Every type of advertising involves costs, that can also be called ‘Adspend’ or ‘Ad Spend’. The concept is sometimes compared to advertising budget. The difference is that the budget consists of a certain amount of money, that is usually ready for advertising purposes and Adspend presents the costs for an individual action.
An online trader would like to sell his products on Amazon, and he has disposed an amount of 10.000,00 per month for that purpose. The campaigns (f.e: through AMS or AAP) are running but just good and imply side costs of 6.000,00. Through the Amazon Marketing Services about 3.500,00 EUR are spent per month and for the Amazon Advertising Platform around 2.500,00 EUR in total. The total Adspend sums up to 6.000,00 EUR. That way we still have 4.000,00 EUR from the budget available.
Adspend plays a decisive role specially in Digital-Marketing, because in relation to the revenue it will be measured, how successful a campaign was. For example, to calculate in Performance Marketing, if advertising is profitable, two different methods can be used: Either measuring the ROAS (Return of Advertising Spend) or ACoS (Average Cost of Sale). Both values present essentially the same, are just calculated differently. One example:
If you want to achieve from an Adspend of 2.000,00 EUR a return of 10.000,00 EUR, the ROAS is 5,00 EUR (or 5:1), that is, for expenses of 1,00 EUR you make a revenue of 5,00 EUR. The ACoS is of 20%, so to get 10.000,00 EUR of revenue, you need to give out 20% for advertising actions.
How high must the Adspend be?
There is a wholesale answer for that. The establishment of the target is decisive to be able to calculate the campaign costs. The following questions need to be asked before getting started with every marketing action:
- How high is the product’s margin of profit?
- How much budget do I have at my disposal for the year?
- Should the ad be profitable right away?
- Do I want to drive the competitors out or gain a share of the market?
- Which stuff- and/ or agency costs add up?
- Is a quick or a long-term sales increase more important?
Not every marketing action has to be based on Pay-Per-Click Performance Marketing (f.e. AMS, Facebook Ads, Google Adwords, Bing Ads) it takes some weeks, until a campaign runs well and achieves a “healthy” ROAS or ACoS. If the Adspend in relation to the revenue is profitable, the margin must be known.
Adspend and variable gross margin
A trader would like to sell a diving watch for 300,00 EUR on Amazon and for that purpose he enters the FBA Programm, so the goods are at Amazon logistics center. The following prices apply:
- 120,00 EUR buying costs
- 45,00 EUR selling taxes Amazon
- 4,00 EUR logistics and send fees (FBA-fees)
- 10,00 EUR staff expenses (f.e. client support, preparations for shipment etc.)
- 57,00 EUR value added tax (Amazon)
After subtracting costs in value of 236,00 EUR the trader has still 64,00 EUR gain margin. Exactly this amount is the variable gross margin that can be give out for campaigns. With just 20% of ACoS, the Adspend for a selling price of 300,00 EUR per product is of 60,00 EUR. So there are 4,00 EUR left, from which the fix costs still need to be subtracted. 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 thus the Adspend is not profitable, it can still pay off strategically. If, for example, shopkeepers confiscate valuable storage space, a short-term increase in advertising expenditure can ensure that the warehouse is “cleared” again. Even if, for example, the market is very competitive, profitability does not have to be the primary goal. Even if the advertising campaigns are in deficit, e.g. if they generate more costs than revenue, this can lead to the displacement of the competitors and ultimately to success.
Unlike Google Adwords campaigns, the Adspend at Amazon has yet a further positive effect. Every single sale leads to a better sales ranking on Amazon and this also increases the relevance for the A9 search engine. A higher relevance leads to improving organic Amazon rankings of the keywords for each ASIN (each product variant) and this results in a better visibility and more sales.
While Google Adwords or Google Shopping do not evaluate the success of a campaign on the sales generated with it, an Adspend should be evaluated differently – profitability plays a more important role here. With Amazon Marketing Services and the Amazon Advertising Platform, every click and every sale increases the relevance of a product. Therefore, the Adspend is to be seen more as a kind of investment.