What is the traffic acquisition cost (TAC)?
Traffic Acquisition Cost (TAC) includes payments made by Internet search companies to affiliates and online businesses that drive consumer and business traffic to their websites.
Key points to remember
- Traffic acquisition costs are payments Internet search companies make to affiliates and online companies to drive traffic to their websites.
- TAC is a major source of expense for online search companies such as Google and Yahoo.
- Investors monitor the TAC of companies to gauge their financial strength and performance.
- If the TAC increases year over year for a company, it has a negative impact on profit margins.
Understanding Traffic Acquisition Cost (TAC)
Traffic acquisition costs (TAC) are a critical factor revenue cost for Internet search companies such as Google. Investors and analysts monitor the TAC of these companies to determine if the cost of acquiring traffic is rising or falling. Increasing the TAC has a detrimental effect on profit margins.
Many Internet companies report revenue on both a gross basis and a net basis that excludes traffic acquisition costs. A key metric for these companies is the TAC as a percentage of ad revenue, with an increasing percentage indicating cost pressures on profitability. Sometimes companies mention Payments excluding ex-TAC traffic acquisition costs.
Google Highlights TAC Increase in “Risk Factors” Section of Its 2018 Annual Report, SEC Form 10-K. An excerpt: “…our expectation that our traffic acquisition costs (TACs) and associated TAC rates will increase in the future.”
In 2018, the TAC as a percentage of ad revenue was 23% for Google. In 2017, Google also allocated 23% of all advertising revenue for this purpose, which allocated billions of dollars to traffic acquisition. As with other businesses that thrive online, Google will need to continue to pay close attention to its TAC trend, as this can greatly affect its overall profit margin.
TAC can also be used as an abbreviation for Total Active Cannabinoids and as one might assume this is related to marijuana. The TAC is calculated by testing to give consumers an idea of the amount of cannabinoids present in a marijuana strain. TAC calculates more than tetrahydrocannabinol (THC) and shows the other chemicals found in marijuana.
Two factors affecting Google‘s traffic acquisition costs include new regulatory measures and mobile charges.
Benefits of Traffic Acquisition Cost (TAC)
With companies shelling out so much money for TAC, it can be difficult for the general public to understand why a company might choose to part with such a portion of its revenue. The TAC is a necessary part of doing business for many companies. These expenses can quickly increase traffic to a website, putting far more money in the company’s pockets than it takes out.
By spending money to increase traffic to its pages, websites are able to increase the monetization of those sites. For every visitor to a monetized website, there is a chance that the visitor will turn into a revenue stream for the business. Quite simply, a business often has to spend money to make money, and this is the case with the costs of acquiring traffic and increasing the number of visitors to a website.
To make money online, business sites must generate traffic. When this website is a search engine, if traffic does not visit the website, there will be no way to make money. However, if a business is spending more than it earns in TAC while trying to increase traffic, the business will not be sustainable for long. It will lose money, which worries business leaders and investors. Therefore, businesses must walk a fine line when considering how much money to spend on acquiring traffic.
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