Why advertising cost of sales (ACoS) is BS!
I hit by introduced to you Mr Mike. Hey Hey hey welcome to amazing. FBI The place the UK based Amazon entrepreneurs. I'm your host Michel Visi welcome to the show. Starting starting a business on your own can be lonely. And worrying. Selling online multiplies issue. Ten fault getting expert help is a great way to Jesus anxiety not wasted time and confusion the amazing FBI. Mentoring program is in its fourth year of helping sellers to get started on Amazon by now we have former clients aunts. You have a starting from scratch done six figures and even in one case seven figures a year. Obviously these are not typical results. These exceptional don't people nevertheless we can help you get launch faster safer and with a much higher chance overall of success with clients from Melbourne Australia earlier to Manchester England we bring a genuinely international perspective to find out more. Go to amazing F. B. A. DOT COM foot slash mentoring. Thanks for listening. Hi this is Michael from amazing. FBI TUB in said the quality of your questions determine the quality of your life now but if a general statement but they about. I'm going to talk about Amazon advertising and some of the mistakes that people make with the questions that asking that welcome and this is a bit of a sort of fireside chats style in don't have a fireside but we have very cozy. I'm chas very old old very comfortable. At great prices sets I did a lot of reading here. Result business books here is. I think I'm GONNA guess around. My wife would shout three things as well so I thought this was a nice place to how a chat to you about a couple of things. The quality of your questions Equality tiny very famous frigate quotes. I believe got to be true. I think he also said the questions terms where you focus on on what you focus on determines the quality of life. So that's missing piece in business. What you focus on is very hey? Brian pulled Energy goes way you'll focus goes if you're the CEO of the business. That's what the focus Businesses Well Davies. Just you that it's one hundred percents treat. Tends to be treated with. Employees will stop of any kind as well so what is to do with everything and nothing but the the main thing that's prompted today is a lot of questions on facebook groups from fairly new bias. Finding these sellers she she's Amos insiders say would buy because they bought into the idea of having an amazing business funding for the enslaved and some very good advice comes out but the thing. Is this if you focus on the wrong questions you never gonNa get good advice. Never GonNa be helpful today. I WanNa talk about Amazon ads. There is a couple of metrics people light to talk about around this. The I think one in particular is a big big red herring if you focus on this gang to help you. In my humble opinion this is after many many hours debating this with a six seven and even occasional eight figure Amazon sellers are in masterminds Member all Iran. Or what have you Plus reflecting experiences. And so here's the thing that's wrong. A advertising costs of sales the first hint that is not a great thing to follow as Mike Questions. Have you ever seen that outside the Amazon ecosystem now. One of the disadvantages you'll have become to Amazon is your first of business model let alone online boxing one is. You won't have any sort of set. Some references by can promise you that is not a metric. Any normal business would recognize good mice which isn't necessarily a sign this wrong but it sounds very technical and it kind of is on it sound financial news as well but what is really read Harry his wife because if you have this also is the stuff that people face gave some of my closest to percent does really bad. What can I do to change my process? Fifty fifty percent of people to say well. That's not bad average cost should be ten percent says who based on what I say. This is full of full kind of specificity. Status thought is. If you're really GONNA get into detail you're going to have to be able to find a forum where you should reveal a lot of detail about your product on the entire A system within which the ACOSS number fits before somebody can give meaningful feedback on a detailed number like that and of course you don't want to be on a facebook group. I would advise against unless it's within a very trusted for people who've signed nondisclosure agreements and stuff all with the coach while you're working one to one and that sort of thing I I do a lot spend a lot of time analyzing people's acoss but not really the cost. The appetizing spent absolutely critical of course cities and the spend per product. Line is is also critical number. But the ACOSS if you think about it if you're running a manual campaign and you are bidding on a particular key would say I dunno digital watch for the sake of argument. Because that's what I can see inviting me doesn't sell digital to watch his plan. Multiple reasons is donated by brand. I got Casio my risk. It being dominated in the space the is or whatever ever ever since that invented and also it's electronics which he shouldn't be so saying unless you really know what you did say don't do this having fights but Sam trying to solve A. I'm trying to Bait on the keyword digital watch for a particular product. When Cecilia blocked is to watch with orange face? which is I could see it? Well okay good. So let's say you bid on that you pay the cost per click systems. Let's say you get a thousand impressions of thousand people. You see the ad and you get a decent click. Through one percent to ten people click on it and you make one sale in a given period say a month right bat. Great Okay. So let's say on the twenty dollars on the six dollar click. So I've had ten clicks dollar each about ten dollars appetizing appetizing coast on none of had sales of twenty dollars from advertising Gusta. Spend as ten dollars for the for. The advertising divided by the sales have made via advertising hint twenty dollars. Ten to twenty is fifty percent k so that seems like a number. Keep an eye on right. But here's the thing. Unlike with Google as a system the Amazon search algorithm new organic one will reward your products forgetting clicks clicks through advertising. Which means that if you run a product for example digital watch which very unlikely incredibly generic Eric Black did so watch orange face might be better. But what have this watch and you manage to run kits through advertising sales right you you gave the algorithm of a hint that it should be ranking. You'll products for that. Keyword will quickly in other words when Abaya comes on Thomason in typesetting Search the search results page maybe pay one pays to pastry whatever should show you a product a little bit higher than it. It did lost time on. That is actually for me. The main use of advertising apart from a discovery mechanism keyword research and stuff which is a separate matter but intense. It's a sales mechanism and ranking mechanisms. Right it's kind of both which is good thing and also confusing. It's good good to get sales whilst you will get you brought it ranked because out Chicago's flick but the main benefit for me in most cases of advertising. Is that you Dr Organic sales now. Here's the problem. Let's say in that month period. You drove one. You'll you'll launching a new product. It's a bit of a strange strange Say That saying one one month. He had ten thousand impressions on this keyword. You had one. Thanks one hundred clicks and You made Let's say fifty sales because you haven't fifty percents domestic assignments. It's fifty percent but let's imagine that same period you sold four hundred units via the Kiewit dish to watch but free under the appropriate organic on the one hundred as driven by advertising. Well now how do we account for the organic sales the value of your advertising for Ganic Sales. It certainly isn't acoss. If you think about it clear mindedly the ACOSS. The cost of advertising for the sales Via advocates is what a costs measures. So it doesn't take account of the productivity of your advertising across across all of your sales for that product line and the solution is very simple the metric which you can pull different things some people call it the wheel acoss some people call the actual ACOSS AA calls. I will call the advertising sales ratio because industry standard thing across the bold in any kind of industry. That's about fast moving. Consumer goods are in fact even broader than that so not just an Amazon specific thing which is a good hint. Ride that is actually a normal business metric which is a good plan to us because in the end we have to compare the opportunity of selling Protozoan with other possible uses of time money and effort and focus and that means we can compare like like with a bit more of that because the appetizing to sales ratio takes the total ad spend on a product line in a given period divided by all of the sale. All all of this is not just the ones driven by particular platform so if you spend some money on facebook cats and you spend money on Amazon. You just add up together that advertisements band unless save the thirty appearance Diapers are the lost thirty days and let's add uphold the sales that you got a particular product line say over the last thirty days then appetizing to spend ratio. Joe Is very simple. It's it's old. There has been divided by the sales and that gives you sort of efficiency ratio. How well your advertising is helping to drive sales? And that's a way more valid metric personnel. Wouldn't bundle up together. FACEBOOK and Amazon spent by the way the way I just suggested that probably not helpful metric forget that but just announced by which is bought most most of US focus on most of the time for driving own recitals. FACEBOOK is probably for launch. And that's kind of a separate issue anyway so coming back to this. Why is this helpful number one? It gives you a much broader perspective but still product line specific on how useful your advertising is being. I'm not suggesting that you don't go into the weeds and and look at the Amazon ads. Data Catholic should click through rates on the absolute sales rates To some degree. If you've got a low click through rates that's not a good sign because you that'd be sending bad signals algorithm that is not going to help rank your product whole galaxy for Kiewit virus is slightly different reason for not doing it but his advertising listen to sales ratio is great festival. It simplifies everything but not in a CPI intelligent way secondly it stopped going mind trying to manage things virus silly metric Acosta costs as meaningless in isolation hyper made clear why that is and the third thing is it. It's it's a very very simple matter to look at mule profit margin per unit of gross margin and your adspend unit Oil Total AD spending your total margin for the month. It doesn't matter. It should be the same thing percentage wise and see if you making a profit breaking even making a loss you'll gross margin on put it off the cost of goods sold so the title landed cost. manufacturing freight 'em insurance Import Duties Etcetera plus the Amazon is in fulfilment fees in Tulsa plus Amazon selling fees. So the commission right so you got the title revenue the Price Salad Minus will this caused gives you. You'll grace majd off the ads then is GonNa be bigger than the title call. You got a just sending a unit for twenty dollars. Listen you'll free. Advertising title Costs Fifteen dollars. You've got a five dollar profit in that All twenty-five percent Avio advertising to sales ratio at a product without slim early margins which not that uncommon for beginner especially is above twenty five percent. You're actually losing money on each sale. If it's lower you'll make a profit and it's Kinda. I knew that simple ready because what other costs have you taken account if I forget the cost. Now you've got to tell you. Advertising costs into account thus the grow small. It doesn't take account of OVID'S I'm not talking about anything else outside outside of the gross profit and loss but still per product line. That's actually the kind of metric you need to stare at by in the end will you need is a product that will make a profit and of course the self rate is also critical another metric that people tend to look at and there's a lot of talks about that and also about in another another episode but this is pretty robust pretty simple very lobbyists. Were all the serious sellers I know use exemption on people get caught up in his AAC offs offs. Walt to why does even exists. Then why are we being security is to ignore it. Well think about it. I have an an odd words account with Google and they very often get hold of me. They try and persuade me to spend more money in. Oh to optimize will make my campaign otherwise about yes. vaiciunas Google. Google makes his money from advertising now. Amazon has a COUPLA very profitable divisions mostly. It's not a profitable company never has is being in fact. It made pay within profits for pretty much all of his existence because isn't very solid strategic reason behind not just businesses the savviest sky in the planet right now in my opinion pretty much up there and one of the reasons if the tax strategy have avoided sales tax for twenty five years finally finally being made I knew like or a company responsible for sales tax but also the other big income tax is tax on your profits as a corporation. So you don't many many taxes you can get the money back into the company without the tax inefficiency in grow your business quickly and it was all about growth. which for the stock market largely is especially rush? Amazon's Greystoke noted dividends Doesn't pay out much cash than that's what they WANNA do right but even in has to keep the lights on so they need cash and uneven Amazon has shareholders. You eventually lost couple of years being pushing to get a little bit more profit so. Aws is the really profitable of Amazon Web Services Services where they provide services very very cheater as sort of competing platform for the planet including everyone famously including the CIA and things like that and the other thing is the advertising advertising that is very profitable for them. So unsurprisingly Amazon's pushed to get their profits from the profits for Amazon ads on the Amazon Dot com retail platform. Going up from mm about two billion dollars a year ago to eighteen ten billion. Sorry the loss figure the likelihood now that might be very out of date but it doesn't matter it gives you an idea of the scale as five X. I five hundred percent increase in an money to Amazon through ads of the last year. Obviously they want us to spend money on advertising if they give the delusion of control via acoss than it gives us a feeling that we know what we're doing means that we're measuring the metrics in the wrong way. I mean you don't necessarily need to worry about a call so it depends on your margins and the effects it's got overall ranking really the simplest metrics in business often turn out to be the most important again. I'm not saying you shouldn't do. Things like negative keywords the efficient use of the data in two tone your advertising you you should but I probably going to be one of the loss metrics. I would look at an overall con of way of staring. Amazon's it sort of constantly wood for the Trees Syndrome because if you are focused on a cost that he would will maybe by advertising campaign pain. The campaigns ECON breaking down by Kiewit obviously. But he's still the wrong metrics be worrying about the one that really really really matches is. What's a gross margin how much she's putting on sizing and if you've got a profit left off that his it the rest is detail yes you can do negative to what you can do all all sorts of stuff that is beyond my ability to say in about five seconds here and some of it's quite technical and I would suggest you get an expert involved in that as well? There are many many many of them Matt. PC on Toronto's very good. Brian Johnson stuff is is very good. There's lots of good people out now but before you dive into the big picture metrics and don't look at the wrong details so hopefully. That was helpful. I'm kind of amazed that anyone still looking at a cost. I guess I live in a world where the people I know who the series Detecting that much as of now I mean they might just just keep an eye on it in the early because the very early days of selling product. What I mean is when you just launched it? Neil this how's is it gonNA come from PPC because obviously it has almost no organic ranking so that point. Yeah you got one hundred percent line and you're only selling sort of eight attended a sold via advertising. That is quite similar to your total appetizing sales ratio. Right and by the way spending hundred percent of your revenue on unappetizing isn't necessarily the wrong thing to do. This is a slightly different discussion. But that's about launch a as long as you know what you're doing and have a particular objective for it that's not necessarily thoroughly Either but I suppose mostly addressing what you should be doing what you've got a product launch you try to make a profit so again. He comes onto clear objectives so I appropriation muddy the I'm just saying there is no single. ACOSS figures writes an ecosystem even if he should be worrying about the advertising is the way forwards. It simplifies a lot as well which is a wonderful side benefit. But that's not the main reason for doing it. The main reason is it's meaningful in the end on. This is going to be the same team. I WANNA do a few different ones about metrics different different Brokaw's about that in the end. What really matters is that you're measuring something meaningful in the wider business context if you'll worrying about profit than what matters? Is You determine profit if you think about cash flow than what my Liz you determine. What your cash flow now is and will project into into the future? What is going to be Those are really really important. Basics of business and any other metrics you have have to relate to those big picture metrics to be meaningful in my opinion and the same with moxy while market share is a very meaningful thing but again as measured by revenue of marketing metrics wchs breakdown sooner or later to find out to metrics things like play three rates breaks down to some not so much market share as of search sharing. There's a few different ways of looking at it but this is getting beyond the scope of this little Little chance but what is important is to measure meaningful things that relate to a wider simple business contexts in the end a lot of it comes onto prophet return on investment annual cash flow. So we'll be talking about a few more metrics on a few more red herrings see out there. Hopefully this has been helpful car fighting thing. Listen again if you need to think hit three because this is not rocket science is the opposite actually simplifying that people make into rocket science into something essentially very simple you can do with in the the back of an envelope and this is a a sanity metric. The I often guys with people he come to me with the listings in trouble. I say well you know. We've got a few options to look at the one ratio we absolutely should measure now is appetizing to sales ratio. And then if you adjust your price all the anything about your listing will you adjust to add. Spent that we should keep an eye on that not necessarily always about having prophet if your objective is to launch your products about profit. You making loss if you'll get to sell through product because you think it's a bit of a rubbish choice and you want to turn that into cash than you might not instant profit item. I just work at break even but that should be a conscious decision to aim for will launch profitable break even and then you should make sure that the metrics are using aligned with a different objective. So get probably getting getting a bit too broad for the for the purposes of this show but that's been helpful. I'd be like a little bit different. I quite like sitting having a chat in an armchair listening and be different. Run about it than than sitting there with my seat and In front of a white bull but Tokyo which I've got to go and talk to a client soon and we got into the research whether full metrics while will be talking about another point. Thanks very much for taking the time with me today. We enjoyed it ticket. That's it thank you so much for your attention really appreciate it now over to you. I eight hundred twenty. Everything learned the critical few. Maybe there's one thing in this podcast that can make all the difference. Find that thing. Twenty percent of inputs give eighty percent of the outputs which all the critical few fees then take action. Imperfect action leads perfect in connection every single time. Finally a not least review. If you've made mistakes learn from them if you made a success duplicate it. You