Advertising is the catalyst that drives sales and improves profit for any business.
Amazon gigs are no exceptions and hence retailers are spending thousands of dollars every month on the platform to boost their sales.
So, if you’re selling on Amazon, you have to spend on advertising. Subsequently, you need to keep track of how this spending is translating into sales and overall profitability.
TACoS (not the Mexican one!) is one of the many parameters that we use on Amazon to analyze how sales and advertising are linked to each other.
What is TACoS, how to calculate it, and what does a certain value of TACoS mean for an Amazon seller?
We will answer all such and many similar questions in this post.
So, without any further delay, let’s start digging right into TACoS on Amazon.
TACoS stands for Total Advertising Cost of Sales. It is essentially a measurement of advertising expenditure in comparison to the total revenue of the business. In other words, it measures the advertising spend of PPC campaigns relative to the total sales of an Amazon business.
TACoS is calculated as a percentage. Also, you can calculate it for the entire business as well as a particular product/listing.
To calculate TACoS, all you need to do is divide the advertising expense by the total revenue (ad-attributed + organic sales). Since TACoS is usually calculated as a percentage, multiply the obtained value by 100.
So, the TACoS formula goes like this:
TACoS = (Advertising Expense/Total Revenue) x 100
If you want to calculate the TACoS for a particular listing, then the formula will be tweaked like this:
TACoS = (PPC expenditure for the given listing/total sales revenue of the given listing) x 100
As you can see, calculating this advertising metric is not that difficult. So, there’s no need for a dedicated TACoS calculator.
Yes. Lower TACoS indicates that you have spent less on ads as compared to your total profit. Meanwhile, higher TACoS shows you are spending more on advertising while your total revenue remains the same. So, sellers usually should strive for lower TACoS in most cases.
But what’s considered lower or higher TACoS? Let’s try to understand it through numbers.
Suppose you have two TACoS figures: 10% and 40%.
10% TACoS means you’re spending 10 percent of your total revenue on ads. On the other hand, 40% TACoS tells you that 40 percent of your total revenue goes into advertising.
Which TACoS value would you prefer from the above? Obviously, every seller would love to go with lower TACoS.
Nonetheless, lowering TACoS to take it close to zero is not something a seller should do. Having 1-2% TACoS doesn’t necessarily mean you are rocking with sales without needing advertisement. It might be showing that you are not making the most of Amazon’s PPC machinery.
The lower the TACoS, the ideal it is. Usually, TACoS between 5-10% is considered an ideal scenario for ad expense and revenue landscape. TACOS 10-20% indicates that you’re spending a fair amount of money on Amazon ads to boost your overall sales.
However, TACOS going higher than 20% is a worrying sign. It shows that you have to reinvest more than 1/5th of all of your revenue into ads. This is where you may need to revise your ad strategy and overhaul your organic sales funnel.
Given the diverse range of product categories and varying sales volumes, it is difficult to have a single TACoS percentage as an average. You can say that most sellers and brands have TACoS in the range of 10% to 15%.
As an Acronym, ACoS and TACoS seem like slightly different versions of each other and that’s true. ACoS stands for Advertising Cost of Sales, and as mentioned above, TACoS stands for Total Advertising Cost of Sales. So, TACoS is actually Total ACOS. But what does it mean in terms of advertising parameters?
For that, we have to analyze the formulas of both ACos and TACoS.
Let’s put their formulas side by side:
TACoS = (Ad spend/Total Revenue) x 100 ACoS = (Ad spend/Ad revenue) x 100
From the formulas, it becomes clear why they are two different metrics. TACoS measures advertising spending in comparison to total sales revenue which includes ad-attributed sales as well as organic sales whereas ACoS only compare ad expenditure to the revenue it generates.
So, TACoS basically shows a bigger picture. It tells how your total revenue is stacked against your advertising expenditure. In other words, TACoS tells you how much your overall sales operation relies on ads. You can also use TACoS value to find the profitability of your sales operations (more on that later).
ACoS, on the other hand, compares ad expenditure and the ensuing ad-driven revenue. So, it is primarily a parameter to gauge the success (or failure) of your ad campaigns. This parameter only compares ad spend and ad revenue.
Like ACoS, ROAS is another metric used to assess the performance of an advertising campaign. In fact, it is the mathematical and contextual inverse of ACoS. If ACoS indicates the costliness of an ad campaign, ROAS shows its profitability or Return on Investment (RoI).
Meanwhile, TACoS is not just about ad spend and revenue. You can use TACoS to assess the entire landscape of your sales/revenue relative to your ad expenditure.
From the above discussion, it has been established that Amazon sellers should strive for lower TACoS. Therefore, when someone says “improved” TACoS, it means “lowered” TACoS. If we go by the TACoS formula, there are three ways to lower it.
We will now discuss various measures that you can take to execute these conditions for a better/lower TACoS.
Many times sellers don’t realize that their advertising budget is not being used in the most optimal way i.e. they overspend on ads without getting the best possible return in terms of sales. For instance, if ACoS (not TACoS) is greater than 30%, it is better to cut down the ad spending.
There are a couple of measures a seller can take to reduce their ad expenditure that won’t affect their total sales volume and collection.
Negative keywords are those deceptive similar keywords that may broadly relate to your product. However, they don’t reflect the user’s search intent at all. For instance, the keyword “wooden chair” doesn’t reflect the search intent of people looking for folding camping chairs. However, automated keyword targeting can put a folding chair’s camping ad on the SERP of “wooden chair”.
You won’t get any clicks let alone conversion on an ad published for negative keywords. In other words, the budget spent on negative keywords won’t translate into sales and revenue.
Therefore, make sure you make a list of all the potential negative keywords for your product and mark them in your Ad campaigns on Seller Central.
Dynamic bidding is an automated way of bid adjustments on Amazon. In dynamic bidding, sellers can decide between two options: up and down and down-only. When you configure your dynamic bidding through the up and down option, your bid goes up and down with respect to chances of conversion i.e. bid goes up by a margin if chances of conversion are high and go down if chances are low.
It is worth mentioning here that this bid adjustment doesn’t guarantee conversion. For instance, your bid may go high and win you the spot, but you still can’t get the sale. In such a scenario, the amount spent on the higher bid will go in vain.
However, when you opt for down-only bidding, you basically devise a mechanism where your bid automatically lowers down for a keyword where chances of conversion are low. This way you can streamline and optimize your PPC ad spending.
So, down-only bidding can save your PPC budget from clicks that lead nowhere. In other words, the appropriate use of down-only bidding can cut down your advertising cost of sales.
Another way to improve and lower your TACoS is to increase your total revenue without amping up your ad budget. This can happen if you are acing your PPC advertising strategy.
In other words, if you have restricted the negative words, leveraging down-only dynamic bidding and making the most of exact match bidding for keywords with low competition and high conversion, you may not need to increase your ad spending. Instead, you need to look elsewhere to increase your total revenue.
These are the two measures you can take to improve total sales revenue while keeping the ad spending the same.
Ads can only go so far in bringing you sales. If you really want to establish a steady stream of revenue, you have to improve your organic sales volume. This can only happen if your listing appears in the organic search of relevant shopping queries.
For that, you will need to populate your listing with the right set of keywords. Whether it is the title, bullets, product description, or A+ Content, you need to fit in relevant keywords in the best context. You can also utilize backend keywords to make your listing more SERP-friendly.
A good SEO regimen will ensure that your listing becomes visible to potential shoppers without any spending on ads.
Good SEO can bring hot leads to your listing/product page. However, they can only convert after going through the content of your listing. Therefore, you need to have top-quality content on your listing. Concise bullets, crisp product descriptions, detailed specs, high-quality images, and helpful Q&A sessions— all these things will improve the rate of conversion on your listing.
Another way to increase total revenue without raising the ad budget is to increase your Average Order Value (AOV). Average order value essentially means the price of a single order from the given listing. By increasing your AOV, you can improve your revenue without doing anything extra on the SEO or PPC front.
There are multiple ways to do that. For instance, you can package low-value similar items on a single listing. You can also choose products with generally higher prices to increase your AOV. Then, you can also put the good old upselling tactic to increase your AOV.
This is the third and last scenario that you can execute to lower your TACoS. In this case, you are not supposed to cut down your ad expense to improve TACoS. Here, TACoS lowers down because even with increasing ad spending, your total revenue is so high that it neutralizes that expenditure and still keeps your TACoS low.
This scenario can only materialize if you’re able to instigate the following sales cycle.
This sales cycle goes like this:
With this sales cycle, your ad spending will increase. However, your total revenue will increase at a higher rate because both your paid and organic sales channels will expand under this cycle. This will eventually lower your TACoS.
TACoS is a very helpful performance metric when it comes to assessing the performance of any given business. Like ACoS or ROAS, this parameter is not just about advertising. Therefore, you can have a more nuanced look at the health/performance of an Amazon gig by reading TACoS values.
Besides analyzing your own business, TACoS is a great metric to read when you want to acquire a third-party seller account/brand on Amazon. Here, we will give you a rundown of how you can look at TACoS to fully grasp the performance of any Amazon business.
What we love most about TACoS is you can use this parameter to determine whether a business is in a healthy or poor sales cycle. You need to know the values of TACoS as well as ACoS and pick the duration (one month, first quarter, etc) for sales cycle analysis.
By using TACoS and ACoS values, you can look at the sales cycle and draw the following four conclusions.
You can also use the TACoS value to find the net profit margin of the given Amazon business.
Suppose the gross profit margin of a business is 30% and its TACoS is 10%. To find the net profit margin, you need to subtract the TACoS value from the gross profit margin.
Net Profit Margin = Gross Profit Margin – TACoS
As mentioned earlier, you can also find the TACoS of individual products/listings. These individual TACoS calculations will come in really handy when you have to find out how a certain product excels with its organic and PPC-driven sales.
If a product has a very high TACoS, it shows that the given item is heavily dependent on advertising. Having this knowledge will enable you to carry out effective corrective measures. For example, you may have to improve the listing content and work on its SEO to improve its click-thru rate and organic conversions.
On the other hand, if a product has a very low ACoS, it can mean two things:
By doing further research like reviewing the average PPC budget of the product category, you can determine which scenario is true.
We hope that the above discussion helps you understand TACoS inside out. A lower TACoS generally indicates that a business is thriving. You can also use this performance metric in various ways to assess the different aspects of an Amazon business.
Whether a business is in a positive or negative sales cycle, what its net profit margin is, or how your advertising efforts are paying off, you can find it by calculating TACoS. You can also assess the performance of individual products through TACoS calculation.
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