Digital ad spending in the US reached over $108 billion in 2018. How do we make sure this money isn’t going to waste, especially on Amazon, where reporting still leaves a lot to be desired?
Companies need metrics that can accurately represent the effects of their ad spend. As of now, you probably rely on Advertising Cost of Sale (ACoS) to determine how your Amazon advertising spend impacts advertising revenue. Although this is a very important metric, it doesn’t consider how advertising spend affects brand awareness and the organic sales that result from that brand growth.
Let’s say we pay $10 in advertising costs to place an ad on Amazon, and 10 people end up purchasing a product from our ads, generating $100 in revenue directly attributable to advertising.
This gives us an ACoS of 10%.
But this isn’t the only metric that we should be focusing on with our $10 ad spend. That $10 also has an effect on brand awareness and organic sales, because the more sales you make on a product, the more likely you are to rank higher organically, leading to more organic chances to make additional sales.
So for simplicity’s sake in our example, let’s say that each of our 10 orders raises our organic rank 1 position, and each of these ranking increases leads to an additional organic sale.* This means we end up generating $100 in additional revenue.
What is our ACoS now? Still 10%. Despite the 100% increase in revenue, no change is reflected in our ACoS because we aren’t factoring organic sales into the equation. We are only focusing on revenue directly generated from the ad.
This is where ACoS fails us in measuring the true value of our ad spend.
*Please note, this is just an example; raising your organic rank is a function of a very complicated algorithm, where sales volume is just one of many factors. Additionally, there is no direct correlation between organic rank increase and sales increase; these numbers are used merely to showcase that improving your organic ranking may lead to more sales.
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. This gives 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 overtime can show how your ad spend can create a snowball effect by helping increase your organic sales.
Here is the basic formula for measuring TACoS:
A low TACoS means that when advertised, a product generates strong sales. Conversely, a high TACoS means that the product advertisements are not returning strong revenue, which most likely means your ads are under-performing. If a product has a high TACoS, the advertising campaign needs to be reviewed and tested with either new keywords, bids, products, or a mix of all three.
When tracking TACoS over time, the goal is for it to remain flat or ideally decreasing over time. TACoS decreasing implies that 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 strictly generating revenue through ad sales alone.
Now what if both TACoS and ACoS are increasing? Your gut reaction may be that this is the worst scenario. But there are certain situations where this would make total sense. Both measures increasing implies that you’re paying more per sale and that your advertising sales are a larger portion of you revenue.
In general, this isn’t the goal when looking at TACoS. However, if you are launching a new product, this is perfectly normal. When introducing a product, all that matters is increasing the 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 make sure to avoid. You never want ACoS decreasing while TACoS is increasing.
You may be used to celebrating when your ACoS decreases, but this particular scenario is deceptive. Although you are generating more advertising revenue per advertising dollar spent, your total revenue is being increasingly influenced by your ad spend. This means that organic sales are becoming a smaller percentage of the total revenue, which is counterproductive to advertising efforts.
In this scenario, you need to take a really close look at not only your ads, but your product listings. Are your product details pages properly optimized with compelling titles, attractive images, strong bullets, and the keywords you are trying to rank for? If not, and you have brand registry on the product, it’s time to update your listings!
For more insight on growing your brand on Amazon, download The Essential Guide to Amazon Advertising for Brands. This guide provides the strategies and tactics your brand needs to generate more sales through the various advertising formats available on Amazon. Get your copy today!