Amazon TACoS (total advertising cost of sale) is a key metric for understanding your business’s relationship to advertising. For sellers who are unfamiliar with what TACoS is or how to interpret it, we’ll cover all of the information you need to know, like:
- how to calculate TACoS
- what your Amazon TACoS means
- why it is useful for brands on Amazon
- top TACoS use cases.
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What Is Amazon TACoS?
Amazon TACoS, or total advertising cost of sale, measures the relationship between ad spend and total sales. In other words, it is the ratio of ad spend to total sales (in %). You can calculate your TACoS on Amazon with this formula:
Please note: TACoS is NOT “Target ACoS,” which is a completely different advertising concept.
What is the difference between TACoS and ACoS?
ACoS stands for advertising cost of sale. It is calculated by dividing ad spend by ad revenue, and it measures the efficiency of your advertising campaign.
TACoS, on the other hand, takes total revenue into consideration — that is, both ad revenue and organic revenue.
Why should I use TACoS?
TACoS can be used to:
- understand your overall profitability
- monitor reliance on advertising for your account or specific products
- analyze the effect of ad sales on organic sales.
At the heart of the metric TACoS is the idea that ad sales drive organic sales and that this effect can cause positive and negative sales cycles.
A positive sales cycle occurs when an increase in ad spend leads to an increase in ad sales, and those ad sales, in turn, improve organic ranking (and the number of reviews) and lead to more organic sales.
A negative sales cycle is triggered in a similar way to a positive sales cycle. A decrease in ad spend leads to a decrease in ad sales, which leads to poorer organic rankings and fewer organic sales.
How Can I Use TACoS to Improve My Business?
Use case 1: Monitor overall business profitability after advertising
Using Amazon TACoS to calculate total net profit margin
To see whether your business model is profitable, we need to calculate the total net profit margin. Let’s look at an example of how we can do this with TACoS:
Let’s say ad spend is $2,500 and total sales are $30,000. Using the formula from above, we’ll divide ad spend ($2,500) by total sales ($30,000) and multiply that by 100, which would give us a TACoS of 8.33%.
Next, we’ll subtract TACoS from our organic profit margin — our profit margin before advertising. (In this example, we assume the organic profit margin is 25%.) The result will be the net profit margin.
Because TACoS is less than the organic profit margin, we know that the overall business model is profitable, with a total net profit margin of 16.67%.
IF TACoS < organic profit margin, THEN your overall business is profitable after advertising
Tracking total advertising profitability over time
Decreasing Amazon TACoS
Generally, a decreasing TACoS indicates increasing total advertising profitability. A downward sloping TACoS most often indicates one of the following situations:
- total sales are increasing and ad spend is increasing but at a lower rate;
- total sales are increasing and advertising spend is not changing;
- total sales are flat and ad spend is decreasing.
An increasing TACoS
An increasing TACoS indicates that total ad profitability is decreasing.
One of the following situations typically leads to an increasing TACoS:
- ad spend is increasing and total sales are not changing;
- ad spend is increasing and total sales are increasing (but at a slower rate);
- advertising spend is not changing and total sales are decreasing.
Note: an increasing TACoS is not necessarily a bad thing if you are investing heavily in advertising to launch a new product, maximize sales, or increase brand awareness.
In these situations, it is normal to see your TACoS increase for a period of time. In the long run, however, you’ll want to have a decreasing TACoS or a flat TACoS.
Use case 2: Understanding how dependent individual products are on advertising
very high TACoS on Amazon = high dependence on advertising
very low TACos = advertising is underutilized
By looking at TACoS levels across your portfolio, you can identify products that are too dependent on advertising and products that do not benefit enough from advertising.
Very high product TACoS
If an individual product’s TACoS is significantly higher than the rest of your product portfolio, this means that the product is highly dependent on advertising.
Optimizing the product’s listing (copy, images, videos, reviews) will increase its click-through rate and conversion rate so that more ad sales and organic sales are generated. This, in turn, will increase the chances of starting a positive sales cycle.
Very low product TACoS
On the other hand, a very low TACoS means that ad spend and ad sales are much lower than other products in your portfolio.
This might indicate that you have a product that has strong organic rankings and sales. However, it also means that it could be a good idea to increase ad spend (or optimize your ads) to increase overall sales by driving ad sales and in turn organic sales.
Use case 3: Identifying positive and negative sales cycles
To identify positive and negative sales cycles, you can look at the relationship between Amazon ACoS and TACoS.
A positive sales cycle
Brands on Amazon invest in advertising for a number of reasons, like:
- launching a new product
- for a seasonal campaign (e.g., Christmas)
- to spark an increase in sales.
Ideally, an increase in ad sales also drives more organic sales. To see if this happens you can monitor TACoS.
An increase in ad spend typically leads to a short-term increase in both ACoS and TACoS (here from Q1 to Q2).
As ACoS stabilizes on a higher level (in Q2), TACoS should ideally begin to decrease, indicating that a positive cycle of more organic sales has been triggered.
As a quick reminder: A positive sales cycle occurs when an increase in ad sales improves organic rankings (and the number of reviews), leading to more organic sales, which in turn further improves organic rankings and sales.
A negative sales cycle
Brands on Amazon often reduce ad spend to quickly cut costs or to optimize ACoS over time. When reducing ad spend, you should monitor TACoS to see if a negative sales cycle has started that needs to be stopped.
Normally, when you decrease ad spend there will be a short-term decrease in ACoS and TACoS. Then both ACoS and TACoS should stabilize. If ACoS has stabilized and TACoS is increasing, however, this indicates that a negative cycle of fewer organic sales has been triggered.
Just to recap: A negative sales cycle occurs when a decrease in ad spend leads to a decrease in ad sales, which in turn leads to poorer organic rankings and fewer organic sales.
Flat Amazon TACoS and ACoS
When both TACoS and ACoS are stable (or fluctuating around a certain level), this indicates neither a positive nor a negative sales cycle has been triggered.
This can occur when an advertising campaign is highly optimized, or when there have not been any adjustments made to an advertising campaign.
While a flat Amazon TACoS is not a bad thing, most advertisers would want to see it decreasing slightly over time, as the brand gains recognition, organic rankings improve, and organic sales build momentum.
How Can I Improve My TACoS on Amazon?
To achieve a decreasing Amazon TACoS, one of the following situations needs to happen:
- Situation 1: ad spend decreases while total sales stay the same or increase (e.g. by using negative keywords to cut wasted ad spend);
- Situation 2: ad spend stays the same while total sales increase (e.g. by moving budget to more efficient targets);
- Situation 3: ad spend increases but total sales increase at a faster rate (e.g. by increasing ad spend for an optimized and high-converting product listing).
Below, we’ll outline how you can drive your TACoS lower by improving ad efficiency and boosting organic sales.
Improve ad efficiency
One of the most effective ways to cut wasted ad spend (situation 1 above) and boost your ad sales (situations 2 and 3) is to optimize your Amazon ads.
To do so, you can focus on improving the following metrics:
- click-through rate: drive more traffic to your to your product detail page;
- cost per click (CPC): make sure your bids are competitive, while not overpaying for ads;
- conversion rate: attaining a higher conversion rate means more profitable ads;
- average sales price: assuming all else equal, a higher average sales price equates to higher profitability.
Boost your organic sales
Apart from using Amazon advertising in an effective way, the best way to bring in strong organic sales is with an optimized product listing.
This means you need to:
- make sure the listing’s search terms are relevant and up to date;
- optimize your product content: images, titles, bullet points, description, A+ Content, videos;
- manage your product reviews and questions.
You can use our free amazon keyword tool – Sonar, to identify the most relevant keywords to include in your listing. Doing this will increase the product listing visibility and improve Amazon SEO.
Amazon TACoS: Final Thoughts
Looking at Amazon TACoS is a great way to put your ad spend into perspective because it brings your total revenue into the picture. In doing so, it captures the impact your advertising and ad sales have on organic revenue.
When analyzing your brand’s business on Amazon, TACoS is also useful for:
- determining net profit margin and tracking total advertising profitability over time
- understanding how dependent individual products are on advertising
- Identifying positive and negative sales cycles.