How to set performance targets in Amazon Ads

Setting realistic targets and managing them is key to maximising use of automated bidding tools

The Amazon ad console and other 3rd party Amazon ad-management tools give you the ability to set performance targets, enable always-on optimisation, and let the platform make data-driven bidding decisions that align with your performance goals. In this article we look at ROAS and CPA targets to understand what they tell you about your advertising activity, how to decide which one to use, and how to manage the targets you set.

Key Takeaways

• Use a CPA target to focus on order volume and a ROAS target to focus on sales value
• Make the target easier to hit to increase campaign delivery
• When the campaigns start hitting the target, make the target harder to maximise efficiency
• Compare the profit per unit to the CPA to easily check advertising profitability

Return On Ad Spend Targets

Return On Ad Spend (ROAS) is one of the primary measures of efficiency in e-commerce. To calculate it you divide sales by ad spend and it shows how much return is generated for each unit of currency spent on advertising.

It’s a useful metric in e-commerce because the revenue generated from customer purchases can vary by product value and by the number of products purchased in a single order. If you know the value of customer orders, then you can use it to maximise the returns you generate through advertising.

Outside of Amazon, privacy laws and technical issues often prevent e-commerce businesses from having reliable data about the sales value that their ad-activity generates. However the closed-loop nature of the Amazon ecosystem means that reliably tracking ad-driven sales value is the standard.

Cost Per Acquisition Targets

Cost Per Acquisition (CPA) is a commonly used measure of efficiency in online advertising. To calculate it you divide ad spend by orders and it shows how much ad spend it takes to generate an order through advertising.

It’s a common online performance metric but it holds less information about e-commerce ad performance than ROAS. The CPA describes how efficient ads are at generating orders, but not how much those orders are worth meaning that it can sometimes be a deceptive indicator. A good CPA could be a weak ROAS if customers are only making low value purchases.

But CPA is crucial to understanding how bid managment tools work. And when analysed together with other metrics, you can get a better understanding of your advertising performance, like calculating how much you should pay to generate actions that lead to purchases, such as clicks.

How The Platform Uses Targets

The platform uses campaign targets to regulate how much it pays for clicks. When campaign performance is strong relative to the target, the platform will submit higher bids to help it win more competitive, higher performing ad placements. Similarly, it will tend to submit lower bids when performance is weak. It usesthe conversion rate and target CPA to calculate the maximum cost per click (CPC) at which it can buy clicks given the current performance.

For example, if the CPA target is £4, and the conversion rate is 10%, then the platform will aim buy clicks at an average CPC of £0.40 or less. It’s worth noting that the actual bidding formulas used in platforms are more complex and use more inputs than what’s shown here but the fundamentals remain the same.

When you use a ROAS target, the platform derives the effective CPA (eCPA) target to calculate the Max CPC. To calculate the eCPA It divides the budget cap by the revenue generated per order to find the number of orders needed to reach the sales target.

What Type Of Target Works Best

Whether to use a ROAS or CPA target depends on your aim. A ROAS target drives sales value because the amount of revenue generated per order factors into how much the platform can bid for ad placements. A CPA target drives order volume because the value of orders does not factor into the bid calculation.

If you run activity with multiple products at differing price points in the same campaign, then it may be disadvantageous to use a CPA target because the platform wouldn’t factor in the revenue generated per order to optimise the bid. It would be more likely to either underbid and lose out to a competitor, or overbid and overpay for an ad placement relative to the amount of potential revenue it could generate.

How To Manage Targets

The campaign targets you set on the platform are effectively a lever for delivery and performance. You reduce delivery and maximise performance by making the target harder, and increase delivery at the expense of performance by making the target easier.

For new campaigns, the platform doesn’t have historical data to make optimised bids, so if you set a target that is too hard, you might be restricting the platform in submitting competitive bids which would result in low or no delivery. It’s better to set targets that allow the platform to deliver ads and collect data, then gradually increase the target difficulty as sales are generated.

When campaigns are hitting the target, make the target harder to maximise efficiency. This causes the platform to focus budget on the ad placements and targeting with the highest potential to reach the new performance target.

How To Use Profit Models When Setting Targets

In order to calculate how much profit your advertising activity is generating, you need to know how much profit you make per unit sold (PPU) to take into account all the costs incurred in bringing the product to market.

Add up your overheads, variable expenses and other fees, then subtract it from the selling price to get the PPU. Multiply the PPU by ad unit sales and subtract ad costs to find the true profitability of your advertising.

In addition to calculating ad profit, the PPU has other uses that can help you to check that other elements of your advertising are running within profitable bounds:

• Anchor CPA Targets - When launching new products with no sales history, you may be unsure what is a reasonable CPA target. Use the PPU as a CPA target.
• Profitability Snapshot - Compare in-flight CPA to the PPU to get a snapshot view into profitability. If the CPA is below the PPU, then the activity is profitable.
• Check Bid Profitability - Use the formulas outlined above and substitute PPU for the CPA target to calculate profitable bidding levels for a product.