If you can't measure it, you can't improve it. TACoS (Total Advertising Cost of Sale) is a unique Amazon metric. It's an interesting one, and directly related to another unique aspect of Amazon — the fact that PPC on Amazon can impact your organic ranking.
With Amazon becoming increasingly competitive, finding new ways to optimize your PPC is critical, and TACoS is a big part of that. Let's explain (hopefully without any Mexican food references).
What is TACoS?
The goal of advertising is not just to sell a product. It is to grow your overall business and increase brand recognition. Shifting your focus to trends in TACoS will provide you with insights into how the actions you're taking are influencing your overall business goals.
ACoS (Advertising Cost of Sale) is the primary KPI to work out how your Amazon advertising spend impacts sales generated by advertising — basically, how well your advertising is helping sell your product. ACoS is the inverse of RoAS (Return on Ad Spend), which Amazon has recently adopted as a primary metric as well, and provides the same information in a slightly different context. Although this is a crucial metric, ACoS doesn't indicate the real value of ad spend. It doesn't reflect the impact your advertising spend is having on brand awareness and organic sales.
By showing advertising spend relative to the total sales generated, TACoS gives a more complete picture. Of course, no single measurement can reflect every aspect of your business. But tracking TACoS over time can show how your ad spend appears to be helping increase organic sales.
Here is the basic formula for calculating TACoS:
TACoS = (Advertising Spend/Total Revenue) x 100
Put simply, TACoS requires that you divide your total advertising spend by your total sales revenue and then multiply by 100.
What is a good TACoS?
An ideal TACoS percentage is subjective and depends on what you are trying to do. Generally speaking, however, the lower your TACoS, the better — just like with ACoS. For a mature product, anywhere between 10% and 15% can be considered “healthy”. But looking at the trajectory of your TACoS in the context of your ACoS is more meaningful than a specific number.
- Low TACoS: A low TACoS rate means that you have a good paid-to-organic ratio of sales — indicating healthy brand awareness, and potentially a large number of repeat purchases. Typically, the lower the TACoS, the better, but a low TACoS could also give you headroom to increase product visibility. Ensure you have sufficient ad budget allocated, you're targeting keywords relevant to your product, and your bids align with the average CPC for your category.
- High TACoS: If a product has a consistently high TACoS, (say over 40%) the advertising campaign needs to be reviewed and tested with either new keywords, bids, products, or a mix of all three. For new products, however, this is fine. You would expect a high TACoS when a new product is launched, and the main goal is to increase sales. But, over time, your TACoS should decrease — which is why trends are important.
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It’s important to keep an eye on your general TACoS. But looking at how TACoS is changing delivers more valuable insights regarding the impact of your PPC strategy on sales, and the health of your product portfolio.
- TACoS decreasing or flat: This means that your product advertised is generating steady and strong sales. It also suggests that organic sales are getting better, which ultimately means your brand awareness is growing too. A low TACoS may also be driven by increased repeat purchases of a product, and a decreasing TACoS could indicate a rise in repeat purchases. Over time, this is what you want to see for all products regarding TACoS.
- TACoS increasing: Increasing TACoS would indicate you're investing more in ad spend, but organic sales are not increasing at the same rate. Your sales are overly dependent on ad spend and not organic sales. If you are deliberately pushing products with aggressive ad bids, an increasing TACoS is an acceptable and expected outcome. But it’s not something you want to see long-term. If you witness an unexpected rise in TACoS, go through your product pages to ensure they are current and fully optimized. You will also want to undertake an Amazon PPC audit to review the state of your paid campaigns.
How to control your TACoS
There are two main ways to decrease your TACoS, and the inverse of these actions will increase your TACoS.
- Reduce your ACoS by spending less (or more effectively) on advertising
- Increase the percentage of organic sales of your products.
Pro tip: By focusing on conversion rate (CVR), it’s possible to advance both of these outcomes simultaneously. Bidding on your highest converting terms can reduce your ACoS by optimizing spend, and an improved CVR will help you climb the organic rank for that keyword. (More on this in the next section).
Minimizing wasted PPC spend in order to reduce your ACoS is a valuable part of any PPC optimization strategy. But focusing on the second point, increasing organic sales, should be your primary priority when thinking about TACoS because that is how you reduced TACoS while increasing overall sales.
Increasing organic sales with PPC
As mentioned, Amazon is a relatively unique platform because PPC has an indirect impact on organic rankings. Although this isn’t explicitly acknowledged by Amazon, it’s something we’ve observed first hand, and is widely accepted by Sellers and Vendors alike. The theory is that the A9 algorithm uses sales velocity as a stand-in for relevance — which is one of several factors determining ranking. PPC conversions increase a product's sales velocity within the context of a search term, which then feeds back into that product's potential to organically rank for that same term.
The basics of this strategy involve targeting your highest converting search terms (a process known as Search Term Optimization) as well as aspirationally targeted non-branded terms that you want to rank for. The former strategy will also help reduce ACoS, helping drive down TACoS on two fronts.
Getting the basics right
Although sales velocity and PPC strategy impact organic outcomes, that doesn’t mean you can focus on PPC at the expense of basic Amazon hygiene. A combination of factors influences the A9 algorithm, including:
- Keyword optimized product text
- Availability and price
- Fulfillment times
- Content and imagery
- Reviews and ratings
Although Amazon pricing strategy is an essential factor, you should also make sure to do everything you can to incentivize reviews, deliver products on time and optimize listings to maximize your organic potential. Content optimization can also contribute by increasing click-through rate (CTR) in the search result, and hence the conversion rate (CVR) on the product page.
Build a brand and looking at long-term CLV
Fundamentally, growing brand awareness and nurturing repeat customers will help drive down TACoS long-term by minimizing your reliance on advertising to make sales. This is something that can be reflected in your PPC strategy — for example, using Sponsored Brand Ads and/or targeting competitor search terms to expand brand awareness. However, brand building is a multi-pronged and long-term strategy.
Customer lifetime value (CLV) calculates the total estimated value a customer will generate over the lifetime of your relationship. This is another powerful metric that can provide interesting context for the interpretation of TACoS, as well as help direct strategies to improve TACoS over time.
For example, you can use CLV to identify "gateway" products that regularly lead to repeat purchases. These, in themselves, may have a high short-term ACoS, but will deliver a reduced TACoS overtime as repeat purchases build. This can also help create loyal customers that may go on to purchase other products, helping you drive down your TACoS across your product portfolio.
Basically, by looking at the bigger picture from the customer standpoint, you can acknowledge where your advertising is creating positive outcomes. CLV provides a longer-term context for your ACoS planning and strategy, and gives you the best possible insight into different customer acquisition costs and where you can best place your ad spend. However, CLV can be quite difficult to calculate, and requires the help of advanced analytics tools to deliver the insights that you need.
Suggested Reading: For more information on CLV, how it’s calculated and how it can be used, check out our blog — Can CVL Calculations Ever Be Accurate?
Not the only TACoS in the shop
When it comes to analyzing your business's success on Amazon, no metric can paint the whole picture. It would be best to consider many interrelated indicators to bring your Amazon marketing into a more precise focus — and TACoS is a critical part of that. It gives you perspective on how your ad spend contributes to your brand's long-term growth.
Armed with this information, you can evaluate your Amazon business's overall health and make winning decisions about your next steps. Analytics solutions can now shape advertising, keyword and content strategy based on this combination of customer behavior, journeys, and historical data to drive success in what is becoming a very competitive market.
Additional reading: For more information on how to use data to help your Amazon strategy, check out our free eBook — How to Make Sense of Your Amazon Customer Data.