This is a guest post by Xuan Xie, digital marketing specialist at m19. Xuan excels at creating strategic content tailored to B2B eCommerce, particularly in the Amazon sector. With a deep-seated passion for eCommerce and expertise in PPC advertising, Xuan is dedicated to driving business growth through a wide repertoire of digital marketing solutions.

If you’ve waded through the competitive landscape that is Amazon PPC advertising, you’ve probably heard of two crucial metrics: ACoS (advertising cost of sale) and TACoS (total advertising cost of sale). While the former focuses on the direct profitability of ad campaigns, the latter takes a broader approach by measuring advertising spend in relation to total revenue. Understanding how these two metrics work together can reveal powerful insights for optimizing your marketing strategy and achieving sustainable growth.

In this article, we’ll explore the role of TACoS, its relationship with product margin, and how it complements ACoS. Then, we’ll provide some best practices for leveraging this metric to maximize profitability.

What is TACoS?

TACoS measures your ad spend as a percentage of total sales (including both organic and ad-driven sales). It’s calculated using the following formula:

TACoS = (Total Revenue / Advertising Spend) × 100

As an example, let’s say you spend $500 on ads, which returns $5,000 in ad sales. You also make $15,000 in organic sales, for a total of $20,000 in revenue. Your TACoS would therefore be: (500 / 20,000) × 100 = 2.5%. In this example, your TACoS is very low because organic sales contribute significantly to your total revenue.

Why is TACoS so important?

Unlike ACoS, which focuses solely on the efficiency of individual ad campaigns, TACoS evaluates the broader relationship between advertising efforts and total revenue, revealing insights into long-term profitability and brand growth.

One of the primary strengths of this metric is its ability to assess the health of organic sales. A declining TACoS, for instance, indicates organic sales are growing relative to ad spend. This suggests advertising efforts are successfully boosting product visibility and rankings, which, in turn, reduces reliance on paid ads over time. Conversely, an increasing TACoS may signal overdependence on ads or underperformance in organic channels, prompting a need for strategic adjustments.

For the long term, the measurement helps sellers identify when they’ve triggered a positive sales cycle, wherein increased ad sales lead to improved organic rankings and reviews, which then drive more organic sales. This virtuous cycle can decrease reliance on ads over time, potentially lowering TACoS and signifying greater profitability.

What is a good TACoS? (TACoS vs. profit margin)

The ideal TACoS for your business depends on your specific goals and net profit margins. To calculate the latter, you first need to determine your profit per unit:

Profit per Unit = Selling Price − Cost per Unit

Where:

• Selling price: The price you charge the customer
• Cost per unit: The total amount to make and sell the product, including:
  • Manufacturing costs
  • Shipping and logistics
  • Amazon fees (FBA fees, referral fees, etc.)

Then, you can calculate net profit margin:

Net Profit Margin = (Profit per Unit / Selling Price) × 100

A healthy net profit margin for Amazon FBA sellers typically ranges from 15% to 25%, with anything above 25% considered excellent. Most Amazon sellers achieve an average of 15%–20%, depending on their product category.

For new sellers, it’s recommended to aim high for a 30% net profit margin. But this is a generalization; everyone’s number will vary depending on their product category, pricing strategy, and competition.

To better understand the relationship between TACoS and profitability, let’s explore some scenarios:

1. TACoS and net profit margin are equal: This strategy can work for new product launches where the goal is to build visibility and rankings. Say you launch a new yoga mat and choose to forgo immediate profit to climb the search rankings and gain reviews instead. As a result, you earn a TACoS of 30% and a net product margin of 30%, which means you break even.
2. TACoS is less than net profit margin: In this scenario, organic sales dominate, and ads are used to maintain visibility. For example, you sell a popular kitchen gadget like an air fryer that yields a 40% net product margin and a 10% TACoS. That indicates your ads are making money, leaving you with a 30% profit after ad spend. This is ideal for mature products that have strong organic sales.
3. TACoS is greater than net profit margin: You take a loss with initial sales in this circumstance, but repeat purchases make the strategy profitable in the long run. Subscriptions exemplify this model well: Let’s say you release a subscription-based skincare product that returns a net profit margin of 20% and a TACoS of 40% right off the bat. That means you’re losing money on every sale due to high ad spend.

This can be acceptable for short-term goals like gaining brand awareness or repeat customers, but it’s unsustainable if mismanaged in the long term.

How TACoS complements ACoS

ACoS focuses exclusively on ad-driven sales, while TACoS provides a broad view of how ads impact your overall business. As such, different trends in each metric will uncover different strengths and problem areas in your sales strategy.

ACoS stays the same while TACoS increase

Your ads perform as usual (i.e., ACoS hasn’t changed), but your TACoS is creeping up.

This happens due to:

• A drop in organic sales: Your product isn’t ranking as high in search results anymore, or maybe competition is cutting into your organic sales.
• Market demand changes: If it’s a seasonal product, fewer people may be buying.
• Overreliance on ads: If organic sales are falling, your ads may have to carry more of the weight, which makes TACoS rise.

ACoS increases while TACoS decreases

In this instance, your ads cost more (which means ACoS is higher), but your overall efficiency (TACoS) is improving, which could be a good thing.

This occurs thanks to:

• Growth in organic sales: Your ads have done their job boosting your product visibility, so more people find you without needing to click on an ad.
• Smarter ad spend: You intentionally spend more on ads to promote a new product, and although that drives up costs, it also increases organic sales.

Both ACoS and TACoS increase

This is a warning sign. If both metrics go up, your ads are becoming less efficient, and your total revenue is unable to keep up with your ad spend.

The likely culprits are:

• Inefficient ads: You could be bidding too much on keywords that don’t convert well.
• Flat organic sales: If organic sales fail to grow, your ad spend will naturally account for a larger chunk of revenue.
• Tough competition: Higher bids or CPCs (cost-per-click) from competitors could be driving up your costs.

ACoS decreases while TACoS increases

This one seems counterintuitive: Your ads are performing more efficiently, triggering a lower ACoS, but your TACoS is rising. Why? Because your total revenue is dropping.

That’s often the result of:

• A decline in organic sales: If fewer people locate your product organically, you have to push ads more to generate sales.
• Market trends: Factors like waning popularity or seasonal dips can lower the demand for your product.
• Overreliance on ads: You may have great ad campaigns, but if your organic sales don’t pull their weight, TACoS will climb.

ACoS and TACoS both drop

The dream scenario is to see both metrics decrease, as that means your ads are working efficiently while your total revenue is growing. It’s the jackpot for your PPC campaigns.

This takes place when you have:

• Strong organic growth: Your ads boost your rankings, so customers can now find you organically.
• Efficient campaigns: You’ve optimized your keywords, budgets, and bids, so your ad spend delivers results.
• Great product-market fit: Customers love your product, meaning you don’t have to rely heavily on ads to sell.

Wrapping up — Dig into your metrics to drive greater profitability

Refining your TACoS is critical for the long-term success of your Amazon PPC advertising. While ACoS provides a focused view of ad campaign performance, TACoS offers a holistic perspective, tying advertising spend to overall business health. An optimized TACoS can signal a strong organic presence, efficient advertising campaigns, and a sustainable growth strategy.

If you want to learn how to improve your TACoS and ACoS for your specific products, check out m19. Our data-backed PPC software and comprehensive platform is designed to centralize metric tracking and refine advertising efforts to yield more frequent and consistent eCommerce sales.