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Navigating Amazon advertising costs for maximum ROI
10 Min Read | March, 2024
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As the economy has taken a turn for the worse, businesses seeking long-term profitability must now reassess their strategies and adopt a more nuanced approach that acknowledges the evolving financial landscape. One major step to doing so is to understand and properly track business costs.
Due to the complexities of tracking all relevant costs, many companies fall into the trap of basing their attribution of Return on Ad Spend (ROAS), or their media ROI, on incomplete information.
The following approach is how companies typically evaluate impact of their investment into Amazon sponsored ads and promotions:
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In this simplified advertising attribution model, a €10,000 investment generated €100,000 in revenue, resulting in an attributed profit of €90,000. This translates to a Return on Ad Spend (ROAS) of 10 or an Advertising Cost of Sales (ACOS) of 10%.
While production cost and fixed costs, such as employees, office spaces, and production facilities are normally included in ROI calculations, businesses often fail to account for other flexible costs involved in running their businesses, especially those directly tied to activities such as sponsored ads, where the variable costs adjust with the scale of production or sales.
Let's apply this to an Amazon business example
Imagine a business produces an item which costs €10 and sells it to Amazon for €30. The production cost of €10 is a variable cost. However, when assessing media return on investment (ROI) the calculation shouldn't stop at production costs.
Let's take fees imposed by Amazon, such as shortages and chargebacks, which are often variable and linked to logistics performance. For instance, when products need to be repacked by Amazon, the vendor must pay additional fees.
Other variable costs include price claims and co-op agreements, which add to expenses with each product sold.
Though, it's not just costs that need to be considered to get the whole picture. Investments in advertising measures such as Amazon sponsored ads, Amazon DSP, and retail promotions are another cost which affects a product's profitability.
However, there's a reason why these costs often get “lost". They are typically managed separately by different teams—production costs within the finance team, Amazon costs within the key account team, and advertising costs divided between marketing and key account teams.
This division of responsibility keeps these different teams from having a comprehensive understanding of the true impact of business activities. To navigate this landscape effectively, businesses must instead consider all these elements collectively to understand the costs associated with products and investments.
Calculating Profit Margin for Informed Investment Decisions
Calculating profit margin is an essential first step before venturing into any media or retail promotion activities. Here are a few tips you should consider when making this calculation:
Shipped COGS is the cost of goods sold based on the list sales price, adjusted for returns and attributed to the day of shipment. This price is before adjusting for contractual conditions granted to Amazon. Cost of Goods needs to be adjusted for those to get the actual profit margin generated for your business. Using adjusted shipped COGS is important for a few reasons: