What it means
Advertising businesses need people to see their ads. Rather than owning every website and device, they often pay others to place their search box, show their ads or set them as the default option.
The payments made for that distribution are called traffic acquisition costs. TAC usually takes two forms.
The first is payments to distribution partners, such as makers of browsers or phones, for steering users toward the company's services. The second is payments to network partners, meaning the publishers who show the company's ads on their own sites and receive a share of the revenue.
Analysts look at TAC as a percentage of revenue, because it shows how much of each advertising dollar is passed to partners. Revenue after TAC is sometimes called net revenue, and it is a better guide to the economic value the company retains.
When TAC grows faster than revenue, margins tend to shrink. Accounting treatment matters.
Companies decide whether to report advertising revenue gross, before paying partners, or net, after paying them, and the choice depends on whether the company is acting as the principal or as an agent. TAC is normally reported as a cost of revenue, so it affects gross margin directly.
Not all companies use the term. Some include similar payments within sales and marketing or cost of revenue without naming them, so comparing TAC across companies needs care.
When reading a report, check how the company defines TAC and what is included. For non-specialists, the key lesson is that distribution has a price.
Even a dominant online business must often pay to keep its place on popular devices and sites, and those contracts can be a significant part of its cost base.
In practice
Real-world examples.
Example
A search company pays a phone maker to set its search engine as the default on new devices. The payment counts as TAC. Analysts compare it with the revenue the default placement brings in.
Example
An online video platform shares 60% of the ad revenue with creators and 40% stays with the platform. The creators' share is treated as a cost of acquiring content and audience. The finance team reports revenue after this share as net revenue.
Example
A comparison-shopping website buys clicks from search engines to bring in visitors. The spend is a traffic acquisition cost, and the marketing team calculates the revenue per visitor. If the revenue per visitor is less than the cost per visitor, the channel is cut.
Formula
Calculation
TAC rate = TAC / advertising revenue x 100
Net revenue = advertising revenue - TAC
Suppose a company has advertising revenue of $50,000,000 and pays $11,000,000 to distribution and network partners. TAC rate = 11,000,000 / 50,000,000 x 100 = 22%. Net revenue = 50,000,000 - 11,000,000 = $39,000,000. If next year revenue rises to $60,000,000 and TAC to $15,000,000, the rate becomes 15,000,000 / 60,000,000 = 25%, so margin is under pressure even though revenue has grown.Case study
Seen in the real world.
Skylark Search is a fictional online search company used only to illustrate the concept. In one year its advertising revenue rose 20% to $240,000,000, but TAC rose 35% to $72,000,000. The TAC rate went from 26% to 30%.
The finance director showed the board that the extra distribution deals brought in less revenue than they cost. In this illustrative story the company renegotiated two contracts and dropped a third, and the TAC rate fell back to 27% within a year. The lesson is that tracking TAC as a percentage of revenue exposes the cost of growth.
The board also asked for TAC to be shown by partner type in every quarterly pack, with revenue per partner alongside it. That view made it easy to see which relationships earned their keep and which were simply buying market share at a loss.
Watch out
Common mistakes.
- Treating TAC as a marketing expense. Many companies record it within cost of revenue, so it affects gross margin.
- Comparing TAC rates between firms without checking definitions. Companies include different payments, so the figures may not match.
- Focusing only on revenue growth. If TAC grows faster than revenue, profit per dollar of revenue is falling.
Questions
People also ask.
What is a good TAC rate?
There is no universal benchmark, as it depends on the business model, but a stable or falling rate usually shows healthy bargaining power.
Is TAC the same as customer acquisition cost?
No, customer acquisition cost is the marketing spend to win a customer, while TAC is the payment to partners for traffic or distribution.
Why do companies pay for default placement?
Default positions drive habitual use, which can bring a steady stream of users at lower cost than winning them one by one. The risk is that the partner can demand more money at renewal.
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