What is a Traffic Acquisition Cost?
A 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, Yahoo, and Baidu.com. 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.
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.
Google and TAC
Google highlights increasing TAC in the "Risk Factors" section of its 2016 annual filing (10-K). An excerpt: "We also expect our traffic acquisition costs (TAC) paid to our distribution partners to increase due to changes in device mix between mobile, desktop, and tablet, partner mix, partner agreement terms, and the percentage of queries channeled through paid access points."
In 2016 TAC as a percentage of advertising revenues was 21.2% for Google.