Almost every brand will at some point ask themselves one of the following questions:
- What should my TACoS be?
- Is my TACoS too low?
- Is my TACoS too high?
First of all, let’s go through what exactly TACoS means when it comes to Amazon, why it is a critical metric to stay on top of and how you should decide what yours should be.
TACoS means Total Advertising Cost of Sale. It is a percentage metric that is calculated by dividing your advertising spend by your total revenue over a given time period. We have included an example of this calculation below.
Using the above example, we are saying that 10% of your total revenue is being spent on advertising.
Importance of measuring your TACoS:
TACoS should not be confused with ACoS (Advertising Cost of Sale). Your ACoS focuses just on advertising metrics (ie advertising spend divided by advertising revenue). It is great for analysing how much advertising revenue you are getting back from your advertising spend, but this only looks at the short-term picture.
By using TACoS, it helps you to analyse how much of your Amazon revenue you are spending on advertising, helping to give you a better understanding of how profitable your Amazon business really is. It also allows you to understand the impact that your advertising efforts are having on your organic sales and growth.
It is easy for brands to get lost in a great ACoS, however this usually only paints a small portion of the picture. Following on from our TACoS calculation example above, let’s put this into what could be a real life scenario across 3 months:
|Metric||Month 1||Month 2||Month 3|
Using the above example, we can see that the ACoS stays the same throughout the 3 month period, meaning that for every £1 invested in advertising, £5 revenue is consistently being generated.
However during the same 3 month period, the TACoS rises by 2.5% each month.
Whilst this could be due to many factors, the main reason behind this would be down to inefficient advertising spend. It suggests that the advertising spend is being invested in areas that are not supporting the organic growth of your products and brand.
With this example, as time goes on your business is becoming less profitable due to no growth in revenue and a continuous increase in advertising spend.
Deciding your TACoS:
You’ve made it this far and you’re looking for the magic TACoS percentage to implement and be on your way… Although it’s not quite that simple.
Brands on Amazon operate at completely different TACoS levels. Some brands run their Amazon business with a 0% TACoS (meaning that they spend £0 each month on advertising), other brands could be operating at over 100% TACoS (meaning that they spend more on advertising than they’re generating in revenue!).
Each brand is at different stages of their journey and have different goals that they’re realistically trying to reach. For example, a newly launched brand on Amazon may need to operate at over 100% TACoS initially on Amazon to build the initial awareness before lowering this metric once they have generated traction for their products. An established brand may have extremely strong organic presence and be able to achieve a 5% TACoS whilst continuing to see growth.
The answer to the “What should my TACoS be?” question comes down to a few things:
- What is your current Amazon position? – Are you a new brand who should invest more in advertising initially to build demand before looking to reduce this?
- What are your goals? – Are you looking to play the long game, spend small and grow at a slower rate, or spend big and accelerate your Amazon sales?
- What is your profit margin? – Once you have factored in all of the costs associated with Amazon such as category referral fees, FBA fees, VAT/tax, COGS, how much room is left to reinvest into advertising?
We find that a typical TACoS for Amazon brands that we provide advertising management services for ranges, on average, between 5-15%.
With the ever-increasing number of products launching on Amazon, advertising is becoming a necessity. Whilst in the long-run your profit margin is the most important metric, you should always budget a fixed percentage of your revenue to reinvest into advertising to give yourself the best chance of continued growth in what is becoming an overcrowded marketplace.
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