What Is Traffic Acquisition Cost?

Traffic acquisition cost (TAC) consists of payments made by Internet search companies to affiliates and online firms that direct consumer and business traffic to their websites. Traffic acquisition costs (TAC) are a critical cost of revenue for Internet search firms such as Google. TAC for these firms is watched by investors and analysts to ascertain whether the cost of traffic acquisition is rising or declining. Rising TAC has a detrimental effect on profit margins.

Key Takeaways

  • Traffic acquisition costs are payments made to affiliates and online companies by internet search companies. The payment is made for directing traffic to their websites.
  • TAC is a big source of expenditures for online search firms like Google and Yahoo. 
  • Investors watch the TAC of companies to gauge their financial and performance strength.
  • If TAC increases year over year for a company, it negatively impacts profit margins.

Understanding Traffic Acquisition Cost (TAC)

Many Internet companies report revenues both on a gross basis and on a net basis that excludes traffic acquisition costs (TAC). One key metric for these companies is TAC as a percentage of advertising revenues, with a rising percentage indicating cost pressures on profitability. Sometimes companies will mention payments excluding traffic acquisition costs using ex-TAC.

Special Considerations 

Google highlights increasing TAC in the "Risk Factors" section of its 2018 annual report filing, SEC form 10-K. An excerpt: “our expectation that our traffic acquisition costs (TAC) and the associated TAC rates will increase in the future.” 

In 2018, TAC as a percentage of advertising revenues was 23% for Google. In 2017, Google also allocated 23% of all its advertising revenues for this purpose, which earmarked billions of dollars for traffic acquisition. As with other companies that thrive online, Google will have to continue paying close attention to the trend of its TAC because it can greatly affect its overall profit margin.

Two factors affecting Google’s traffic acquisition costs include new regulatory moves and mobile fees.

Benefits of Traffic Acquisition Cost (TAC)

With companies shelling out so much money for TAC, for the general public, it can be hard to fathom why a company might choose to part with so much of its revenues. TAC is a necessary part of doing business for many companies. Those expenses can increase the traffic to a website quickly, putting much more money in the company’s pockets than it takes out. 

By spending money to drive up the traffic on its pages, websites are able to increase those sites’ monetization. For every website visitor a monetized website has, there is the possibility the visitor might convert into a source of revenue for the company. Quite simply put, often a company must spend money to make money, and that is the case with traffic acquisition costs and driving up a website’s number of visitors.

To make money online, companies’ sites must generate traffic. When that website is a search engine, if traffic is not visiting the website, there will be no way of making money. If a company spends more than it makes, however, on TAC while trying to drive up costs, the business won’t be sustainable for long. It will be losing money, which makes the heads of the companies and investors nervous. Therefore, there is a fine line to walk for companies when considering how much money to throw toward traffic acquisition. 

Related to marijuana, TAC is Total Active Cannabinoids. TAC is calculated through testing to give consumers an idea of how much cannabinoid is present in a strain of marijuana. TAC calculates more than just tetrahydrocannabinol (THC) and lays out the other chemicals present in marijuana.