cost per sale (CPS)
The cost per sale (CPS), also known as the pay per sale, is a metric used by advertising teams to determine the amount of money paid for every sale generated by a specific advertisement. Understanding and tracking the CPS allows advertisers to take steps to reduce their costs, thus increasing profit and optimizing productivity.
The CPS can be calculated by dividing the total amount of money the company spent on the ad campaign (the cost) by the sum of all sales made.
While cost per sale can be applied to all advertising campaigns -- including TV and radio ads, prints and billboards -- it is most effective and accurate when measured for digital advertising since the ad's performance can be broken into small details, such as clicks and page reads.
In a digital campaign, the consumer clicks through an advertisement to the business's website in order to complete the transaction. As soon as the customer reaches the main website, a pixel is attached that tracks that specific user through to checkout. This provides for a much more accurate and precise CPS calculation than traditional media ad campaigns. Since traditional campaigns cannot track the sales specifically generated by the campaign, then incidental sales may be included in the CPS calculation and the results may be ruined.
How to calculate cost per sale
To calculate cost per sale, the ad team must first set a budget and a date range for the campaign. Once the ad is active, every single sale is tracked during the selected time period. Then, as mentioned above, the total cost of the campaign is divided by the number of sales made to determine the cost per sale.
CPS = total cost / sum of sales
While calculating CPS, all aspects of the campaign must be taken into consideration. To more fully understand both the cost per sale and strength of the ads, several other factors should be measured. This includes:
- Lead-to-prospect conversion - The average amount of time employees spent working on the campaign, converting leads into viable sales prospects. The cost of benefits, direct salaries and payroll taxes should all be considered in this conversion.
- Prospect-to-customer conversion - The average amount of time it takes a potential buyer to turn into a paying customer and the activities required to make the change, such as phone calls, proposals and video conferences. The cost of these activities should be considered.
- Web-based marketing - Company websites can be a huge recurrent cost for businesses. When calculating the total investment put into the website, both the original cost of creating the site and the cost of maintaining and updating the site should be considered.
- Customer service - The amount of money spent on customer service training and support. This factor is an important consideration when calculating CPS because the quality of the customer service is directly related to customer retention -- or the ability to hold on to a customer and repeat the transaction.
- Commission - Many salespeople work for commissions -- meaning they get paid based on the size of their order. Therefore, the bigger the order, the larger the compensation. The cost of these commissions must be considered in the CPS calculation process.
Benefits of finding the cost per sale
The cost per sale calculation process provides a variety of numbers that can be used to identify areas within the company where sales productivity can be strategically improved. However, optimizing productivity is an ongoing process and, therefore, the cost per sale should be continuously calculated to help companies discover different ways to lower their costs while improving results and increasing revenue.
Companies can lower the cost per sale and increase profits by implementing sales training, website optimization and customer retention training.
With sales training, the best practices of the top salespeople are identified, cataloged and promoted throughout the sales organization. Website optimization ensures the site is easily accessible, operates correctly and provides a positive experience for customers that facilitate repeat visits. Similar to sales training, customer retention training identifies the best practices in maintaining customer relationships, records them and then promotes their practice throughout the sales organization.
The cost per acquisition (CPA) metric is frequently used with CPS to measure, record and report on the results of an advertising campaign. CPA refers to measurement of the total cost of attaining one customer. When measured together, CPA and CPS can provide a strong picture of how successful a campaign is.
However, the biggest obstacle or flaw when calculating cost per sale is skewed results stemming from the fact that some customers will click through an ad to the website, but then won't return until much later, possibly after the campaign has ended, to complete the purchase. Therefore, while the CPS is a valuable metric, it does not reveal the overall value of the campaign since it does not consider sales that happen after the campaign has ended.