Advertising is a crucial aspect of running a successful business on Amazon. While it helps increase visibility, drive traffic, and boost sales, it also incurs costs that need to be closely monitored. From sponsored product ads to display ads, every campaign comes with its own set of costs. As an Amazon seller, it is important to have a comprehensive understanding of all costs involved to ensure profitability and make informed decisions.
This is where Amazon TACoS (Total Advertising Cost of Sale) comes into play. It is a unique metric provided by Amazon that helps sellers measure the efficiency and impact of their advertising campaigns. In this blog post, we will dive deep into what TACoS means, how to calculate it, its importance, use cases, limitations, and how to improve it.
Key takeaways
- TACoS is a metric specifically used by Amazon to measure the total cost of advertising against the total sales generated from all activities.
- It takes into account all types of ad campaigns, including sponsored products, sponsored brands, and display ads.
- TACoS helps sellers make informed decisions about their advertising strategies and campaign budgets.
- Improving TACoS can lead to increased profitability and more efficient use of PPC (Pay-Per-Click) advertising on Amazon.
What is Amazon TACoS?
Total Advertising Cost of Sale or TACoS, is a unique metric provided by Amazon that helps sellers track the overall impact of their advertising spend on their business. It calculates the percentage of ad spend relative to the total sales revenue. Essentially, TACoS gives a more accurate representation of the true cost of advertising on Amazon.
This metric is different from ACoS (Advertising Cost of Sale), which only takes into account the cost of advertising relative to the sales generated from a campaign. TACoS, on the other hand, considers their impact on overall sales including organic purchases.
How to calculate Amazon TACoS?
Calculating TACoS is a simple formula:
TACoS = (Advertising spend/Total revenue) x 100
In simpler terms, it requires dividing the total amount spent on advertising by the total sales revenue and multiplying by 100. The result will give the TACoS percentage.
For example, if you spent a monthly budget of $1950.60 on advertising and generated $9,240 in organic sales and $2,800.20 in ad sales, your TACoS would be:
TACoS = (1,950.60 / (9,240.00 + 2,800.20)) x 100 = 16.2%
To understand this better, let’s take a look at the different components of this formula:
- Advertising Spend: This includes all costs incurred in running ad campaigns, such as click costs, clicks on sponsored products, and fees for sponsored brands and display ads.
- Total Revenue: This includes ad sales and organic sales generated from those ads.
Therefore, in the example above, for every dollar spent on advertising, you generated $16.2 in sales.
What is the difference between TACoS and ACoS?
While TACoS and ACoS are important metrics for measuring the impact of advertising on Amazon, they serve different purposes.
- TACoS takes into account all types of ad campaigns and their overall effect on sales, providing a more comprehensive understanding of the true benefit of advertising.
- ACoS, on the other hand, only considers the sales that can be directly attributed to advertising. This means it does not account for organic sales giving a more narrow view of advertising performance.
To put this into perspective, let’s use the example from earlier:
Total sales for one month: $12,040.20
Ad spend: $1,950.60
Organic sales: $9,240.00
Ad sales: $2,800.20
To calculate ACoS, we use the following formula:
ACoS = (Advertising spend/Ad sales) x 100
In this case, the ACoS would be:
($1950.60/$2,800.20) x 100 = 69.7%
From this calculation, it may seem like the advertising campaigns are not performing well. However, when we look at the TACoS:
TACoS = (Advertising spend/Total revenue) x 100
($1950.60/$12,040.20) x 100 = 16.2%
This paints a different picture and shows that, overall, the advertising campaigns are performing well and driving significant sales. It is important to consider both metrics to get a complete understanding of the effectiveness of advertising campaigns on Amazon.
Why is TACoS important?
TACoS is crucial for Amazon sellers as it provides valuable insights into the performance and revenue generated from ad campaigns.
One major advantage of TACoS is its ability to highlight the organic ranking boost that comes with successful ad campaigns on Amazon. Unlike other platforms, Amazon rewards advertisers with better organic ranking as a result of ad sales. This can lead to increased visibility, more organic sales, and ultimately higher profits. On the other hand, a high TACoS could indicate over-reliance on paid search and a potential decline in organic ranking.
Here are some additional ways TACoS can impact your Amazon business:
Positive sales cycles
A positive sales cycle is when your sales increase with little or no additional ad spending. This could be due to organic traffic, seasonal spikes, or discounts. While this is a desirable outcome, it is important to track TACoS to ensure that your overall profitability is not compromised.
Negative sales cycles
A negative sales cycle is when your sales drop with no corresponding decrease in ad spending. This could signal decreased organic traffic or poor customer reviews. By tracking TACoS, you can identify the overarching cause of these dips and adjust your advertising strategy accordingly to prevent revenue loss and maximize profits.
Connection between ads & profitability
TACoS shows the correlation between advertising efforts and overall profitability. An improving TACoS indicates that organic sales are driving a significant portion of revenue, while a worsening TACoS could mean that paid search is becoming more critical to generating sales. By monitoring this metric, sellers can make informed decisions about their ad spend and adjust their strategies accordingly.
Cannibalizing organic sales
A unique scenario that can occur is when TACoS increases, but ACoS decreases. This can happen when organic sales are not keeping pace with advertising spending, indicating a potential loss of profits from cannibalization. Tracking TACoS can help identify this issue and enable us to make adjustments to prevent future losses.
What is a good Amazon TACoS?
There is no specific “good” TACoS percentage value as it varies depending on factors such as product category, pricing strategy, and ad campaign goals. In general, a lower TACoS is desirable as it indicates more organic sales are being generated from ad campaigns. However, it is important to track TACoS over time and analyze trends rather than focusing on one specific number.
To ascertain what qualifies as a “good” TACoS for your business, compare your current TACoS with previous periods and industry averages. It will provide a benchmark for your business and help identify areas of improvement.
For example, last quarter, your TACoS was 23%, but this quarter, it has decreased to 16%. It indicates improvement and might be considered a good TACoS for your business. However, if the industry average for your product category is 12%, then there is still room to shift your efforts. Our downloadable benchmark reports are a great way to get a better sense of how your category is doing.
If all else fails, set your TACoS through your profit margins. If your products have 30% profit margins, you don’t want TACoS above 30% long-term, as your campaigns are not profitable. As an action, you can lower spending on less efficient products and campaigns or focus on higher-margin products.
How to use TACoS to measure your PPC campaigns
TACoS is a valuable metric for measuring the success of PPC campaigns on Amazon. Along with ACoS, it provides important insights into the profitability and effectiveness of advertising efforts.
Here are some scenarios that can help you understand TACoS better:
TACoS is improving or remaining flat: This indicates that your ad campaign is generating a substantial return on investment. It also suggests that organic sales and traffic are increasing, which can improve your brand’s presence and reach more potential customers. Not only does this improve your advertising efforts, but it also has a positive impact on overall business performance.
TACoS is weakening: This suggests that you are spending more on ad campaigns, but organic sales are not increasing at the same rate. While this may not be the worst-case scenario, you should monitor this trend and make adjustments to avoid over-reliance on paid search. You can consider optimizing your keywords, targeting, or ad placements to increase organic sales and lower TACoS.
TACoS is increasing while ACoS is decreasing: This scenario may seem desirable as ACoS is decreasing, indicating a lower cost per conversion. However, it can be deceptive as organic sales are not keeping pace with ad spending. In this case, it is important to focus on improving organic ranking and driving more organic sales to improve TACoS.
TACoS and ACoS are increasing: While this may occur when promoting a new or lesser-known product, it is not an ideal situation for sustainable business growth. As your ad campaign generates more sales, focus on optimizing for organic ranking and driving increased organic sales over time.
Amazon TACoS use cases
As an Amazon seller or advertiser, improving TACoS requires well-outlined strategies and action plans. Here are some key use cases where TACoS can guide your decision-making and help optimize the efficiency and profitability of your advertising campaigns:
Use case 1: Evaluate a product’s reliance on advertising
Use TACoS as a valuable metric to assess the revenue generated by your products through advertising. It aids in determining the effectiveness of your ad spend and whether it yields a favorable return on investment.
While a high TACoS may indicate increased reliance on advertising, it is essential to consider the overall profitability of the product. If the product generates significant revenue and maintains a healthy profit margin, a higher TACoS can be justified.
However, if the product has a low-profit margin and relies heavily on advertising, it may be worthwhile to reassess the product’s pricing strategy and advertising efforts. Some adjustments could include increasing the product’s price or optimizing keywords and targeting to increase organic sales.
Use case 2: Evaluate whether you are cannibalizing organic sales
Running Amazon ads can lead to the common issue of cannibalizing organic sales. It happens when paid search generates sales at the expense of organic sales, resulting in an overall decrease in profitability.
But how do you identify if your advertising efforts are cannibalizing organic sales?
- By closely monitoring TACoS and the trend over time. If TACoS increases while organic sales decrease, it could indicate cannibalization.
- By analyzing the impact of advertising on individual product SKUs. If a particular SKU shows a significant increase in ad sales but a decline in organic sales, it may be worth considering adjustments to prevent further cannibalization.
In addition, TACoS can also help identify the overall impact of advertising on your brand’s organic visibility and sales. If TACoS is consistently growing while ACoS is improving, it may indicate that your ad campaigns are not effectively driving organic sales.
Use case 3: Evaluate overall profitability
Your business’s profitability is a key factor in decision-making, and TACoS can provide valuable insights into the overall impact of advertising on your bottom line. By monitoring TACoS over time, you can assess whether your ad campaigns are generating favorable returns and ensure the lucrativeness of your brand.
However, it is essential to consider other factors, such as profit margins and operational costs, when evaluating profitability. When taken into account alongside TACoS, you can create a more accurate picture of your business’s financial performance
Limitations of Amazon TACoS
While TACoS is a valuable metric for measuring advertising performance on Amazon, it does have some limitations. These include:
- Lack of external factors: TACoS only considers the impact of ad campaigns on your sales and profitability. It does not take into account other external factors, such as seasonality or industry trends, that may affect overall business performance.
- Limited to Amazon advertising: TACoS is only relevant for assessing the impact of Amazon PPC campaigns. It does not provide insights into other forms of advertising, such as influencer marketing or social media ads.
- Varying factors affecting TACoS: As discussed in the use cases, multiple factors can affect TACoS, making it difficult to pinpoint the exact cause of changes in the metric. Consider all factors and use TACoS as a general guide, not the sole indicator of advertising success.
- Only provides a snapshot of performance: TACoS is most effective when monitored over time, as it can show trends and patterns. However, it only provides a snapshot of performance at a particular point in time and does not consider future implications.
How do I improve my Amazon TACoS?
As a seller or advertiser, having ideal strategies and implementing best practices can help improve your TACoS and overall advertising performance on Amazon. While there are various methods to achieve this, here are some key strategies to consider:
Improve PPC ads efficiency
Efficient PPC ads are crucial for achieving a lower TACoS. Achieve this by consistently monitoring and optimizing ad campaigns, which involves adjusting keywords, bids, targeting, and ad spending.
It is also crucial to stay up-to-date with Amazon’s advertising policies and guidelines to ensure your campaigns comply with them and avoid potential penalties or issues. Consider investing in tools or hiring experts to help manage your PPC campaigns.
Keyword selection
Choosing the right keywords for your products is crucial for achieving a favorable TACoS. Use tools like Amazon’s Search Term Report or third-party keyword research tools to identify high-performing and relevant keywords for your products.
Implement the identified keywords into your campaigns and regularly monitor their performance to make adjustments as needed. Ensure that you also consider negative keywords, which can help eliminate irrelevant clicks and improve ad efficiency.
A/B testing
A/B testing, or split testing, is a common strategy used in advertising to compare the effectiveness of different elements such as ad copy, images, or landing pages. It can also be applied to Amazon PPC campaigns to identify the best-performing ad variations and optimize future campaigns accordingly.
In addition, A/B testing can also help identify factors contributing to high TACoS, such as ineffective ad copy or images. Gradually improve your advertising performance by making little adjustments and tracking their impact. Take advantage of Amazon’s built-in A/B testing feature or use third-party tools to conduct your tests.
Improve Amazon TACoS with Trellis
While there are various ways to improve your Amazon TACoS, using the right tools and software can streamline the process and help you achieve better results.
One such tool is Trellis. Our software offers automated keyword harvesting, campaign automation, algorithmic bidding, and data-driven insights to optimize your ad campaigns. With features such as market share maximization and budget reallocation, we can help improve your TACoS and overall advertising performance on Amazon.
In addition, Trellis also offers consolidated campaign setup and optimization, making it easier to manage multiple campaigns with different objectives and budgets, which can help improve TACoS over time.
Contact us today to schedule a demo and see how Trellis can help you achieve your TACoS and advertising goals on Amazon.
