How is Target ACoS calculated?
Target ACoS = Margin before Ad Spend (Break-Even ACoS) – Target Margin after PPC
Target ACoS = Profit Margin (Before Advertising) – Target Profit Margin (After Advertising)
More details on what the ACoS metric is and how it can be interpreted correctly are explained in more detail in this article HERE. In terms of how to determine the optimal target ACoS, you may refer to the chart below:
So, what does this chart mean?
After subtracting all costs, the profit margin for the product in this example (without costs for PPC) is at 20%. Therefore, it is possible to spend 20% of the revenue on ad spend without making losses.
Determining a Target ACoS thus depends on how much margin the product is targeting when PPC costs are included. In this example, it was decided the net margin after PPC should be at least 5%. Hence, the ACoS must not be higher than:
20% - 5% = 15%. This is the Target ACoS.