If you’ve been interested in starting an Amazon FBA business, you’ve likely been looking into launching a private label brand. Private label brands can be lucrative when you play your cards right. Effectively, you’re finding a product for wholesale that you can private label and sell as your own.
Private labeling simply means you’re slapping your logo and branding on the product. Sometimes, it also means that you’re improving the product as well. But not always. However, either way you look at it, when you decide to private label, you have to understand the baseline costs of customer acquisition.
When it comes to Amazon, that’s calculated with something called the Advertising Cost of Sale. Otherwise known as the ACoS. So what is the ACoS and how is it calculated? One thing to understand is that there are two different ACoS numbers you need to know in order to gauge your profitability.
What Does ACoS Stand For?
The ACoS effectively refers to how much it costs you to acquire a customer on Amazon. In other words, this references your ad spend on the platform. Amazon FBA businesses have access to Amazon’s pay-per-click (PPC) ad platform. This allows businesses to bid for customers by sponsoring their product in search results.
You’ve likely seen them before. There’s often 3 initial sponsored items on a search whenever you look for anything on Amazon’s platform to purchase. But that’s not the only type of ad they have. There are numerous types of ads. From display ads to category ads to ads on competitor’s pages and more.
The point is that you have to understand what your ACoS is and know just how much you can spend to churn a profit. But this also brings another term to light that’s even more important than the ACoS itself. We’re talking about the Break-Even ACoS. The Break-Even ACoS takes all your costs into account, and not just your ad spend on Amazon.
Organic Vs. Paid-Ad Sales
When it comes to your Amazon sales, the platform will only calculate your ACoS based on sales from those ads. But, the issue is that you’ll get sales through organic channels because of a rise in your sales from paid ads. It makes understanding the base ACoS a little bit more complex, but not impossible.
Without throwing too much at you, you can easily use your total daily sales results to calculate your total ACoS on all your sales. Not just your sales that came from paid ads. Amazon will only show you that, unfortunately. However, your job is to find out your total ACoS based on all your sales.
The formula for doing this is simple. All you have to do is take the amount you spent on ads with the total daily sales number to get your ACoS for the day. That means if you spent $200 on ads and made $1,000 from both paid ads and organic sales, you had an ACoS of 25%.
ACoS = 100 x ( Total Ad Spend / Total Sales)
The formula is simple. But achieving a good ACoS is another story entirely.
What’s A Good ACoS Number?
Obviously, when it comes to your ACoS, the lower the number is, the better. Why? Because a lower number means it costs you less to acquire a customer. Meaning, if you spend $100 to make $1,000 in sales (10% ACoS) it’s better than spending $300 to make the same $1,000 in sales (30% ACoS).
The same is true in any other business. The less money it takes to acquire a customer, the better. Plain and simple. So when it comes down to the numbers, most people want to know what a good ACoS is. However, this number can fluctuate based on numerous factors such as your product niche, the competition and the season.
If you’re in a highly competitive niche, your ACoS will be far different than other less-competitive niches. And, if it’s Q4, which means a huge increase in demand, it will be different again. Still, there are numbers that are good and numbers that are bad.
How To Calculate Your Break-Even ACoS
More than knowing your ACoS itself, it’s important to understand your Break-Even ACoS. When it comes to Key Performance Indicators (KPIs), this is your most important number. You should track this daily using a spreadsheet.
Effectively speaking, your break-even ACoS is the total percentage cost involved with creating and marketing your product based on the sales price. And that means knowing all the costs involved with creating your product in the first place.
Meaning, if your landed cost of goods is $10 into an Amazon warehouse and it costs you another $5 in ad spend to sell that product, your total costs are $15. Your Break-Even ACoS can only be determined by knowing the final sales price of your product. If it cost you $25 to sell it, your Break-Even ACoS would be 60% (100 * ($15/$25)) and your regular ACoS would be 20% (100 * ($5/$25)).
Make sense?
Determining Your Break-Even ACoS Works Like This…
That means that if your product is selling for $20 and you’re spending $9 on fees, you have a profit of $11. Meaning, your costs are 45% of the sales price. However, if it costs you $4 to sell that product then you just spent another 20% securing the sale. That drives your profit down to 35%, leaving you with a per-unit profit of $7.
That means your break-even ACoS is 55% since 55% is your profit before Amazon takes its share of the pie. When you understand your break-even ACoS, you can conduct your pricing strategies effectively.
Undercutting The Competition
When you first launch your product, you’ll want to be aggressive. That means undercutting the competition. But not by too much. You should aim for no more than a 20% deviation in price. Meaning that if your closest competitors are at $25 per unit, you should aim to be at $20.00.
Avoid going further than 20% on a deviation. If you want to give more of a discount, you should add a coupon of up to 15% for all orders. Your goal here is to sell as many as possible during those crucial first three months while still ensuring that you turn a small profit.
Why the first three months? That’s because you’re in the so-called Honeymoon Period on Amazon. Basically, Amazon gives a natural boost to newcomer products on the platform for the first 90 days. In this period, the algorithm is more favorable to you to help you compete on the platform.
Aggressive Pricing & Ad Spend Strategy
This also means being aggressive with your marketing in the first three months as well. You’ll be reinvesting a majority of your profits back into the business, so be prepared to hustle at the outset so that you can truly grow and scale your business.
People are naturally drawn to lower prices. But you don’t want to go too low here. Unless you can really afford it, that is. Either way, you still want to churn a profit. You just need to b resolute that you won’t churn as big of a profit as you will later on.
Increasing Sales Velocity
Your ultimate goal here is to spend as little as possible to secure the sale as you can. However, you still want to ensure that your Break-Even ACoS helps you churn that all-important profit. Otherwise, what’s the point of being in business, right?
That’s why the Break-Even ACoS is such an important number to not only know, but also to track on a daily basis. It is your ultimate KPI. Track it every single day. There are other metrics to track as well. This is merely one of them.
But if you’re just starting out and all of this seems overwhelming to you, don’t let is be. Selling on Amazon is not complicated or convoluted. In fact, it’s one of the best opportunities out there. Why? Because you’re tapping into a pre-existing platform and logistics system that’s already created and configured for you.
Selling On Amazon
The beauty of selling on Amazon is that you have access to over 100 million prime members who are readily scooping up simple, everyday products left and right. And, they’re spending over $1,400 per year doing just that. This gives you access to massive buying power.
In fact, one of the biggest beauties of selling on Amazon is that everyone on the platform has massive buyer intention. Unlike Google or Facebook and other platforms where there is social or informational intention, people on Amazon are there to buy.
Meaning that people visit Amazon to buy. They visit other platforms to buy as well, but primarily for information. In the SEO world we call this search intention. The beauty about Amazon is that the search intention there is buyer intention. Elsewhere, it’s different.
How Much Does It Cost To Sell On Amazon?
If you’re wondering about ACoS, you’re probably wondering how much it costs to sell on Amazon. Well, the numbers can most certainly vary. If you’re looking for more detail on that, I’d suggest reading my post here that goes into detail on it.
However, keep in mind that there are numerous tasks you need to do before you get your private label Amazon FBA business off the ground. So don’t expect this to happen overnight. It takes time and it takes persistence. Yet, there is literally no better opportunity than this right now.
Why? Well, for starters, you’re teaming up with one of the biggest companies in the world. And, one of the richest humans on the planet. That likely won’t change anytime soon. And, even if it does, you’ll still be selling on the world’s largest store with the most sophisticated logistics in place.