What is CPS in Advertising?
In advertising, CPS usually refers to “Cost per Sale” or “Cost per Conversion.” It is a significant performance parameter that advertisers and marketers use to assess the efficacy and efficiency of their advertising efforts. CPS represents the advertiser’s cost for each successful sale or conversion their advertising efforts generate.
CPS is calculated by dividing total advertising expenditure by the number of sales or conversions achieved by the campaign. CPS is calculated as follows:
CPS = Total Advertising Spend / Sales or Conversions
For example, if an advertiser spends $1,000 on a campaign that results in 100 sales, the CPS is:
CPS = $1,000 / 100 sales = $10 per sale
CPS is an important measure as it assists advertisers in determining the return on investment (ROI) for their advertising initiatives. The campaign may not be profitable if the CPS is too high and surpasses the profit generated by each sale or conversion. CPS is frequently used by advertisers along with other metrics such as Return on Ad Spend (ROAS) and Customer Acquisition Cost (CAC) to examine the overall performance of their advertising campaigns and make decisions based on data to optimize their marketing strategies.
How to calculate Cost Per Sale?
To get the Cost per Sale (CPS) for an advertising campaign, divide the total advertising spend by the number of sales generated by that campaign. Here’s how it works:
CPS = Total Advertising Spend / Number of Sales
Here’s a step-by-step approach for calculating CPS:
Calculate your total advertising spend:
This includes all expenses related to the advertising efforts. It can include charges for ad placement, creative production, agency fees or any other expenses directly related to the campaign.
Find the Number of Sales:
Count the total number of sales or conversions that may be directly assigned to the particular advertising campaign. These should be sales that you can safely connect to the efforts of the campaign.
Apply the Formula:
In the CPS formula, enter the values from the first two steps and 2:
CPS = Total Advertising Spend / Sales Number
Finish the division to find the CPS value. This will show you the cost of each sale generated by the advertising campaign.
If you spent $10,000 on an advertising campaign that resulted in 1000 sales:
CPS = $10,000 divided by 1000 sales = $10 per sale
Example of Cost Per Sale:
Let’s look specifically at an example of how to compute the Cost per Sale (CPS) for an online advertising campaign:
Suppose you manage an e-commerce website that sells handmade jewelry. You decided to advertise your items by launching an online advertising campaign on a social media site. You invested $5000 into this campaign. During the campaign period, you tracked the outcomes and discovered that the advertising efforts resulted in 50 sales.
You can now compute the CPS using the following formula:
CPS = Total Advertising Spend / Number of Sales
CPS = $5000 / 50 sales
CPS = $100 per sale
In this example, your jewelry advertising campaign’s cost per sale (CPS) is $100. This means that each sale costs you $100 in advertising expenses. You may analyze the campaign’s success and determine if it is producing a positive return on investment (ROI) by comparing this CPS to the profit you get from each sale. If the profit from each transaction exceeds $100, the campaign is profitable and if not, your marketing approach or campaign budget may need to be adjusted to boost its ROI.
Pros and Cons of Cost Per Sale:
CPS, like any other measure, has its pros and cons:
Pros of Cost Per Sale (CPS):
Measures Actual Conversions:
Because CPS focuses on actual conversions or sales, it is a highly practical and business-focused measure. It directly connects marketing efforts to revenue generation.
CPS allows advertisers to assess their Return on Investment (ROI) more precisely because it compares the cost of advertising to the revenue gained from sales.
The notion of CPS is simple and easy to express inside an organization. It shows just how much it costs to gain a customer.
CPS assists marketers in tracking the performance of their campaigns over time, allowing them to make data-driven decisions for optimization.
Advertisers may allocate their financial resources more effectively by examining CPS data. They may choose campaigns or channels that generate a lower CPS but a greater ROI.
Cons of Cost Per Sale (CPS):
It might be difficult to determine which marketing contacts led to a sale, especially in complex customer journeys. CPS may not capture the entire picture of consumer interactions.
Long Sales Cycles:
It can take time to see the impact of marketing activities on sales for organizations with long and complex sales cycles. In such circumstances, CPS may not provide immediate answers.
Dependence on Accurate Data:
For CPS computations, accurate tracking and attribution data are important. Incorrect data can result in misleading CPS measurements.
Not suitable for All Campaigns:
CPS is best suited for e-commerce and direct response campaigns when the primary purpose is to drive sales. It may not be the most appropriate metric for brand awareness or engagement campaigns.
Risk of Over-Optimization:
Concentrating entirely on minimizing CPS can lead to a temporary, narrow perspective, potentially sacrificing, long-term brand-building and customer retention efforts.
In conclusion, Cost per Sale is a significant metric for determining the return on investment for marketing campaigns, particularly for organizations with specific conversion goals. However, it is critical to utilize it in combination with other metrics and to be aware of its limits, especially in complex customer journeys and when considering broader marketing goals beyond immediate sales.