Understanding Your Advertising Metrics: ACoS, TACoS, ROAS
Advertising for your e-commerce business is one of the quickest and most effective ways to increase revenue and improve sales rank. As you advertise on an online marketplace, understanding the revenue being generated as a result of your spend is crucial. Amazon sellers are likely familiar with Advertising Cost of Sales (ACoS), which takes into consideration advertising spend relative to its generated sales. It’s a similar variant of Return on Ad Spend (RoAS) used by Google. However, what many fail to additionally monitor is Total Advertising Cost of Sales (TACoS), which is a more all-encompassing revision of this metric.
Advertising Cost of Sales (ACoS)
As mentioned previously, ACoS is just a measurement of your ad spend in relation to the revenue it generates. Calculating ACoS is simple: divide your total ad spend by the total value of its generated revenue and multiply by 100 to obtain a percentage. Let’s say that your business spent $20 on Amazon ads for its new product. These ads were appealing to several online shoppers, leading to an additional $100 in product sales. In this instance, your ACoS would be 20%. While this is a great way to monitor your advertising’s subsequent impact on revenue and ensure that you aren’t wasting money, it fails to take a broader look into the effects advertising can have on your business.
Total Advertising Cost of Sales (TACoS)
Let’s refer back to that $20 your business spent on ads, and the resulting $100 in additional revenue. These new customers were pleased with their purchases and left glowing reviews. This growth in sales and customer feedback will contribute to an increase in your organic ranking, making it easier for other customers to find your business. Furthermore, as your new customers spread the word about your products, additional sales can be obtained organically. This “halo effect” is the reason why your business should also be examining TACoS.
TACoS is a similar calculation to ACoS, but it takes into account your overall revenue rather than revenue generated solely from ads. It’s a way of measuring the holistic effect that advertising can have on your business, with sponsored content turning into organic sales.
TACoS can provide extensive insights into the performance of your ads in relation to your overall business. While a low number suggests that a small investment in ads yields a large increase in sales, a high number suggests underperforming ads. As you monitor TACoS over time, the goal is to keep this number constant or for it to decrease.
The best use of TACoS is in relation to ACoS. While it may appear to be a great thing if your ACoS is decreasing over time, what if TACoS is simultaneously increasing? A lower ACoS indicates that every dollar you spend on advertising has an increasing impact on additional revenue. However, if TACoS is growing, this suggests that your business’s revenue is being influenced increasingly by your ad spend. The goal of advertising is to have a snowball effect, leading to future organic growth. This scenario suggests that you need to be taking a look at your products and their listings rather than their ads.
Return on Ad Spend (ROAS)
ROAS is simply the inverse of ACoS, and it’s an industry standard benchmark in advertising. This metric is useful in helping you understand how many dollars in sales were the result of one dollar spent on advertising. While ACoS is useful for measuring how much you spent on ads to gain one dollar in sales, ROAS is better for understanding the efficiency of your advertising dollars. So, in the case of your $20 spent on advertising and $100 in resulting sales, your Return on Ad Spend would be 500%, and your Advertising Cost of Sales is 20%.
The Value of Multiple Metrics
Advertising metrics such as ACoS, TACoS, and ROAS are invaluable KPIs to your business as it markets its products online. While each of these metrics is unquestionably helpful on its own, together, they can help you form a more all-encompassing look into your business. Tracking these numbers and their evolution over time will help you establish advertising goals and budgets, as well as contributing to a better understanding of growth. Furthermore, by monitoring your advertising performance for various products, you will learn which strategies result in higher clickthrough rates and potential purchases. As your business gears up for Prime Day, monitoring your advertising KPIs will help your business maximize its success.