TACoS vs ROAS: A Guide for New Amazon Sellers

Majority of Amazon sellers focus on ACoS (Advertising Cost of Sales) as a measure of how good their Amazon Ads campaigns are performing. But what if I tell you that there is a much better way to measure the effectiveness of your Amazon PPC? This metric is not available in the Amazon Campaign Manager. But you can calculate it on your own very easily. Its called TACoS.

What is TACoS?

TACoS stands for Total Advertising Cost of Sales. It's a metric that helps you understand how much of your total sales is being spent on advertising. Point to note here is that we’re talking about Total Sales (Ads + Organic + Referral) & not only Ad Sales. This is where TACoS differs from ACoS. Whereas ACoS accounts for only the ad sales, TACoS accounts for the total sales. 

• Formula: TACoS = (Total Ad Spend / Total Sales) * 100
• Example: If you spend $200 on ads and your total sales are $2000, your TACoS is 10%.

TACoS is crucial because it gives you a holistic view of your advertising efficiency. It tells you how well your ads are driving sales across your entire Amazon business. As a rule of thumb, the lower the TACoS number the better it is. Also, TACoS is always lower or at most equal to ACoS. 

What is ROAS?

ROAS stands for Return on Advertising Spend. This metric shows how much revenue you earn for every dollar spent on advertising.

• Formula: ROAS = Total Revenue from Ads / Total Ad Spend
• Example: If your ads generate $1000 in revenue and you spent $200 on those ads, your ROAS is 5.

ROAS focuses on the direct impact of your advertising efforts. It’s essential for understanding the immediate return from your ad spend. You might have noticed that the formula for ROAS is the inverse of ACoS. This is why inverse from ACoS, higher the ROAS number, better it is.

FunFact: ROAS is a newish metric in Amazon Campaign Manager. I’ve been running Amazon ads since 2014. And till the late teens, I don’t even think ROAS was available as a metric in the Campaign Manager. 

Key Differences

Understanding the key differences between TACoS and ROAS can help you use these metrics effectively:

• Scope: TACoS looks at your total sales, giving a broader view. ROAS focuses only on sales generated from your ads.
• Perspective: TACoS helps in long-term strategy by showing overall ad efficiency. ROAS is great for short-term performance evaluation.
• Usage: Use TACoS to gauge overall business health. Use ROAS to optimize individual ad campaigns.

Real-World Applications

Let’s talk about how these metrics play out in real life:

TACoS

• Long-term Growth: If your TACoS is decreasing over time, it means your organic sales are increasing relative to your ad spend. This is a good sign of long-term growth.
• Budget Allocation: Helps in understanding where to allocate your advertising budget effectively.

ROAS

• Campaign Performance: A high ROAS means a particular ad campaign is doing well. If one campaign has a ROAS of 10 and another has 2, the first is more effective.
• Immediate Decisions: Useful for making quick adjustments in your campaigns to maximize returns.

Why Both Metrics Matter

Ignoring TACoS or ROAS can lead to skewed perceptions of your advertising performance. For instance, a high ROAS might look great, but if your TACoS is also high, your overall profitability could be suffering. But if asked to pick one over the other, I’ll definitely go with TACoS. This is because organic sales growth is extremely important for any seller to succeed on Amazon. If you don’t get lots of organic sales, you’ll neither be profitable nor will you see a lot of improvement in BSR (organic rank). So, what we do at AMZPro is keep a track of ACoS/ ROAS on a day to day basis & keep a track of TACoS on a weekly basis. This helps maintain our focus on the bigger picture without losing sight of the day to day ad performance.

Stats to Consider

1. Average TACoS: According to a study by Sellics, the average TACoS for Amazon sellers is around 10-15% .
2. Average ROAS: Tinuiti reports that a good ROAS benchmark is around 4:1 .

Conclusion

Understanding TACoS and ROAS is vital for your success on Amazon. Use TACoS for a comprehensive view of your ad spend's impact on your overall sales. Use ROAS to fine-tune and optimize specific campaigns. Balance both metrics to ensure your business is growing sustainably and profitably. Keep an eye on these metrics, adjust as needed, and watch your Amazon business thrive.