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Finding a healthy balance between organic sales and paid sales from ad campaigns is the optimal situation for any brand or retailer. If your paid sales outweigh your organic sales, you can run the risk of becoming overly reliant on ads to drive revenue. If your organic sales drastically outweigh your paid sales, you begin to question if your campaigns are optimized and effective to begin with.
To help you understand how effective a campaign is relative to your ad spend, you leverage the advertising cost of sales (ACoS) metric. ACoS is the percentage of sales spent on advertising and is calculated by taking total ad spend, dividing it by total ad sales, and multiplying by 100. A lower ACoS generally indicates that you are spending a lower percentage of sales on advertising.
In order to understand if you are making more than you are spending, the return on ad spend (RoAS) metric identifies the ratio of ad revenue and ad spend. It is calculated by dividing total sales by total ad spend and is an inverse of ACoS — meaning that RoAS is equivalent to one divided by the given ACoS. Unlike ACoS, though, RoAS is represented as an index rather than a percentage.
While both of these metrics provide valuable insights to help you analyze your ad spend and understand your return on investment, a new unique performance metric is gaining traction in the Amazon ecosystem — total advertising cost of sales (TACoS).
Amazon TACoS Defined
While ACoS and RoAS are both confined to strictly your advertising efforts, TACoS sheds light on your entire business performance. The goal of your advertisements, after all, is not to solely drive sales through ads but to act as a catalyst to organic traffic and consumers searching for your product directly.
The metric measures your advertising spend relative to your total revenue generated, enabling you to granularly understand how your campaigns are directly impacting your company’s overall revenue growth, including organic sales. You can measure TACoS in unison with ACoS, RoAS, revenue, and gross profit to more accurately depict business performance and your bottom line.
To calculate TACoS, divide your total ad spend by your total sales revenue and then multiply that by 100. This information will contextualize your ad spend with a more big-picture view, provide clarity on any hard boundaries for your ad spend, and gauge how much your business truly utilizes advertising to drive sales.
Using Amazon TACoS to Measure Holistic Business Growth
While your TACoS is going to vary by your industry and company makeup, there are different scenarios that TACoS can help you understand. Generally, if your TaCoS is decreasing or remains flat, this is an indicator that your advertised product is producing strong, or at least steady, sales. Your organic sales, therefore, are becoming a more important aspect of your total revenue and your advertising program is playing a tangible role in the growth of your brand.
If your TACoS is increasing, this is an indicator that your ads are not driving an uptick in organic sales or placements and your campaigns or product detail pages may be underperforming. You can take this information and perform listing optimization and enhance your Amazon SEO strategy.
When looking at your ACoS and TACoS simultaneously, remain alert for a decreasing ACoS and increasing TACoS. While in other circumstances a lower ACoS is a positive sign, in this scenario it signifies that your ad spend is increasingly influencing your total revenue, hinting at the antithesis: your organic sales are becoming a shrinking segment of your total revenue. Like the above scenario, if this happens, you should prioritize on-page optimization to ensure your listings are clear and compelling.
Leveraging TACoS will equip you with valuable details for evaluating your overall investment in ads on Amazon, budgeting effectively, and understanding to what extent your ads are actually working. By knowing what percentage of total revenue your ad spend generates, you will be able to identify blind spots and areas with growth potential as well as understand if your ads are, in fact, fueling the flywheel and promoting organic growth.