The ACOS Limit serves as "The Anchor" for your advertising strategy, guiding the Bidder to maintain profitability. It should be set equal to the average pre-ad gross margin of the products in the given ad group. This helps the bidder understand the breakeven point for the products within your ad group. To set the most accurate ACOS Limit, input the Cost of Goods Sold (COGS) for the SKUs involved. This ensures the Bidder can effectively manage ad spend, optimizing your ads for maximum efficiency/profitability.

How to Set Your ACOS Limit

Your ACOS Limit should be set at the pre-ad gross margin of the products within each ad group. This means:

Identify Your Pre-ad Gross Margin: Entering your COGS allows Teikametrics to calculate your pre-ad gross margin and this can be referenced to set ACOS Limit.
Set Your ACOS Limit: Use this pre-ad gross margin value as your ACOS Limit. This limit indicates the breakeven point for the products in your ad group.

By setting the ACOS Limit at the pre-ad gross margin, you provide the bidder with a clear guideline on the breakeven point. This helps optimize your ad spend and maximize profitability.

Understanding Why Actual Measured ACOS Can Exceed Your ACOS Limit

When managing your advertising campaigns on platforms like Amazon and Walmart, you may sometimes notice that your actual Advertising Cost of Sales (ACOS) exceeds the target ACOS limit you've set. This can be concerning, but it's important to understand the factors that can cause this to happen, even when your campaigns are performing well overall. Here are three key reasons:

1. Volatility in Conversion Rates

What Happens: Conversion rates can fluctuate significantly over short periods due to various factors like changes in consumer behavior, competitor activity, or even seasonal variations.
Impact on ACOS: Ad spend divided by ad sales, any sudden drop in conversion rates (i.e., fewer sales) will increase your ACOS temporarily, even if your ad spend remains constant.
Example: If you're running a campaign and a sudden market trend causes fewer people to buy, your conversion rate drops. This means that for the same amount of ad spend, you're getting fewer sales, which leads to a higher ACOS for that period.

2. Window Length

What Happens: The time window you choose to measure ACOS can greatly affect the results. Shorter windows are more sensitive to day-to-day fluctuations, making ACOS appear more volatile.
Impact on ACOS: A shorter measurement window might show spikes in ACOS due to temporary factors like a sudden surge in clicks without a corresponding increase in conversions. Over a longer period, these fluctuations tend to smooth out, providing a more accurate representation of performance.
Example: If you measure your ACOS over just one day, and that day happens to have a lower-than-usual conversion rate, your ACOS might spike. Measuring over a month or two would likely give a more stable and realistic picture.

3. Bid Exploration

What Happens: To optimize your campaign, we often allow bids to explore the upper range of target bids. This exploration is necessary to find the optimal bid levels that maximize performance. However, during this phase, the actual conversion rate might be lower than expected.
Impact on ACOS: As these exploratory bids start high, they might lead to an increase in ACOS, especially if several keywords are being tested at once. Over time, as the system learns and adjusts by lowering the bids, the ACOS should stabilize and align more closely with your target.
Example: If you're launching a new set of keywords, the initial bid might be higher to test the waters. If these keywords don't convert as expected, your ACOS will temporarily rise. As the campaign continues, the system will adjust the bids, and the ACOS should decrease.

Summary

In summary, while it might be alarming to see your ACOS exceed the set limit, these fluctuations are often a normal part of campaign optimization. Volatility in conversion rates, short measurement windows, and necessary bid exploration all contribute to temporary increases in ACOS. Over time, as data accumulates and the system optimizes, your ACOS should align more closely with your targets.