WTF are traffic acquisition costs?

By Seb Joseph

Nothing focuses the mind on financials like an economic downturn. Even so not every financial figure is as revealing as it sounds. Take Traffic Acquisition Costs (TAC), for example.

There was a time when these costs were a real bellwether for the financial sustainability of an online advertising company. They were essentially a way to see how those businesses bought traffic they could monetize at a time when it was its primary revenue source. If a company spent more than it made on TAC then it was a sure bet that the business wouldn’t be sustainable for long. Times change, though. Nowadays, TAC is more like office gossip: good to know, but it doesn’t always matter.

That’s about as complicated as things are going to get. Here’s a short, digestible breakdown of what TAC means.

WTF is TAC?

In simple terms, TAC is how much an ad tech company pays to buy revenue; it’s the variable pass-through costs ad tech vendors pay to the exchanges, publishers and data providers that help them sell more impressions. It’s a number that reveals how much money an ad tech vendor had to spend at a given time to make more money. This should theoretically be a useful number given ad tech vendors need to do two things all the time: attract ad budgets to their platform and extract fees from it.

The reality, however, is that TAC has its limitations. Anyone wanting to know how much ad tech vendors are paying publishers for the inventory on behalf of their end clients or advertisers can look at TAC. It will only reveal so much, though. Most ad tech businesses aren’t just in this business of arbitrage. They’re also platforms that connect publishers with marketers as well as provide services to the latter such as strategy development, reporting tools and analytics. So TAC — at a push — accounts for a marginalized part of a more nebulous ad tech revenue stream.

Come to think of it, TAC can be downright confusing. Not every ad tech vendor reports TAC — and the ones that don’t necessarily do so in the same way.

Hang on, TAC isn’t the same number for every ad tech vendor?

No. But that shouldn’t be a surprise. There are so many different ways ad tech vendors spend money to make money now that TAC is just part of a “spend money to make money” playbook. Remember, ad tech vendors book revenue when they owe the responsibility to someone (like a publisher) to fulfill a sale of media, but they also book revenue for software. Don’t forget the revenue booked for sales to an advertiser or an agency. To say nothing of the revenue from the ad exchange a company might be running in the middle of an auction. And on it goes.

Examples?

Certainly. Let’s zoom in on the financials of two ad tech companies that — at least on the surface — are in the same business: selling impressions on behalf of publishers. One of …read more

Source:: Digiday