Before You Start
Before delving into the significance of TACoS in Amazon PPC, it is essential to have a basic understanding of Amazon advertising and key performance indicators.
Familiarize yourself with terms like ad spend, total sales, and ACoS, as they are relevant to TACoS calculations. You can learn the barebones basics by reading our Amazon PPC Beginner’s Guide.
Having a foundational understanding of these concepts will enhance your comprehension of TACoS and its importance in your advertising strategy.
Overview
- Understanding TACoS: Total Advertising Cost of Sales
- The Importance of TACoS in Amazon PPC
- How to Hit Your TACoS Targets
- Summary and Next Steps
Understanding TACoS: Total Advertising Cost of Sales
TACoS represents the percentage of total sales revenue that is spent on advertising. It is calculated using a simple formula:
For example, if your total ad spend is $500 and your total sales amount to $5,000, your TACoS would be 10%. This means that 10% of your sales revenue is allocated to advertising costs.
In other industries, sometimes TACoS is referred to as the Advertising-to-Sales Ratio; so if you hear both of those terms, they are likely referring to the same thing.
The Importance of TACoS in Amazon PPC
Tracking Advertising Efficiency
TACoS serves as a crucial indicator of advertising efficiency.
A lower TACoS percentage indicates that you are spending less on advertising relative to your total sales, resulting in more efficient campaigns.
As you optimize your advertising strategies, aiming for a lower TACoS becomes a primary goal, as it means you are getting more sales for every advertising dollar spent.
That said, try not to fall into the trap of thinking that you should always be approaching 0% with your TACoS. Depending on your industry, having lower TACoS (c’mon, who doesn’t love tacos after a long day?) might not necessarily translate into increased advertising efficiency.
For example, if your current TACoS is sitting at 15% in one month and it suddenly dips to 2% in the next month, there is a high chance that your total sales also may have dropped. This is because the amount that your business spends on advertising usually has a directly proportional relationship to your total sales.
Evaluating Campaign Profitability
TACoS plays a vital role in determining the profitability of your advertising efforts.
A high TACoS may suggest that your ad spend is not generating sufficient sales, leading to potential losses.
If you are unsure of whether or not your TACoS is actually high, a rough benchmark for a “high TACoS” would be around the 50% range. If you are unintentionally hitting >50% TACoS, then I suggest reassessing your campaigns and cutting out bleeding PPC campaigns.
Making Informed Budget Decisions
Using TACoS as a guide, you can make well-informed decisions about your ad budget allocation.
As you set your advertising budget, consider the desired TACoS percentage based on your profitability goals. A good general rule of thumb for new startups to follow is to aim to spend about 30% of their total sales on advertising in order to acquire new customers as fast as possible.
As your company starts to grow and/or you would like to shift your focus more towards profitability, you can aim for a lower TACoS like 10%.
On that note, a lower TACoS allows for greater profit margins and can justify allocating more budget to successful campaigns.
Limiting your ad spend and campaign budgets in order to hit your TACoS target is a great way to move the bottom line on your P&L.
How to Hit Your TACoS Targets
Now that we got the basics out of the way, let’s talk about practical implementations of how we can actually hit our TACoS targets that we set for ourselves.
Below is a list of steps that can serve as a good starting point for your journey on hitting your Amazon PPC TACoS target.
1. Decide On Your TACoS Target
Firstly, before you hit a target, you need to decide on one.
Are you just starting out and want to acquire customers as fast as possible? If so, then start with a higher target, such as 30%.
Are you already generating a significant amount of organic sales to sustain growth? If so, then start with a lower target, such as 10% or 15%, so that you can make your advertising dollars more profitable.
Remember, deciding on a target is ultimately all about where you currently are with your business and what your business objectives are at this moment in time.
TACoS targets can always be changed down the line, so if you’re having a hard time deciding, just pick one and roll with it until you need to readjust.
2. Decide On Your Budgeting Strategy
There are a couple of ways to limit your Amazon PPC ad spend so that you don’t overspend and exceed your TACoS target.
1. Campaign level budgets
Using campaign level budgets gives you the most control over how your budget gets allocated by Amazon.
That said, you can adjust your campaign level budgets on a frequent basis in order to allocate more of your spend to your most profitable campaigns. I recommend adjusting them at least once per day.
The downside of campaign level budgets is that it can require a lot of work if you have many campaigns in your Amazon PPC account. Depending on the size of your account, this can be a significant portion of your work day.
2. Portfolio level budgets
Amazon PPC portfolios can have their own budgets. This makes it easier to group your campaigns however you want by portfolios and set individual portfolio budgets that way.
This method is a bit easier and less time consuming than doing campaign level budgets, but the tradeoff is that you lose the granularity that you get with campaign level budgets.
3. Account level budgets
Account-level budget settings allow you to set an upper limit for the average daily budget for Sponsored Products ads across your account.
This is by far the simplest way to manage your TACoS, but the tradeoff is that you lose all the granularity that you get with either portfolio level budgets or campaign level budgets.
3. Take Last Week’s Total Sales and Calculate This Week’s Budget
The last thing that you need to do is figure out how much you can actually spend every week in order to keep your TACoS in line.
To do this, just take your total sales from last week (from Business Reports in Seller Central) and multiply it by your TACoS target to get this week’s total budget.
For example, if we made $100,000 in total sales last week and our TACoS target was 15%, then our total budget for the week would be $15,000.
The next step in the process is to divide your total weekly budget by 7 in order to get your daily budget that you need to make in order to hit your target TACoS. In our last example above, our daily budget would amount to $2,142.86.
Once you have your daily budget, just set your budgets accordingly based on the budget strategy that you decided on in Step 2!
Summary and Next Steps
In summary, TACoS (Total Advertising Cost of Sales) is a crucial metric to track when it comes to advertising on Amazon PPC. It is calculated by dividing ad spend by total sales revenue and is used to evaluate advertising efficiency, campaign profitability, and make informed budget decisions.
To optimize TACoS, businesses should aim for a lower percentage, indicating more efficient campaigns and higher profitability.
To take action on the points discussed in this post, your should first evaluate their current TACoS and decide on a target based on your objectives.
Then, you should choose a budgeting strategy that aligns with your goals and adjust campaign, portfolio, or account budgets accordingly.
Finally, use the formula provided in the post to calculate your weekly budget and adjust their daily budgets accordingly.
By following these steps, Amazon businesses like you can optimize their advertising strategies on Amazon PPC and improve their TACoS, leading to more efficient campaigns and higher profitability.