With so many formulas and approaches available for calculating optimal PPC spend on Amazon, it’s no wonder this topic has been discussed and debated for so long. Every sponsored product professional seems to have his or her preferred method. So which approach really is best?
In our last post on this topic, we talked about the 25/25 approach to PPC spend. However, the Amazon scenery has changed since last year when the article was published, and we think it may be time for a follow-up. Are the fundamental principles we presented last year still valid? What other methods can be used to determine optimal spend in 2017? These are the questions we’ll try to answer in this post, but let’s make sure a few basic pieces of information are in place first.
Before starting to experiment with different PPC spend strategies, you have to be fully aware of your current profit margin: the amount you are left with after all product costs (Cost of Goods Sold), taxes, fees and other costs related to selling your product have been deducted. If you’re not sure what the actual profit margin is on every one of your products, read no further before figuring it out. Once you’ve calculated your profit margin on every product, all other calculations can be done much more easily.
You’ve made it to the next paragraph, so we’re going to assume you know the complete cost structure of the products you’re selling on Amazon. Now let’s examine several approaches for determining optimal sponsored products spend. We’ll present the pros and cons of each and leave it to you to decide which approach suits your products best.
OPTION 1: PREDETERMINED SPEND
Vendors who have been selling on Amazon for a while may already have an idea of what daily PPC spend they prefer. Similarly, companies may have clients who specify the amount they prefer to spend daily or weekly. If this is the case, all you have to do is set a daily account spend cap, and your job is initially done. You can do this by navigating to the Advertising Settings tab.
This is the easiest method for determining spend. No difficult estimations are required. Plus, you can be confident that your ad spend won’t go over a certain dollar amount on any given day.
Until sales start arriving, this is basically a guessing game. It would likely be pure luck if you hit upon the optimal spend (neither overspending nor limiting your sales potential) on your first try.
As sales start growing, you may notice that you’re hitting the daily advertising spend cap. If you’re satisfied with the ACoS you’re getting (cost of your ad campaign relative to the sales it generates), you should feel comfortable increasing spend.
OPTION 2: SPEND AS A PERCENTAGE OF TOTAL SALES
This approach assumes there is an ideal ratio of advertising spend to total sales. For most of our accounts, we have found this optimal ratio falls between 8 and 12 percent. As we mentioned previously, if you’re familiar with your profit margin at the SKU level on Amazon, calculations like this will seem easier.
Once you find the most profitable spend, it’s very easy to maintain by looking at daily spend versus daily sales.
It will take a few weeks to get this right. Also, this approach assumes you have estimated overall sales and ad spend correctly. If you haven’t, then your percentages will be off and the formula won’t really help you.
This is a dynamic process, so don’t worry if you end up spending less than 8 percent or more than 12 percent in the first few weeks. The beauty of pay-per-click advertising is that you can always adjust! Even if you know the current trend of your sales growth, it will change (and hopefully accelerate) once you start advertising in your account, so adjustments will always be necessary.
OPTION 3: ACoS-BASED ESTIMATION
If you’d rather stay on the safe side of advertising spend, you can start with incredibly low daily campaign budgets, along with incredibly low bids, and gradually increase each week until you reach the top of your profitable ACoS range.
For example, you may want to start with daily budgets as low as $10 and bids as low as $0.10 per click and increase every few days until a decent number of clicks and sales have been recorded. Remember to take the 3-day sales lag into consideration; it can take up to 72 hours for Amazon to attribute sales to a PPC campaign.
This approach can be great for new Amazon sellers because it can help them avoid unnecessary spend.
It will take some time to reach the optimal level of spend, and all those weeks of changing spend will be affect what you see in your account.
Avoid getting trapped by ACoS. Lots of Amazon sellers over optimize for ACoS, missing out on expansion possibilities that could bring a lot more money in net profits. Think about it this way:
If you spend one dollar on PPC and get $100 in sales, you have this amazingly low ACoS of one percent and a net profit of $99.
If you spend $100 and get $1000 in sales, you have a higher ACoS than in the previous situation (10 percent) and a net profit of $900.
Which situation would you rather be in?
While the first scenario would seem most appealing if we were only looking at ACoS percentages, it’s clear that you have earned much more money in the second scenario. At the end of the sales day, your goal is to maximize profit. ACoS is just a measure that may or may not help you achieve that goal.
OPTION 4: 25/25 RULE
The approach we discussed last year is still applicable today. If you’re trying to come up with a rule of thumb and avoid unnecessary mathematical estimations, you can use this rule from our colleague Brent:
- Under normal conditions (not in ultra-competitive categories and not during major holidays) optimize for ACoS around 25 percent.
- Also aim to have 25 percent of the total sales in the account be attributed to ad campaigns.
For example, an ideal scenario might be that you earn $1000 in sales after spending $250 on PPC. This would mean you had achieved the first criterion above: 25 percent ACoS. To achieve the second criterion, you would want your overall sales in this scenario to be $4,000, meaning that 25 percent of those sales had come from your ad campaign.
Of course, slight variations in these numbers should be expected from week to week.
There is no ideal approach for determining PPC spend, especially not in a marketplace like Amazon that covers so many different categories. Always let a clear understanding of your profit margins, as well as awareness of your competitors, be your guides when finding your own personal approach to determining ad spend.
Do you have a different or more efficient way of calculating optimal ad spend? Let us know in the comments section below!