow your ads and grow your product, you know, target more keywords, bring in more revenues, you've got to go through this cycle of expansion and then optimization bringing things back in. I like to think about it, like, you know, you're casting a net and then you're pulling it back in to catch more fish. Right?
So, um, so you want to start by expanding the ACoS. This could be again, new product or existing product. It's just a cycle that you go through on a regular basis. So you expand ACoS. This means, um, you know, or you expand, I should say your campaigns, like you launch new campaigns, you're testing new targeting keywords, products, ASIN's, right? And when you do this, naturally, your ACoS is going to come up, you know, cause you're pushing more money out. You're willing to try a lot of different things. You're willing to try new things, right. So the ACoS is going to come up. So the ACoS might go up and become like a hundred percent, right? So, you know, a lot of sellers would think, well, this is terrible. This is bad. What I'm doing is wrong. This should not be happening, but this is a very natural thing that will happen.
And it's actually a good thing if you're doing it for the right reason. Right. So ACoS grows, let's say in this case, it's a hundred percent, you know, what's going on. Like that's terrible. But yeah. So obviously it's not something you can sustain, right. But it's, you're paying to ultimately then grow the business. So let me explain. So a hundred percent as the ACoS, obviously that's not sustainable because your breakeven point is only 30%, right? So you're losing money on the ads. So what you do next is you set a target ACoS, right? So we could say that you set your target ACoS at your breaking point, which is 30%. And then you optimize. So now you run the paid advertising systems to optimize your advertising, to approach 30%, right? So that your ACoS becomes the target ACoS. This might take a couple of weeks, but it will happen if you run the right systems, right. It's just you, because you control the bids, you control what you're doing, right. So you can just optimize down to hit this percentage with your ACoS. So let's say now your, your ACoS has become 30%.
The next thing you want to do is you want to analyze the ACoTS, which is this number, right? Because you've got to get a benchmark. You know, there's no point doing it right away when you're expanding. But once you optimize to the first target ACoS, that you set, because you're going to set different ones. But the first one you set, in this case, it's the breaking point. Sometimes you might set it at higher than the breakeven point, if it's a very competitive product, sometimes you want to go below the breaking point right away. But usually it's about the breaking point. And then when you reached that point, that's when you analyze the ACoTS. So the ACoS has come down and now you look at the whole situation like paid and organic. So let's say in this example that your total ad spend is $1,500 and your total sales are $10,000, right?
So this means that your ACoTS now is 15%, right? So you've got an ACoTS of 15%, okay, good or bad? We don't actually know yet. Right. But that's, you know, telling us what we need at this point. So the next thing, cause now at this point, what you're trying to do is you're trying to figure out the best point to be at with this product. You know, what point is going to make you the most profitable overall with both paid and organic, because paid is not, it doesn't work in isolation. Organic does not work in isolation on Amazon paid and organic sales are connected, right? So it's critical to analyze that relationship, those ratios. So that's why we use the ACoTS, but we don't know if this is the ideal point to be. You know, we don't know if this is the most profitable point to be almost for certain
if you brought your ad spend down to zero, you know, your total sales would come down as well and you would not be making the most profit. Even if you brought your, you know, your ACoS down to a very low amount, then your ad spend, you know, really went down to a small amount. You might think, Hey, the ACoTS is great, you know, potentially, but it might not be where you're making the most money. So you want to find out, you know, at what point do you make the most money? So you're balancing your paid advertising with your organic sales. Because when you drop that paid advertising, your organic sales will come down as well. We just don't know by how much. And at what point, you know, we strike up a nice balance because obviously with more ad spend the organic will come up to a certain degree.
But at some point more ad spend is not really going to cause more organic sales. So we're trying to find, you know, the right, the sweet spot, which is where you make the most profit. So now let's say, you know, we set the new target ACoS because we've got to test this, we've got to figure out, you know, where are we the most profitable? So let's say our. Now this is a target ACoS. This is not the ACoS. This is the target. So right now it's, uh, it's a, um, uh, yeah, so it's it's right now, the ACoS is at 30% our target was set as 30% now we're going to set it lower. So we're going to set it at 20%, right?
And then we're going to watch the ACoS actually come down, that's what's going to happen. Right? So now let's assume the ACoS has come down. And the ACoS is the same as the target ACoS, which is, or the TACOS, which is 20%. Then it comes to the final step or the next step. This is gonna give us the information we need to make a decision as to whether or not a 20% ACoS is better than 30%. That's the first thing we're trying to figure out, right? Because if we find out that a 20% ACoS is better than the 30% great, we want to stay there or we want to test actually going lower and see if that improves things even more. Or if it's worse, if we're making less profit now, we want to go back up. We might test 25% next, right?
So it's, you're trying to find the right balance. Now, what do you want to do after you reach a 20% ACoS. So you've gone through these four steps is you want to analyze the impact. So we call this the impact score. And it's really the impact that this change had on your profitability, on the overall sales, of your business for this particular SKU. So what you do now is you will analyze, so these are two different situations. You would have one of these or, you know, it would be different, but these are two examples, right? So example 1 is this. So your total ad spent, came down from $1500 to $1000 and your total sales also came down from $10,000 to $9,000. And you might think this is a bad thing because you're selling less. But now if you take the difference, so your ad spend came down $500 and your sales came down $1000 dollars.
So that's what's in blue here and you divide these numbers, you get 50% and 50% in this case means that this is an improvement. You're making more money right now than you were when your sales were $10,000. Because, you know, because proportionately, the ad spend has calmed down more than the sales. And becauset he breakeven point of your product is 30%, 50% is higher. It tells you that right now you're making more money. So you've just, you know, improved things. And the second scenario. So this is just to show you like how thin of a line this can be and why you need to understand what you're doing so that you optimize for profit and you make more money, not less and you're actually doing the right thing. You're helping your business. You're growing your business instead of, you know, maybe harming it by just lowering the ACoS blindly just based on the campaigns.
So the second example is negative. So this is positive, but let's say your total ad spent, came down to a thousand dollars. Same as in example number one. And so this means, you know, you're, you're spending $500 less with your ads, right? But then your total sales came down to $8,000 instead of $9,000. So the total estimate is the same $1000 and $1000 from$ 1500. But the total sales from $10,000 came to $8,000. In the second example, instead of $9,000 which means that you're selling $2,000 less. Now with this lower ad spend. Now, when we divide these two numbers, $500 divided by $2000, this gives us 25% which is just slightly lower than the breakeven point. But because this impact score is lower than the breakeven point. It tells you that right now you're making less money. So in this case, lowering the ad spend by $500 bucks, which caused $2000
in, in in, in revenue, you know, lower revenue, this was a bad change, just a slightly worse, you're slightly worse off right now. You're actually making slightly less money, not a lot. So if this were to happen, you would want to raise your target ACoS back up. And then with your systems, your paid advertising systems, you know, you will bring the ACoS back up. And then, you know, you're trying to find the sweet spot. So, um, so the sweet spot is going to be spending a little bit more than this, on ads, in this case, you know, the sweet spot could be spending less. We don't know, we have to test then dropping the target ACoS as to like 15% maybe, and seeing what happens. So hope this makes sense. This is how to really see if you should lower your ACoS ultimately, or like at the beginning, to see what the impact truly is on your business.
And that's how you can find out, you know, what the ACoS should be. So you make the most money because remember paid and organic are connected and they don't operate in isolation on Amazon. So hope this has been valuable. And this has opened your eyes to how to really look at your paid advertising on Amazon. So you can actually optimize for the most amount of profit instead of just blindly optimizing for let's say a lower ACoS on your campaigns. So yeah, that's it. I hope you found this very valuable. If you did, please do like this video and share with other sellers that you think would benefit. And you're also welcome to comment below this video and let me know what you think I would love to hear from you, what ever it is that you think about this. I would love to know. And also if you want more videos like this, I will release more videos every month.
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