To control our ACoS we need to know what our target ACoS is.
Well what should my target ACoS be?
There is no magical target ACoS all accounts should achieve. There are a million factors to consider when determining ACoS targets. Goals, product conversion rates, current stage of the product life cycle and category CPC’s just to name a few.
For the purpose of this article we will be using a target ACoS of 25%.
Lets calculate a few items before continuing.
Use your PPC data for these calculations:
Average Order Value (AOV) = Sales / Orders
Conversion Rate (CVR) = Orders / Clicks
Click Threshold = 1 / CVR
Spend Threshold = AOV * Target ACoS
CPC Threshold = Spend Threshold * CVR
The example below will be looking at the ACCOUNT LEVEL overview. You can drill down further to keywords and apply these same formulas to fine tune at the ad group or keyword level.
Example: Sales: $10,000
Orders: 500
Clicks: 4,000
Target ACoS: 25%
AOV = $10,000 / 500 = $20
Conversion Rate: 500 / 4000 = 12.5%
Click Threshold: 1 / .125 = 8
Spend Threshold: $20 * 25% = $5
CPC Threshold = $5 * 12.5% = $0.625
In the example above this is what we know we need to achieve in order to hit our target ACoS:
Average CPC should be ≤ $.625
On average keywords need to withstand 8 clicks before we see a conversion
On average we can spend up to $5 per conversion
Now let’s look at a few examples of keywords outside of our targets and analyze them to see where they need to be to get back within our targets.
Keyword 1:
Clicks: 8
CPC: $1.00
Spend: $8
Sales: $20
ACoS: 40%
In this scenario we know that our CPC is too high which means our bid is too high for this keyword to meet our targets. At 8 clicks we know our CPC needs to be $.625 or below.
Keyword 2:
Clicks: 12
CPC: $.50
Spend: $6
Sales: $20
ACoS: 30%
Here we see that our CPC is actually below our clicks threshold however our number of clicks are above our click threshold. So the CPC actually needs to go even lower in order to meet our target ACoS. In this case our CPC would need to be $.42 or lower (Spend Threshold $5 / # of clicks 12).
Keyword 3:
Clicks: 4
CPC: $3
Spend: $12
Sales: $20
ACoS: 60%
Here we see our conversion rate is actually quite high. It only took 4 clicks to convert vs our account average of 8. That being said we are still overbidding on this keyword to meet our targets. CPC is too high. Our CPC for this keyword would need to be $1.25 (Spend Threshold $5 / # of Clicks 4) to meet our goals.
How about when a keyword has 0 orders?
Well when a keyword has 0 orders we can use either our Spend Threshold or our Clicks threshold to decide if we need to cut our spend to that keyword.
If we choose to use our Spend Threshold we are allowing as many clicks to take place prior to hitting our Spend threshold.
If we choose to use our clicks Threshold then we are allowing any amount of Spend to take place up to 8 clicks.
For the most conservative approach both thresholds should be used in unison. This will cut expensive keywords requiring less than 8 clicks to exceed our spend threshold and will cut low conversion rate keywords exceeding our clicks threshold.
Now depending on the keywords being analyzed you may opt to use one over the other in certain cases.
I hope you found this article helpful and use these calculation to help you better understand and control your ACoS.