If you’re selling products on Amazon and using PPC advertising to grow your business, there is an important performance metric that has recently been gaining traction that you should know about; it’s called…
It stands for Total Advertising Cost of Sale, and measures advertising spend relative to the total revenue generated. TACoS gives you a snapshot of how your Amazon PPC ads are performing (directly impacting sales), as well as help you to determine the best long-term strategies for your Amazon business.
Ad Spend Margin Impact can be considered synonymous with TACoS. It is the percentage that your Ad Spend is reducing your overall margins/profitability.
Calculating TACoS is crucial for sellers using PPC ad campaigns, because if an ad doesn’t produce the expected additional revenue to at least cover its cost by volume of sales, it’s actually draining profits rather than helping to generate them.
Monitoring TACoS will give you a more comprehensive view of your overall business performance than just your ACoS. TACoS provides a big picture view of your business (revealing how much your business is relying on advertising), helping you to figure out what you should be doing to improve it.
Despite being a major metric for measuring the success of your Amazon ad campaigns, ACoS doesn’t reveal the entire story…the larger picture.
TACoS takes into account the revenues from your advertising and from those generated by your organic sales.
ACoS, Advertising Cost of Sales, is measured as a percentage showing you how much a sale costs you in advertising money. Simply defined, ACoS lets you know at a glance whether your ad is profitable or not.
To calculate your TACoS, divide your total advertising spend by your total sales revenue and then multiply it by 100. TACoS = (Advertising Spend/Total Revenue) x 100
To calculate your ACoS, divide your total Ad Spend by your total sales and then multiply it by 100. ACoS = (Ad Spend / Ad Revenue) x100
The only difference between the formulas of TACoS and ACoS is you calculate your total revenue with the first and ad revenue for a single product with the latter.
Just like ACoS, the lower your TACoS is, the better. Conversely, a higher TACoS means your total sales are becoming more and more influenced by your Ad Spend. Your Ad Spend is becoming a significant factor in your overall revenue, which is not what you want.
Looking at TACoS and ACoS together can also help you to understand how ad spending for a new product you’ve recently launched on Amazon is affecting the bigger picture.
If your ultimate goal is to grow total sales, a sound strategy would be to accept a higher ACoS in the short-term in order to increase sales velocity, while working to improve your TACoS in the long-term.
Giving consideration to TACoS in addition to ACoS, gives you a more holistic view of how your Ad Spend is affecting overall sales. It’s vital for you to be on top of these numbers as they let you know if you’re spending too much on advertising without getting the expected boost in sales. Also, they help to caution you from being too dependent on ads for your sales. It should always be the end goal to earn from organic sales as much as possible.
Organic sales versus PPC sales (Organic to PPC Sales Ratio) – an ideal ratio would be in the ranges of 70-30, or 80-20, indicating that the majority of sales are generated organically, and not a result of PPC advertising. This will help to lower your TACoS or Ad Spend Margin Impact (the impact of your Ad Spend on your profit margins).
Lifetime Value of a Customer – Lifetime value is an estimate of the average revenue that a customer will generate throughout their lifespan as a customer. If you are looking at how your Ad Spend contributes to your bottom line, knowing the ‘worth’ of a customer can help you determine the best strategies for your marketing budget.
The simplest formula for measuring customer lifetime value is the average order total multiplied by the average number of purchases in a year multiplied by average retention time in years. This provides the average lifetime value of a customer based on existing data.
This really depends on the product being sold and the profit margin established by the seller for their business. ‘Good’ TACoS is relative to your brand size and its objectives. For example, if you have recently launched a new product, you might have high TACoS. However, if most of your products are performing well, your TACoS will be low.
Typically, most sellers fall between 6% and 10%. PPC Ad Spend isn’t always a bad thing, but overspending, or spending without an appropriate return can eat deeply into your margins. Therefore, it’s best to be between 6% and 10%.
If you are nearing 20% or higher, that percentage may be a little too high, because it is significantly eating into your profit margins. Once again, keep in mind that the life cycle of the product is also an important contributing factor for where your TACoS lands.
A low TACoS (2%-#%) indicates that a seller is not taking full advantage of all of the opportunities that Amazon offers for advertising, such as Sponsored Brands and Sponsored Display Ads. By under-utilizing the wide range of advertising tools available to them, sellers are in danger of leaving a significant amount of money on the table in the long run.
Amazon advertising helps to improve your TACoS (lowering it), by driving more organic sales.
This looks at the other ‘fringe benefits’ that your advertising dollars have on your Amazon business such as its profitability and growth.
Understanding how TACoS can affect everything else in your Amazon ad performance is critical if you want to sustain a successful business on Amazon. Of course, this is not the only metric or facet of your business you should focus on.
A successful Amazon business is comprised of several important moving parts. If you’re looking for help in developing and managing an advanced Amazon advertising strategy, consider working with the experts at Entourage Management Services. The EMS team takes a holistic approach to scaling Amazon businesses and helping brands become household names.
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