Previously, we talked about the value of the cost-per-lead metric. In fact, we’ve mentioned the value of it in marketing, as well as in quantifying the market value of your business. Potential buyers love hard numbers. And with the cost-per-sale metric, you can demonstrate 1) profitability, and 2) that you speak their language.
So how much does it cost you, on average, to close a sale? For best results, you can track your CPS in two ways: in terms of just sales and marketing costs, and in terms of sales/marketing costs plus operating expenses. Combining your sales costs into your operating expenses will tell you exactly how much its costing you to make money.
Additionally, you’ll learn how much you’re making, and how effective your sales and marketing engine really is. There’s always room for improvement. With CPS and CPL you can pinpoint where.
You can show profits by taking the difference between Sales Total and number of tickets multiplied by CPS, over a given time period. If you combine number of tickets and CPS with the rest of your operating expenses over a given time period, you can nail down total profits.
To track Cost-per-sale, you’ll need to track the following numbers over a given time period:
Number of Leads
Cost-per-lead
Leads required per sale
Total Number of Tickets
Sales total
Total Marketing Costs
Total Sales Costs
To make this easy, choose a time frame where its easy to quantify the costs. Obviously, tracking it week-by-week is going to tell you the most. But this might also make it harder to nail down some of the above important numbers. Monthly should be easy for most businesses, as your marketing costs and sales team salaries are probably paid out weekly and/or monthly. All you have to do, then, is track your total number of leads and your sales numbers over the month.
We’ll start with the magic formulae, and then we’ll follow it up with how to track each of the above numbers. Here are the two formulae you need to nail down Cost Per Sale:
CPL * LRPS
(Total Marketing Costs + Total Sales Costs) / TNT
Number of leads
This one’s simple; just track your total number of leads over the given time frame. To do this, you’ll need to determine what you want to call a “lead”. Some consider a talk with a sales team a “lead”, whether its in person or over the phone. You might also consider visits to certain pages on your website a lead IE to sales pages but not to blog posts.
You’ll have to ask your sales people to track their leads. For online leads, you can get the analytics from your website.
Cost per Lead
CPL= Total Marketing Costs/Number of Leads
We’ve covered this in depth previously, here. This metric is just as valuable in its own right as Cost Per Sale, and we recommend understanding it in full.
Total Number of Tickets
This is the number of sales you closed in the time frame. Not your sales total — just the number of transactions. You’ll want to track it by customer as well, so you can make some decisions. For example, if one customer makes multiple purchases in a month, is that multiple tickets for one lead? Or is it an up sale, and thus its own lead? Does it matter for your business? That’s for you to decide.
Leads Required Per Sale
This will be your total number of leads over the given time frame, divided by total number of sales.
Total Marketing Costs
This is (hopefully) quite simple. Just add up the monthly bills for any advertising you run, and throw in any other quantifiable expenses. We add monthly maintenance fees for website into this, as we consider that both a marketing and sales tool. If you’re using Display Ads and/or Pay-Per-Click, you’ll have to total those costs each month, as it will vary.
Total Sales Costs
This is going to be the total of your sales team’s salaries, plus the commission you pay out over the given time period. You’ll need to add in any other expenses that fall into said time frame, like the cost of travel and hotels, training, and the cost of sales literature. Even if you’re only paying for training once per year, we suggest dispersing that cost over the whole year. So if you’re tracking monthly, just divide it by 12.
Cost Per Sale in action
Let’s look at some example numbers to help you wrap your head around how to calculate Cost Per Sale.
Metric Total
Number of Leads 8
Cost Per Lead 375
Leads Required Per Sale 2
Total Number of Tickets 4
Sales Total $17,000
Total Marketing Costs $3,000
Total Sales Costs $2250
If we use the CPL * LRPS method, we get:
$375 per lead * 2 leads required to get a sale = 750 per sale. Remember that CPL in this case is Marketing Costs divided by total number of leads in a given time frame. That means this only quantifies the average amount of money that goes into marketing costs to get each sale.
For the (TMC + TSC) / TNT method, we get:
$3,000 + $2,250 = $5,550 / 4 transactions = $1,387.50 per sale. This is more accurate number for calculating all of the expenses that go into getting a sale.
By having both numbers available, you can calculate total cost of a sale, and you can also compare the difference between the two:
$1,387.50 CPS – 750 CPS = a difference of 637.50 per sale. This reflects what we already knew — that the company in this example is actually spending more on marketing costs than sales costs. And the difference is pretty close to the difference in TSC and TMC. To be exact, its 750 – 637.50 = 112.5.
The last useful thing you can do with your CPS is compare it to the average sale total. Obviously, the CPS needs to be much lower than your average sale, or you won’t be making much money. In this example, you’re looking at 17,000 / 4 transactions, which gets you $4,250 per sale. Since you’re spending 1,387 to earn that sale, the difference will be your profit, so $4,250 – $1,387 = $2,863 profit per sale.
Of course, that is without considering other operating expenses. You could total up the rest of payroll(outside of the sales team), production costs, your monthly lease, your electricity, and any other business expenses you have. Divide this by total number of sales and add it to your CPS to get the true total of everything you have to cover to keep your business and sales engine running.