Published May 9, 2019
Digital ad spending surpassed traditional ad spending for the first time in 2019. In 2020, ecommerce surpassed levels that weren’t expected until 2025. How do you ensure that the extra money your brand is spending on online advertising isn’t going to waste – especially on Amazon, where reporting still leaves a lot to be desired?
Companies need metrics that accurately reflect the results of their ad spend.
As of now, you probably rely on Advertising Cost of Sale (ACoS) to determine how your Amazon advertising spend impacts your revenue. This is a critically important metric, but it doesn’t consider how what you spend on ads affects brand awareness and the organic sales that result from that brand growth.
Business being good isn’t always a good thing. Shipping, inventory, and fulfillment are the basic underpinnings of a business that must work flawlessly for marketing & advertising to be worth it – and they are all in flux right now.
Let’s say you pay $10 in advertising costs to place an ad on Amazon. 10 people end up purchasing a product from your ad, generating $100 in revenue directly attributable to advertising.
This gives you an ACoS of 10%.
But this isn’t the only metric that you should focus on with your $10 ad spend. That $10 also impacts brand awareness and organic sales. The more sales you make on a product, the more likely it is to rank higher organically, leading to more chances to make additional sales.
For simplicity’s sake, let’s say that each of your 10 orders increases your organic rank by one position and each increase in ranking leads to one additional organic sale.*
This means you generate $100 in additional revenue. What is your ACoS now?
Despite the 100% increase in revenue, no change is reflected in your ACoS because you are only focusing on revenue directly generated from the ad. You aren’t factoring organic sales into the equation.
This is where ACoS fails you and marketers everywhere in measuring the true value of your ad spend.
ACoS fails us in measuring the true value of our ad spend. Total Advertising Cost of Sale, or TACoS (not to be confused with tacos, the delicious Mexican delicacy), measures advertising spend relative to total revenue generated, giving advertisers a much more accurate picture of how their ad spend performed.
TACoS allows advertisers to measure the effect of their advertising on the long-term growth of their company. Tracking your TACoS over time can show how your ad spend can create a snowball effect by helping increase your organic sales.
How Do I Calculate TACoS?
The basic formula for measuring TACoS is:
A low TACoS means that when advertised, your product generates strong sales. Conversely, a high TACoS means that your product advertisements aren’t returning strong revenue (and your ads are underperforming). If a product has a high TACoS, the advertising campaign needs to be reviewed and tested with new keywords (for Amazon SEO), bids, and/or products.
The goal is for your TACoS to decrease or remain flat over time. A decrease in TACoS implies that your organic sales are becoming an increasingly larger part of total revenue, which increases their weight in relation to ad revenue. This implies that your advertising is successfully growing your brand and you are becoming less dependent on generating revenue through ad sales alone.
Now, what if TACoS and ACoS are both increasing? Your gut reaction may be that this is the worst-case scenario. Indeed, this generally isn’t the goal when looking at TACoS. It implies that you’re paying more per sale and that your advertising sales are a larger portion of your revenue.
But in certain situations, it makes complete sense. For example, when introducing a product, all that matters is increasing your total sales. As time passes, you should look for TACoS to decrease as your organic volume for that product picks up.
The last scenario to consider is one you want to make sure to avoid.
You never want ACoS to decrease while TACoS increases.
You may be used to celebrating when your ACoS decreases, but this particular scenario is deceptive! You are generating more advertising revenue per ad dollar spent, but your total revenue is increasingly becoming influenced by your ad spend. This means that organic sales are becoming a smaller percentage of your total revenue, which is counterproductive to advertising efforts.
In this scenario, you need to take a close look at not just your ads but also your product listings. Are your product details pages properly optimized with compelling titles, attractive images, strong bullets, and the right keywords? If not (and assuming you have Brand Registry on the product), it’s time to update your listings!
TACoS + ACoS: Next Steps
For more insight on growing your brand on Amazon, download Amazon Stores + Sponsored Brands: Taming the Two-Headed Monster for Marketplace Profitability. This guide provides the strategies and tactics your brand needs to drive more customers to your brand through Amazon Stores and Amazon Sponsored Brands.
*Note: This is just an example. Raising your organic rank is a function of a very complicated algorithm in which sales volume is just one of many factors. Additionally, there is no direct correlation between increases in organic rank and increases in sales. These numbers are used merely to showcase that improving your organic ranking may lead to more sales.