Before You Start
- This is an advanced article on Amazon advertising theory. If you are a beginner, please read our Beginner’s Guide to Amazon PPC and make sure that you have a pretty good understanding of all of the basic concepts of advertising on Amazon before you continue.
- If you are curious about the optimal bids for some of your products, then be sure you have the target ACoS and price for all of those products handy!
Overview
- How to Calculate the Optimal Bids for Amazon Ad Campaigns
- Considerations
- Summary and Next Steps
- Related Articles
How to Calculate the Optimal Bids for Amazon Ad Campaigns
Amazon has become one of the largest and most popular e-commerce platforms in the world. Many businesses leverage the Amazon Advertising platform to showcase their products and services to a wider audience. However, with the increasing number of businesses advertising on Amazon, competition is getting stiffer, and advertisers need to optimize their ad campaigns to get the most out of their ad spend.
One of the key factors that advertisers need to consider is bid optimization. By optimizing bids, advertisers can improve their ad visibility, increase sales, and maximize their ROI. In this article, we will discuss how to calculate the optimal bids for Amazon PPC campaigns.
Understanding the Formula for Calculating Optimal Bids
To calculate the optimal bids for your Amazon PPC campaigns, you need to understand the formula for calculating the optimal bid for each keyword.
The formula is:
Similarly, we can represent this formula (see below) in a different way to calculate our absolute maximum bid that we can bid for in order to break even on each PPC sale:
This formula needs to be applied for each keyword for each product.
Breakdown of the Formula
Below is an explanation of all of the variables in the formulas listed above:
- ACoS stands for Advertising Cost of Sales, which is the ratio of ad spend to sales revenue. ACoS is expressed as a percentage, and it helps advertisers understand how much they are spending on advertising compared to the revenue generated from their ads.
- Product price refers to the price at which you are selling your product on Amazon. It is essential to have a clear understanding of your product price because it determines your profit margin and your advertising budget. This is expressed in the currency of the marketplace that you are calculating bids for.
- Conversion rate is the percentage of visitors to your product detail page who end up buying your product. It is an essential metric that helps you understand how well your product is performing on Amazon. Conversion rate is expressed as a percentage.
- The 1.25 at the end of the formula is a unitless constant that multiplies on our final calculated bid. The reason that we do this is because in 99% of cases, our actual CPC will always be lower than our bid by this factor. This, of course, can be heavily dependent on your particular account or marketplace, but through our testing, we’ve found this constant to work pretty well.
If you haven’t already, be sure to check out our In-Depth Beginner’s Guide to Amazon PPC to learn more about key metrics and their definitions.
For all examples below, we will be assuming that your main marketplace is on Amazon USA, which means that we will be using dollars ($) as our currency.
Maximum Spend Per Sale
The first part of the formula tells us the absolute maximum that you should be spending, in dollars, in order to get a single sale for your product.
The reason that it tells us our absolute maximum spend for a single sale is because we are taking the Product Price and multiplying it by an arbitrary percentage value, a.k.a Target ACoS. The units for the output of this formula remain as dollars.
Example data for a product that has a product price of $50:
| Target ACoS (%) | Product Price ($) | Maximum Spend ($) |
|---|---|---|
| 5% | $50 | $2.5 |
| 10% | $50 | $5 |
| 15% | $50 | $7.5 |
| 20% | $50 | $10 |
Maximum CPC Per Sale
Multiplying the maximum spend by the product’s conversion rate then gives us the maximum CPC (cost per click) that is allowable for obtaining one sale. In a perfect world, if all clicks from all keywords for this product were at this CPC, then that would mean that you would never go past your target ACoS.
Consider the following when we substitute conversion rate in this equation:
Since the units of all variables in the numerator remain as dollars after multiplying them by each other [Target ACoS (%), Product Price ($), Units Sold (unitless)], the units of this equation becomes $ per click, a.k.a cost per click.
Example data for a product that has a product price of $50 and a target ACoS of 20%:
| Target ACoS (%) | Product Price ($) | Conversion Rate | Maximum CPC ($/click) |
|---|---|---|---|
| 20% | $50 | 5% | $0.50 |
| 20% | $50 | 10% | $1.00 |
| 20% | $50 | 15% | $1.50 |
| 20% | $50 | 20% | $2.00 |
| 20% | $50 | 25% | $2.50 |
| 20% | $50 | 30% | $3.00 |
| 20% | $50 | 35% | $3.50 |
| 20% | $50 | 40% | $4.00 |
From this sample data, notice how the allowable maximum CPC increases as conversion rate goes up and as target ACoS and product price remain constant. This is because if our product is converting well, then we need less people to go on the listing in order to win a sale!
Now we’re getting closer!
Optimal (or Maximum) Bid Per Keyword
Multiplying the output of the equation above by our constant of 1.25, you will get the optimal (or maximum) allowable bid that we can have for a keyword for a certain product:
Considerations
In a perfect world, we would just run this calculation once and apply it to all keywords for all products in our Amazon account. As much as we would all love this (believe me… I would adore this!), the world obviously isn’t perfect and we need to take a few things into consideration when running this calculation/analysis on your own products.
Looking at our formula above, we have the following variables to take into account:
- Target ACoS
- Product Price
- Conversion Rate
For two of the three variables, we have direct control over. There is one variable where we don’t have direct control over: conversion rate.
Target ACoS can be defined and changed by you at any time.
Product price can be changed by you at any time.
Conversion rate is the one that we need to worry about…
Conversion Rate, Conversion Rate, Conversion Rate
If you noticed from the formulas above, all of variables have only one “spot” in the formula, so you may be asking yourself: how long of a date range should I use for getting the conversion rate of the product that I am running this calculation on?
This is a great question, but there is no one-size-fits-all answer for this.
Conversion rates are 100% bound to change on a day-to-day basis. That said, this still does not discount the validity of all of the maths that we did earlier on in this post.
If conversion rates change daily, then you need to take the volatility of these changes in conversion rate into account when deciding how often to change your bids based on the formula that we derived above.
For example if your conversion rates have tiny changes on a day-to-day basis, like ±1-2% per day, then you will probably be fine with changing your bids less frequently.
On the other hand, if you see more drastic changes on a day-to-day basis, like ±10-20% per day, then you will need to change your bids more frequently to account for these large jumps.
The best advice that I can give you is to use the following “rules of thumb” when doing this calculation:
Rule #1 – Use historical average PPC conversion rates, if you have the data
If you have historical Amazon Advertising data for the product that you’re working on, then it is usually always best to take your conversion rate figures from that product’s historical performance. This can easily be done by taking your total number of units sold and dividing it by your total number of clicks over a certain date range (more on date range in a bit!).
If you do not have historical Amazon PPC data for the product, then the next best thing that you can do is take your Unit Session Percentage from Amazon’s ASIN Business Reports for the product over a specified date range.
Rule #2 – Shorter date ranges give better adaptability, longer date ranges give more reliability
Getting your conversion rate from a shorter date range will give you better adaptability. What I mean by this is that your calculated “optimal bid” will be more accurate every time you run this calculation because your are only taking a small sample of conversion data from a recent date range.
On the other hand, getting your conversion rate from a longer date range will give you better reliability. This is because if you get your conversion data over a longer period of time, you are taking the average over that long timespan; essentially “smoothing” the jumps in your conversion rate that happen on a day-to-day basis.
So what date ranges should you use? Try these out and see what works best for your own product. Adjust as necessary as you iterate this process!
Short date range: last 7 days, ending at 48 hours from the current date.
Long date range: last 30 days, ending at 48 hours from the current date.
Summary and Next Steps
In conclusion, optimizing your Amazon PPC campaigns by calculating the optimal bids for your keywords for each product is a crucial aspect of improving your PPC profitability, increasing sales, and maximizing your return on investment. By understanding the formula for calculating optimal bids, you can start to take control of your Amazon ads and see real results.
To get started, make sure you have a good understanding of basic Amazon PPC concepts and gather all the information you need for your products, including your target ACoS, product price, and conversion rate.
From there, you can use the formula provided in this article to calculate the maximum amount that you can bid on each keyword.
Remember to keep an eye on your conversion rate and adjust your bids accordingly.
With some practice and patience, you’ll be able to optimize your campaigns and get the most out of your ad spend. Good luck!