Why Amazon TACoS and ACos Are Not One Size Fits All

There is no shortage of metrics you can monitor when advertising your products on Amazon, CPC, CTR, ACoS, TACoS - but which is the most important and how do you determine your targets?

Our Favorite Amazon Advertising KPI

Drumroll please... our favorite KPI is TACoS! 🌮

 TACoS stands for Total Advertising Cost Of Sales. To explain TACoS, we want to start with ACoS (Advertising Cost Of Sales) as that’s the one most utilized as it resides comfortably within the Amazon Advertising user interface (UI).

Simply put, Amazon ACoS is the ratio of the amount you spend on advertising relative to the revenue generated by that advertising spend. It’s likely you’ve heard of ROAS (Return On Ad Spend). ACoS is quite similar, but simply the inverse ratio.

For example, if you spend $100 on advertising and generate $1000 in sales, then your ACoS would be 10% [(100 ÷ 1000) X 100 = 10]

ACoS is a basic, but powerful KPI for measuring ad efficiency.

Now let’s talk TACoS. TACoS is calculated very similar to ACoS but with one subtle and crucial difference.

With TACoS, we’re looking at ad spend as a percentage of the total sales of that product and not just the sales generated from the actual ads.

Why is this so important? Simply put, the lower the TACoS percentage, the higher the profit margin for the total sales of your product, not just the sales generated from the last click on the actual ad itself. Also, it’s a great way to measure the effectiveness your ads have had on the overall growth of the product as it considers revenue from both paid and organic traffic. However, what’s most important is to set ACoS targets at defined levels of aggressiveness with the goal of ultimately getting your TACoS as low as possible.

How to determine goals for ACoS and TACoS

First of all, never set a single KPI goal for your entire product catalog. KPI’s should be set at a product and/or product group level. If your catalog is small enough, set it at a product level. If you’re dealing with a larger catalog with products similar in nature, then we recommend setting it at a product group level.

How hungry?

The first thing that you must determine is the brand’s appetite for growth (see what I did there 😁 ). How much are they willing to spend to grow revenue? Are they willing to take a loss in the early stages to drive long-term sustainable growth and success? Understanding a brand’s appetite for growth and gauging their aggressiveness is an important step in determining your strategy and setting your KPI’s for ACoS and TACoS.

Lots of appetite and taco discussion here... I’m getting hungry.

How profitable? 

Never lose sight of profitability when setting your KPI’s. It’s crucial that you understand the product or product group’s gross margin. To calculate this, you need to consider your base product cost as well as inbound shipping fees (if FBA); FBA fees or your own carrier costs if you are the one shipping the order; your product’s return rate and the loss on any discarded product; and, of course, Amazon’s referral fees. Once you know your true gross margin for selling the product on Amazon, you’ll know exactly what you’re working with as a % of your top line sales.

What is the product lifecycle phase?

Once you understand the appetite for growth/aggressiveness and know what your true gross margin is, you can set your KPI’s. But don’t get ahead of yourself, you still need to consider a few things. Most importantly is giving consideration to the product lifecycle. In what stage is the product, or product group? Introduction, growth, maturity, or decline?

Did you just launch the product? Is it beyond launch and in a growth stage? Has the product peaked and is maturely delivering consistent performance? Or, is it on the way out?

Introduction / Launch Phase

If a product is in the introduction or launch stage, it’s most likely you’ll see a high TACoS percentage. It’s the old adage here: “spend money to make money”. Unfortunately, it’s rare you can simply launch a product in the digital space and expect it to perform without heavily investing in marketing and, specifically in this case, advertising. That case has never been truer with the rapidly rising customer acquisition costs (CAC) that brands are seeing these days.

Growth Phase

As the product advances into the growth stage, you should see TACoS declining, but will likely want to continue setting a relatively aggressive ACoS target so as not to miss out on driving towards peak volume and higher organic ranking.

Maturity Phase

Now, you’ve made it to the maturity stage. Congratulations!

This is where you should be able to dial back ACoS to a permanently sustainable level and one you’re comfortable with for the long-term. This is also where you will see your lowest possible TACoS. You’ve hit stride... enjoy!

Decline Phase

Lastly, is the decline phase. There are many factors that could cause a decline. It could be a decision the brand makes to discontinue a product. It could be a supply chain challenge or a raw material issue. It could be an external factor like increased competition or simply a decline in consumer interest in the product and/or product category itself. Regardless of the root cause, setting ACoS and TACoS targets is important during this phase. You may want to discontinue advertising altogether. Or, maybe you want to dump the product so you run a sale and drive ads to unload the inventory. There is more than one way to skin this cat, but understanding the cause and the objective is key in setting your KPIs during this phase. Careful, as these KPIs can change rapidly during the decline phase.

The last consideration is in which advertising cycle is the product or product group.

Product advertising cycles

We like to take products through two advertising cycles: Acquisition and Optimization.

The Acquisition phase is when we’re more aggressive. We’re adding keywords and casting the widest net possible. We’re learning which search terms drive sales and which search terms are “duds”. It helps us find new opportunities while also setting us up for refinement. During this phase, we anticipate a higher ACoS and, subsequently, a higher TACoS. That's okay and is a good sign. It represents acquisition of the intelligence necessary to move to the next phase...

...Optimization! This is where we’ll take what we’ve learned during the Acquisition phase to refine and optimize our campaigns. We’ll introduce new keywords based on search term analysis. We’ll optimize match types of existing keywords. We’ll set negative keywords to eliminate ad spend on under-performing search terms. We’ll optimize budgets and, ultimately, we’ll continue to drive towards an ideal ACoS and, most importantly, TACoS goal ultimately maximizing the product’s contribution margin.

How do I set my KPIs?

There is a lot to consider (gross margin, appetite for growth, willingness to be aggressive, product lifecycle phase, advertising cycle) and, ultimately, the KPIs are going to vary by client, brand, product, product group and category competitiveness. I can’t tell you the exact KPI targets you should set, but I have created the handy graphic below to help you visualize how the ACoS and TACoS goals will vary and change over time. Use this to set those goals as early as possible and then monitor performance as you advance through the various stages.

If you’re struggling to understand these metrics and would like to speak with one of our Retail Bloom team members, schedule a consultation. We’re here to help. We live and breathe all things marketplace and eCommerce. We’re passionate about helping others and adding value wherever we can.