Setting a goal for search advertising can be challenging, but it is also necessary. The goals are crucial for the decisions made in the optimization work and for determining which actions should be prioritized. There are several metrics (KPIs) used to assess profitability, but one of the most common is “cost of sales,” often abbreviated as COS. In this blog post, we explain the concept and provide tips on how to arrive at a reasonable target.
How do you calculate cost of sales?
Cost of sales can be translated directly and is calculated in exactly the same way: the cost of the advertising being evaluated divided by the total revenue generated by that advertising. This data should be available in Google Analytics, provided that conversion tracking has been implemented correctly.
The calculation results in a decimal figure that is usually converted into a percentage. If the cost of advertising in October was SEK 25,000 and the revenue was SEK 175,000, this results in a COS of approximately 14.35%.
What is a reasonable cost of sales?
When we discuss goal setting with our clients, we are often asked what a reasonable COS target is. This is, of course, a valid question, but one that is difficult to answer without deeper insight into the business. However, we can provide some guidance on how to think about it and what factors to consider in order to arrive at an answer.
Profitability or growth
To begin with, you need to decide what the focus of the business should be for the upcoming advertising period. Often, it comes down to a trade-off between profitability and growth. Even though the ambition is naturally to achieve both healthy profitability and sustainable growth, it is important to decide which of the two is the priority for Google advertising right now.
Is it more important to maximize sales at the expense of lower profitability (higher COS), or to maximize profitability at the expense of lower revenue? What matters most, and why? Deviations from the chosen objective may of course occur, for example during campaigns or other marketing activities.
COS with a focus on growth
If you decide to focus on growth and the goal is to sell as much as possible, the COS target should be set as high as possible. This means being willing to pay more per unit of revenue, which creates room to achieve higher positions in search results, use broader keywords, or apply other methods to simply drive more traffic to the website.
The key question then becomes: how much can a transaction cost? Should the COS be set at a level where you break even after fixed and variable costs, should you still generate a small profit, or are you even willing to accept a loss because you see long-term value in acquiring new customers who will generate future revenue?
These are the questions that need to be answered in order to arrive at a reasonable growth-focused COS and to work as efficiently as possible with advertising. Most often, a form of average COS is applied across the entire product range, but it is of course also possible to set individual COS targets for specific product categories, brands, campaigns, or similar segments.
COS with a focus on profitability
If you decide instead to shift focus toward making advertising as profitable as possible, you need to think in the opposite direction, which is often more challenging. We can define the business’s break-even point (BEP) by considering costs and margins, thereby determining the highest acceptable COS. However, it is not possible to know exactly what the lowest achievable COS is.
Competition and cost-per-click change constantly, and there are many additional variables that influence whether visitors choose to take action on the website—variables that can also change without us fully understanding why. One of the most effective approaches is to look at historical performance and try to estimate the lowest feasible COS without losing too much revenue. Close collaboration with the person or agency responsible for the advertising, along with testing and careful follow-up, is highly recommended—especially in situations where there is no historical data to compare against.
Key takeaways
- What is most important for the business in the near future: profitability or growth?
- What costs and margins do we have?
- What is a new customer worth in the long term?
- What does historical performance look like, and what estimates can we derive from it?
- Dare to test and be meticulous with follow-up.
Good luck with your goal setting!
