Pay-per-click (PPC) advertising is one of the most valuable tools available to Amazon sellers. Chances are you’ve struggled at one point or another with identifying appropriate benchmarks and analyzing how effective your PPC campaigns actually are.
Most are familiar with ACoS (the inverse of ROAS), but another metric we have found is essential to understanding your overall PPC strategy is TACoS.
Today, we will review both metrics and discuss how they are different from each other and why both are important to your success on Amazon.
ACoS is an Amazon exclusive acronym that stands for Advertising Cost of Sales. In short, it tells you how much money you’re making from ads. The formula to calculate ACoS is:
Ad Spend / Ad Sales
ACoS measures your direct advertising performance telling us whether our ad spend is effective or not. Anything less than 100% ACoS means you’re making a profit on each dollar spent on advertising.
Remember, High ACoS means low ROAS and low ACoS means high ROAS.
ACoS should be analyzed at campaign and account levels. This is because you’ll likely have different targets for branded and non-branded campaigns. Branded campaigns are likely to have a low ACoS (higher profitability) because you’re hitting customers who have already heard of your brand and likely further down on the purchasing funnel. On the flip side, non-branded campaigns have higher ACoS (lower profitability) because you’re trying to reach new to brand customers who are searching with broader search terms & keywords
In a perfect world, every product you sell would have an extremely low ACoS but depending on your goals, a high ACoS isn’t always a bad thing. ACoS is specific to ads only - which conceptually only makes up half your business and doesn’t speak to organic sales.
This is why we shift our focus into a more valuable KPI called TACoS.
TACoS stands for Total Advertising Cost of Sale which measures advertising spend relative to the total revenue generated. It is a metric that provides a holistic understanding of your Amazon business. ACoS only tracks the results of your advertising efforts, TACoS takes all of your sales into account — regardless of whether they came directly from advertising or not. The formula for TACoS is:
Ad Spend / Total Sales
TACoS is essential to focus on - you’ll want to use it to monitor your brand equity on Amazon and your profitability.
Your advertising might be driving higher ACoS, but your overall TACoS is low because you’ve had success with organic search conversions. You might have a 45% ACoS and a 18% TACoS because of how your advertising performs within the holistic view of your account performance. Advertising on Amazon is non-negotiable, but you can have sales that come from outside of it.
The truth of it is, there is no set ACoS or TACoS that you should stand by. It really depends on the product being sold, and the profit margins established. Here at DLVRD Media, we take a customized approach of crunching Amazon fees, FBA fees, COGS, and then backing into a break even ACoS. Once we establish the break-even ACoS, we turn to our total revenue to see where TACoS needs to land. At the end of the day, our #1 priority is to grow your revenue profitably.
To provide some round numbers in a perfect world, we would land on 35% ACoS and 15% TACoS. If you are focused on growth, and profitability is not as important, then I would say let’s max out the ACoS and TACoS to make sure we are spending enough to drive more revenue. Now, on the flip side, if you are focused on driving profitability on Amazon, then we need to talk about how much profitability you are focused on, and make sure we cap our budgets at that specific ACoS and TACoS.
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.
A major gap in PPC strategy for many sellers is the failure to look at TACoS as well as ACoS. Focusing only on the latter risks subjecting yourself to tunnel vision, which prevents you from looking at both your organic and paid sales in relation to ad spend, and also accept that a high ACoS in the beginning is just part of succeeding on Amazon.
If you would like a free audit to see where your ACoS and TACoS are and how they can be improved, contact us to get a personalized approach to your success on Amazon.