074: Tactic Tuesdays: The Most Dangerous Metric on Amazon... ACOS

074: Tactic Tuesdays: The Most Dangerous Metric on Amazon... ACOS Speaker 2: Welcome, everybody, to the Brand Fortress HQ podcast. This is another Tactics Tuesday. And today, we're going to be talking about something that I think all three of us feel pretty passionately about, which is talking about why ACOS is maybe the most dangerous metric on Amazon. So ACOS is one of those numbers, or if you want to look at the reverse of that, a ROAS, that's pretty standard across a lot of different marketing platforms. And, you know, there's some specific reasons why it's really not the best measure for how effective ads are on Amazon. So just to set the table a little bit, you know, at least from my perspective on why, you know, the first thing to start with is why ACOS is so powerful or excuse me, so dangerous. And the reason I'm bringing this up is because Amazon is a unique marketplace as far as like your ads have a massive impact on your organic rank and your total sales. So if you're just measuring ACOS, then you're really not taking into account how much of an impact that it has on You know, your Amazon sales overall, and that's really different from if you look at, you know, meta ads for Facebook and Instagram that you're pushing your website, you know, there's ROAS makes a lot of sense. The same thing with, you know, Google, if you're doing those to your website, like there's not that additive effect. I work on organic rank, whereas on Amazon, that organic rank, along with your ads, either positively or negatively, think about it like rocket fuel can push you really fast in one direction or the other. So I think that's the first thing to just kind of set the table as far as what makes ACOS I'm going to talk about what makes ACOS dangerous and also what makes it a lot different than how other platforms work like Meta or Google. So with that, I'll turn it over to you guys and let you share a little bit about why you guys think that ACOS is a pretty dangerous metric. Speaker 3: Well, I think so on the front end of this, obviously, the majority of our listeners probably know exactly what you're referring to, but just to set the stage a little bit, so ACOS, Advertising Cost of Sale, and it only refers to how much money did you spend We're going to talk a little bit about revenue related to how much income you brought in from ads. It does not account for, and this is why Jon's saying what he's saying, it does not account for the amount of revenue that was brought in from non-ad based sales or organic sales that came in. And so then you're not measuring, as Jon said, you're not measuring the total effect of those sales. You know, I want a 30% ACOS. That's great. But if you are not tracking how is your revenue changing on the organic side, then that's a blind spot that you have. And so you end up targeting kind of the wrong thing because ultimately you're looking for total revenue. And of course, obviously at the end of that process, total profit. And so, TACOS would be the better metric, which is your total advertising cost of sale. So, when you're looking at those numbers, you would be comparing how much did I spend for advertising versus what was the total amount of revenue that I brought in per week, per month, or if you break it down on a skew level. And so, that's a much better metric because as your organic rank improves, and of course, hopefully, if you're doing your PPC right, Then you are going to gain some organic ranking benefits from that as you start selling on specific terms and you start refining your PPC so that you're getting better click through rates and conversion rates on those particular keywords that you're looking for. Then, you know, the number of organic sales that you're getting should increase, you know, in relationship to the amount of money you're spending on advertising. So you really need to pay attention to that number. And if you're not, it is a major blind spot. Speaker 2: Yeah, just one thing I want to add there, and I appreciate you kind of clarifying that, Mike, is in defining terms. So if you advertise on other platforms, you're probably used to return on ad spend or ROAS and just, you know, Anybody who's listening can Google it and it'll show you the mathematical formulation, but basically 100% ACOS equals a one ROAS. Those things are basically, they're different mathematical formulas, but they basically get to the same place. So that's why ACOS and ROAS can be used somewhat interchangeably in the sense that they measure the same thing, but they're just different ways of measuring it. Speaker 3: They're essentially reciprocals of each other. So like a 20% ACOS is the same as one-fifth and that would equate to a five ROAS. Speaker 2: Exactly. Speaker 1: Yeah, so how I look at sponsored product ads, which for most brands probably accounts for about 80% of their ad spend, I look at sponsored product ads as a way to prop up your organic rank. It's not a sales channel. Sponsored brand and sponsored display have their place in more upper funnel, but most of your sales from an advertising standpoint are going to come from sponsored products. And really, the way to look at those types of ads are increasing your organic rank for keywords that matter. And if you think about it in that way, it's easy to see why ACOS is such a short-sighted metric. Because if I know that I've chosen the right keywords that people are searching for to find my products, In the short term, if ad sales are propping up my organic rank and that's increasing, I don't care what my ACOS is because I know that I'm going to get to the top of page one and that's where I'm going to get those free sales, which is then what's going to improve my taco. From that standpoint, ACOS isn't even really a metric that I pay attention to or that I tell brands to pay attention to when you're talking about sponsored product because it has a very specific function, at least in my mind. And that function is to increase your organic rank. So yeah, I mean, when you're looking at tacos, how you make your tacos better is you get more organic sales. And that's what sponsored product ads are for, in my opinion. Speaker 2: Well, and I'll add to that in the sense of, you know, one of the other things after being in the agency space now for five years that I still see a lot of is where agencies will promise, hey, you know, yep, we can cut your ACOS. You know, you're at 40% right now. We can cut you down to, you know, 15% or whatever it happens to be. And what they don't tell you in that is, is that the way they're doing that is by cutting a lot of your I'm cutting essentially a lot of your sales. So you lose a massive amount of sales velocity in order to pull down your ACOS because then they're only going after the absolute best keywords, which means that you may be kind of like what you were talking about, Matt. You may be losing out a lot of keyword rank and other things that are driving sales for your brand. Where you are profitable at, say you're doing $100,000 a month in sales and you've got a 40% ACOS, but really your tacos or your total advertised cost of sales, once you factor in both Ad sales and organic sales is maybe closer to 20% and you're still profitable. Well, now if you cut your sales in half because you've pulled back really hard on your ads in order to hit that 15% ACOS number, you may actually, at the end of the day, have less money in your pocket at a 15% ACOS versus a 40% ACOS. Speaker 3: Well, and I think that that's probably the primary key there, right? Like at the end of the day, the reason that we're selling is so that we put money in our pocket. So if what you're tracking is not how much money am I putting in my pocket at the end of the day, then you're tracking the wrong numbers. And as such, ACOS is an irrelevant financial metric. It doesn't serve you in any good way. You couldn't use it in terms of what are my financial numbers. Like if you're trying to figure out your CM1 or 2 or 3, well, when you hit that CM3 level, contribution margin, you're looking at your ad costs. Well, ACOS doesn't figure into that. You're just going to plug in what is your ad cost and it's related to your total revenue. You're taking total revenue minus each of these degrees of expenses, advertising being at that last, you know, downstream layer. And so that's why ACOS is so irrelevant. TACOS becomes the relevant factor because then it's comparing the actual spend against the total actual revenue that you're bringing in, including those organic sales. I think it's also relevant to point out that, you know, from an agency perspective, Or I guess maybe I should say from a seller's perspective, when you're using an agency, you need to recognize that, you know, of course a good agency hopefully is not doing this, but you don't know when you hire an agency, are they a good agency or not? Like you may have seen their reviews, maybe someone to give them a recommendation, but you really don't know until you get in the weeds with that company, whether they're going to do what they promised they're going to do. And so let's just take the scenario where you hire them on and it turns out they're actually not a very good agency, but they are a good agency presenting the right numbers that make them look good. One really easy way to do that, and this is one of the things that we run into as a brand, is if you have a strong brand in your category, and especially if you have a, we'll say a significant USP versus your competitors. Then, one of the things that you can easily run into with an agency is that they can quickly prop up their numbers by simply advertising on branded search terms and using branded defense, you know, sponsored display, sponsored brand ads, that sort of thing. You're going to get really good ACOS numbers if primarily what you're advertising to or who you're advertising to are people who already know your brand and are looking for your brand and would have bought your brand regardless. You know, you may get an ACOS of three or four or five on many of those searches and as a result it brings your overall ACOS way down. And so it's easy to hide behind those sorts of campaigns and if you don't know what you're looking for, you won't even know that they're doing it. A lot of times, this is another thing to pay attention to with regards to the advertising campaigns that are being set up for you, is that branded campaigns, like those branded terms, should always be, at least in my opinion anyways, you can correct me if you think otherwise, Jon, but I would say that branded terms should always be in separate campaigns. From your non-branded terms so that one you have clear data so that you can see how are you performing on branded terms? And how are you performing on non-branded terms, but also so that you're not clouding those numbers? Because if I'm an agency and I create a campaign that so ours is pro-tell products So if I've got pool net in there, but then I also have pro-tell products pool net in there and And the ProTip Products one is a 3%, you know, ACOS, and PoolNet is 40%. Well, all of a sudden, those numbers look way better than they really do if I don't dig into them. And so it's easy to hide that sort of stuff as an agency, and quite frankly, even an agency that isn't trying to hide it. If they're not being careful about how they set up your campaigns, they could be hiding it even by accident. But it doesn't matter if you don't know to look for it, then your numbers still look way better than they probably really are. Speaker 1: That's why segmenting is so important. And you mentioned that, Mike. And you also mentioned that agencies or even yourself, even running PPC yourself, you can very easily accidentally have that happen where most of your spend are going to branded type of keywords. Because what happens in a campaign, if you have generic keywords mixed with branded keywords, Your branded keywords are going to convert at a much higher clip. So then Amazon's going to give that keyword or those keywords a whole lot more of the budget because it knows that it's converting the best. So that's Amazon making the decision, Hey, like this one's converting really well. Let's give it more of the budget. So if you're not segmenting your campaigns in that way, you're going to have a bunch of campaigns that have a bunch of branded keywords that are rising to the top and getting the majority of the spend. It's not even something that always an agency is doing intentionally to try to prop up their numbers. Sometimes it's that the segmenting of those aren't right. And another reason why, you know, there's software out there and I've worked for an agency that also built an AI-based tool and they preach that as best practice also because you have different goals for different campaigns and if you have a branded campaign, You know, those are typically advertising to people that are searching for your brand. Well, that's not going to grow your business. Those aren't incremental sales. Those aren't new to brand sales. The ones that you're actually looking for, the ones that you want to become raving fans of your brand, those are people that are already looking for it. And there's an argument to be made that they were going to purchase your product whether or not they saw an ad, because hopefully you're just one or two spots down organically. So, you know, I think it's important to know that it's not just You know, an agency or someone trying to prop up their numbers, like if there's a reason why segmenting those is best practice, it's because Amazon will always give more of the budget to the higher performers. Speaker 2: Yeah. And there's a couple of things I want to build off of what you guys said, because I think it's so important. So the first thing is, you know, from a philosophy standpoint, I would say that It does make sense in order to advertise at some level on your brand. That said, you know, I mean, Coca-Cola still advertises on their brand. So obviously, you know, and if you look at every major brand, they still advertise on their brand, even if they're, you know, making hundreds of billions of dollars. So there is advantages to doing that. Now, with that said, I think to your point, Matt, You want to make sure you're doing that with a different strategy than you would with audiences that are just looking for a keyword solution. Because with your brand, they're probably likely to buy, so you don't need a super aggressive bid. You're just trying to make sure that you're at the top of search and easy for them to click on. And having that segmented out really allows you to have as much control as possible over that bid and how much you're spending on people that have already bought from you before versus new to brand customers. The other thing is that there's not a lot of things that Amazon rolls out that I really like. That said, I will say within the ads platform, they now make it much, much easier to see what your new-to-brand percentage is. And if you're seeing your new-to-brand percentage below 50%, there's probably something funny going on there unless you're in one of these strange categories where a lot of your sales are coming from subscriptions or some sort of consumable. So that's probably an easy way to look. And then I would also say that If you ever, you know, trying to figure out like, okay, well, how much should I invest in new to brand? Search query performance report is a great place to look for that information because you can actually run tasks and you can say, okay, well, if we cut our, you know, again, assuming you have these, you know, segmented out correctly. You can say, okay, what happens if we cut our branded campaign spend by 50% to our bids? Do we see anybody gain traction over the course of a week or a few weeks on when we start looking at the search query performance report? If we go from having 90% of those sales to having 70% of those sales, well, then maybe it makes sense to be spending on those brand terms. But if you don't see that move at all, if you're still at 90%, well, then you know that You know, you can streamline your branded campaigns, but you can only do that if you have the right campaign structure and you're not trying to hide it with ACOS. Speaker 3: Yeah, that's actually something that we're investigating right now ourselves is just how much should we be investing in branded search. Now, to be clear, there's a difference between brand defense campaigns that you're running on your actual listings. Versus branded keyword searches that you might be advertising separately, you should always be doing brand defense on your listings to keep competitors off of your listings. And not only that, it gives you that opportunity to cross sell and upsell and whatever else if you've got multiple products in your line. So definitely be doing that on your actual listings. But the question that really we're asking here in relationship to this idea of what metrics should we be using and that sort of thing is, You know, how much should I be spending on branded search? So when somebody actually goes to Amazon and searches for my brand Should I be advertising on those at all? If I should be, how much should I be spending? What sort of CPCs should I be looking at? That sort of thing. And if you're not testing that, you need to. And again, back to what we were just saying a minute ago, if you haven't segmented things out properly, it's going to be really hard to do those tests and actually verify whether you should or shouldn't be advertising on your brand and how much you should be spending and that sort of thing. Making decisions becomes really problematic if your data is muddled. And so you really want to be careful about that. Speaker 1: I'm throwing this out there, Mike, as this is a conversation that I recently had with a service provider that helps us at ProTuff. When we did that test, the branded test, the data was further muddied by offensive targeting showing up in the search results. I did not know that, but when you are targeting competitor ASINs, You also show up on search results that that ASIN shows up in, not just on their detail page, but also in the search results. And so when you're turning off branded... Actually, I said that wrong. I need to go back to the drawing board with that. So anyways, Negate, we can sketch that out of our podcast because that didn't go with what we were saying. Anyways, carry on, Jon. Speaker 2: Well, I think, and again, it's a live podcast, so it just shows that it's live. Some of these things like understanding ACOS and finding better measures and metrics to use, I think, is the overarching goal. And Mike, you talked about it a little bit, and I want to make sure that since we're talking about ACOS and what not to measure, that we also talk about what to measure. And I think when you start talking about profit margin and contribution margin, those really are... I mean, tacos is a good number, but in an ideal world, you're measuring what your net profit contribution is by SKU and realizing that different SKUs have different jobs. You've got hero SKUs, you've got tripwire SKUs, you've got sidekick SKUs, and you're You could have a tripwire SKU that's just designed to get people into the brand to where your goal is to break even. And that's great because it gets people to buy a product from your brand, to experience it, and to start that customer journey because somebody who's bought your product is you know, what is it five or six times more likely to buy from you again? Like it's just significantly more. And if you're looking at those being profitable, you know, you're really going to struggle. Whereas, you know, maybe some of your complimentary or, you know, sidekick products You might want a massive contribution margin on those because you realize, hey, either these are one-time purchases or this is something that I don't sell a ton of, but when I do sell it, I want to make sure that there's plenty of margin there to be had. And that has to be taken into account for your ads as well. Speaker 3: Well, there's also a component there. So if we're talking about contribution margin, We have seen, and not that this should be a surprise, right? Generally speaking, if you lower your price, you will likely get better click-through and better conversion rate. Now, obviously that's not always the case. There are situations where that rule isn't going to apply. But as a general rule, most likely that's what's going to happen if you lower your price. Now, so that also would apply when, you know, if you're running promotions or things of that nature, or similarly with, you know, not necessarily a price discount, but a perceived price discount with strikethrough pricing or things like that on your listing. So the only reason I bring that up is that Tacos is a useful measurement, but again, it still doesn't get to the end point, which is what is, you know, what is my contribution margin at the end of the day? You know, like where am I coming out profitability wise, including everything that I'm doing? And so one of the things that we noticed was that when we ran promotions, our tacos dropped considerably. And so as a result, if you're not taking that into account, you have to account for not only how much am I spending on ads, but also how much am I spending on discounts. And between the two, You know, where am I ending up on my contribution margin? So at the end of the day, what you really want to know is if I account for all of the various different strategies that I'm employing on Amazon, what is the endpoint of all of that? And again, like you said, Jon, that endpoint is You shouldn't be looking at the same endpoint as being necessary for every single SKU. That endpoint should be different. It's possible that the contribution margin on one product may be, you know, like you may not expect to make any profit at all on that one. Speaker 2: You may lose money on that product and be perfectly, I mean, if you look at these companies are a perfect example of that. They advertise so aggressively that they have 100%, 200%, 300% ACOS, yet they know that if they get people on subscribe and save and remarketing and that type of stuff, that they make plenty of money. Speaker 1: It's more proof that ACOS is a very short-sighted metric. And for those types of brands like supplements, LTV is a much more important metric to them because they know that that customer is going to come back and order 12 more times. And so they can spend way more to acquire that customer on the front end because they know how much that customer is worth on the back end and through the rest of their subscriptions. So that's another very important point on why ACOS is such a short-sighted metric. Speaker 3: Well, there's another aspect that comes into play there too and that is where are you in the life cycle of your brand and your business. If you're moving toward an exit, depending on where you fall in terms of overall revenue for the business, it may be that you're in a phase where revenue becomes the more critical aspect of your financials to whoever is going to purchase your business. That varies greatly depending on where you are. If you're a seven-figure business versus an eight-figure business, there's a big difference there in terms of what a potential buyer is looking for, whether they're looking primarily for profitability or whether they're looking for that your revenue is kind of on this hockey stick curve. And so those are things to pay attention to. If you don't have any intention of ever exiting your brand, well then maybe that becomes a non-issue and all you're looking at is cash flow and profitability. But if you are, you know, depending on where you are in your business, again, ACOS becomes irrelevant. You know, you always have to be looking at what are the metrics that I should be looking at for my business because of what I'm trying to accomplish. And it isn't the same for my business versus Jon's business, for my business versus Matt's business. Just because somebody else says these are the metrics they look at and these are the numbers that they want, that doesn't mean those are the right metrics or the right numbers for you. Speaker 2: Yeah, I think, you know, and bringing this back to ACOS, I think what's so important and what you brought up there is, is that, you know, and I know they come out every year where they're like, okay, here's the different categories and here's the average ACOS across that category. And it does kind of show you a little bit of how competitive or at least how much ads costs in those categories. So from that vantage point, like there is, you know, something that you can learn from those. I would not use those as, you know, tried and true benchmarks because it's going to depend on what's your brand strategy? What does that look like for the individual product? Like you said, Mike, like where are you at in that business cycle? And what are you trying to accomplish? Because, you know, Matt, like you said, lifetime value. So LTV could be very different. And then I would just even add on to that, you know, That metric, you're actually looking at lifetime gross margin in a lot of cases rather than lifetime value as far as, you know, when are you getting on your ads? And at the end of the day, it really comes down to, you know, being able to track the right data and finding those, you know, handful of KPIs that are really going to move the needle for your business based on where you're at right now. So, I think with that, as we kind of wrap up, I always like to leave with something, an action item for listeners. Matt, if you want to maybe start first, what is one action item that you'd give to listeners as they think about better metrics than ACOS? Speaker 1: Well, I think in a little bit of a different direction, I think what I would do is I would implore people to look at their campaigns and ask themselves the question, what is the point of this campaign? And if the point of the campaign is I want to rank high for this keyword, then completely throw out the ACOS metric because that is completely irrelevant to what your goal is and pay more attention to how your organic rank is increasing the more you spend and the more sales that you get. Speaker 3: I think for me, I would probably say, first of all, the obvious, I hope, is that if you are focusing on ACOS, take a step back and go look at your historical record of sales and start looking at Tacos instead of ACOS and get a better gauge for, and not just, you know, at any specific It's a segment of time, but over the course of time, how is my tacos changing? Is it increasing? Is it decreasing? Where's my revenue going? Is it increasing or decreasing? But looking at that number and trying to evaluate whether you're moving in the right direction for your business. Hopefully Tacos is moving in the right direction for you. But also again, coming back to what phase are you in your business? Or what phase are you with respect to a particular product? You know, it's like you can It's not a bad idea, obviously, to be looking at what is your profitability overall in your business. You obviously need to be paying attention to that. But again, going back to that issue of what is each product there for, what is its purpose, how is it serving your brand? Looking at those tacos numbers and other metrics with regards to, you know, back to what Matt was talking about, not only should you have a goal in mind for a campaign so that you can evaluate the metrics of that campaign against that goal, but you should have a goal for a product and be able to measure, you know, and evaluate your metrics with regards to that goal for that specific product. So I would take the time to kind of dig into those metrics and figure out, you know, Are you moving in the right direction with respect to the most critical metrics that apply to that particular product? And maybe that's tacos. Maybe it isn't, you know, maybe it's some other metric, but at least figure out what it is. Don't just assume that ACOS is the metric you should be targeting. Speaker 2: Yeah. And then I would leave with this. I mean, I think there's a lot of metrics in between, you know, from start to finish that you can look at, but I would say at a bare minimum of, you know, looking at your, your Total sales and tacos. So kind of back to what you were talking about Mike of like those are the two things that I'm seeing like it's not a Do I want a low tacos or high sales? It's I want a tacos that works for my business and I want growing sales. So if you kind of combine those metrics together, usually if you're holding your tacos in a reasonable area and you're seeing sales grow, you're moving in the right direction. And if you're seeing your tacos hold steady and you're seeing your sales shrink, You probably have something that you need to address and then, you know, vice versa. If you're seeing your, you know, your sales increase, but your tacos, you know, spike massively, there's probably something that needs to be fixed there. So it's not an or in a lot of cases, sometimes you have to combine, you know, I like tacos and what your total sales look like to combine those together in order to get a real good picture of, Hey, are we moving in the right direction or not? Speaker 3: You know, and one, one more thing I want to add to that just briefly is, Every business is going to go through those ebbs and flows where the numbers are looking terrific and everything is moving in the right direction. And then those other times when probably all of your metrics are not necessarily moving in the right direction. And I just want to encourage anybody who's listening right now whose metrics seem to be moving in the wrong direction. You know, don't freak out, first of all. That isn't going to help. Recognize that there's a better than average chance that the reason for your metrics having changed in that way and moving in the wrong direction may not necessarily have anything to do with something that you did. It may very well have something to do with a change that Amazon made, you know, a new competitor in your category or something that changed about your category. But there's something, you know, in there and you need to either find it or if you can't find it, then find a way to work around it to move those metrics in the right direction. But just recognize just because the metrics aren't looking good right now, that doesn't mean you don't know what you're doing. It doesn't mean you're not a successful business and it doesn't mean that you're not going to turn it around. Chances are as long as you just stay the course and you figure out a solution and you will find one as long as you stay at it long enough, you'll probably be fine. If you freak out and think I must not know what I'm doing because my metrics are moving in the wrong direction and all of my peers seem to be doing great and for some reason my business isn't, You know, then that's where you're going to have a problem. And the reality is, and anybody who's been listening to the podcast for, you know, a few months knows, ProTuff right now is in kind of a rough space. And part of that is the tariffs. Part of that is some other, you know, things that happen with agencies and maybe some decisions that we made that weren't the best ones or decisions that we didn't make and we should have. But the reality is, I know that I'm good at what I do. I know that I know what I'm doing. And still, I have a problem in my business right now. I'm going to find a solution to it. And things are going to move in the right direction. I'm just in a slump at the moment. So if you're in that slump, don't give up on it. You know what you're doing. You're doing the right things. Just keep pushing forward. Speaker 2: Yeah, I think that's fantastic advice and a great way to wrap up this episode for Tactics Tuesday. Thank you, everybody, for listening, and we'll see you in the next Tactics Tuesday. Thanks for tuning into the Brand Fortress HQ podcast. If you haven't already, hit the subscribe button and be the first to get new episodes every Tuesday and Thursday, where we'll continue to bring you the most actionable insights and strategies for fortifying your brand on Amazon and beyond. If you haven't already, please Trading and review, it helps the show grow, which means we can keep bringing you the best of the best each and every week. 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