Every type of advertising incurs costs, which are also referred to as “adspend“. The term is made up of the English word “ad” or “advertising” and “spend”. The term is often mistakenly equated with the advertising budget. The difference is that the advertising budget is the absolute amount of money that is generally available for advertising measures and ad spend is the exact amount of money spent on a specific measure.
Adspend example
An online retailer wants to advertise its products on Amazon and has an advertising budget of EUR 10,000.00 per month. However, the advertising campaigns (e.g. via AMS or AAP) only perform moderately well and cause costs of EUR 6,000.00. Via the Amazon Advertising Platform formerly Amazon Marketing Services (AMS), EUR 3,500.00 is spent per month and via the Amazon Advertising Platform a total of EUR 2,500.00. The total ad spend is therefore EUR 6,000.00. This leaves a total of EUR 4,000.00 from the advertising budget provided.
Calculate Adspend with ACoS and ROAS
Ad spend plays a crucial role in digital marketing in particular, as the success of a campaign is measured in terms of the revenue it generates. To calculate whether advertising is profitable in performance marketing, for example, two different methods can be used: The calculation according to ROAS (Return of Advertising Spend) and according to ACoS (Average Cost of Sale). Essentially, both values say the same thing, they are just calculated differently. An example:
For example, if you achieve a turnover of EUR 10,000.00 with an ad spend of EUR 2,000.00, the ROAS is EUR 5.00 (or 5:1), i.e. you achieve a turnover of EUR 5.00 with an advertising spend of EUR 1.00. In this case, the ACoS is 20 %, i.e. to achieve a turnover of EUR 10,000.00, 20 % of this must be spent on advertising.
How high can Adspend be?
There is no one-size-fits-all answer to this question. The decisive factor when calculating advertising campaigns is always the objective. The following questions should be asked before starting marketing measures:
- How high is the margin on my products?
- How much advertising budget do I have available over the entire year?
- Does advertising have to be profitable quickly?
- Do I want to use marketing to displace competitors or increase market share?
- What additional personnel and/or agency costs are incurred?
- Is a quick or long-term increase in sales important?
Not every advertising measure has to be profitable immediately. Especially in click-based performance marketing (e.g. AAP, Facebook Ads, Google Adwords, Bing Ads), it takes several weeks and sometimes months for a campaign to run well and achieve a “healthy” ROAS or ACoS. If the ad spend is to be profitable in relation to sales, the margin must be fundamentally known.
Adspend and contribution margin
A retailer wants to sell a diving watch for EUR 300.00 on Amazon and uses the FBA program, i.e. the goods are stored in the Amazon logistics center. The following costs are incurred:
- 120,00 EUR Purchase costs
- 45.00 EUR sales fees to Amazon
- 4.00 EUR Fees for logistics and shipping (FBA fees)
- 10.00 EUR own personnel costs (e.g. customer support, shipping preparation, etc.)
- 57,00 EUR sales tax (VAT on Amazon)
After deducting the costs of EUR 236.00, the retailer is left with a margin of EUR 64.00. Exactly this amount would now be the contribution margin that can be spent on advertising campaigns, for example. Assuming an average ACoS of 20%, the ad spend would be EUR 60.00 for a sales price of EUR 300.00 per product. After deducting the margin, EUR 4.00 would remain, from which the fixed costs would be deducted. In this case, the adspend would not be profitable.
Adspend strategy – differences between Amazon and Google
Even if the contribution margin is too high and the ad spend is therefore not profitable, it can still be strategically worthwhile. If, for example, slow sellers are taking up valuable warehouse space, a short-term increase in advertising expenditure can ensure that the warehouse is “cleared” again. Even if the market is very competitive, for example, profitability does not have to be the primary goal. Even if the advertising campaigns run at a loss, e.g. generate more costs than sales, this can lead to competitors being squeezed out and thus to success in the long term.
Unlike Google Adwords campaigns, the Adspend on Amazon has another positive effect. Every single sale leads to a better sales rank on Amazon and this in turn increases the relevance for the A9 algorithm. Increasing relevance in turn leads to better organic Amazon rankings of the keywords for each individual ASIN (each product variant) and this results in better visibility and more sales.
While Google Adwords or Google Shopping do not evaluate the success of a campaign based on the sales it generates, an ad spend should be evaluated differently – profitability plays a more important role here. With Amazon Marketing Services, but also with the Amazon Advertising Platform, every click and every sale increases the relevance of a product. The ad spend should therefore be seen as a kind of investment.