Cost per order (CPO) – an introduction
We all know how important metrics and KPIs are in measuring a business’ success. While there are many to choose from, a select few are critical to really understanding how a business is performing. Marketing metrics, such as cost per order (CPO), are particularly valuable.
What is CPO?
Cost per order is used to determine the effectiveness of a business’ sales and affiliate marketing efforts. The metric looks at the business in terms of the return on investment and by dividing the total marketing costs by the number of actual orders received during a specific period by new or returning customers through their online store.
By calculating the cost per order, businesses can identify which marketing channels or strategies are the most cost-effective as well as compare the performance of difference products.
The difference between CPO and CPM (cost per mille) or CPC (cost per click) is that a purchase must be made, so the focus is not on the number of impressions but on the number of orders generated off the back of clicking on the ad.
Why is CPO so important?
CPO allows the business to measure the success of a particular marketing campaign and the efficiency of their sales and marketing efforts by only paying for marketing spend directly linked to sales. CPO also forces the business to consider their landing pages and evaluate the effectiveness of the website.
By comparing the cost of marketing against the number of orders received, CPO can help businesses make informed decisions about where to allocate their marketing budget and how to optimise their sales and marketing efforts to reduce costs and increase revenue. If a particular channel or strategy has a high cost per order, the business may choose to allocate their budget to more cost-effective channels or strategies.
It’s worth remembering that CPO in isolation can be misleading as it’s influenced by many variables. There are a few metrics that are typically used alongside CPO. For example, cost per acquisition (CPA), customer acquisition cost (CAC), return on ad spend (ROAS) and average order value (AOV).
What is a good CPO?
A good cost per order will vary depending on the industry and the type of product or service. A business selling high value products will likely have a higher CPO whereas a business selling lower value products and therefore lower margins potentially are likely to have a lower CPO target.
Generally speaking, a lower cost per order is considered to be better than a higher one.
Where CPO is high, this can indicate that a business is spending too much money acquiring customers per order which in turn is detrimental to profitability and growth. A low CPO is considered to be more efficient and cost effective, helping a business increase its revenue and profitability in the long term.
It’s also important to note that cost per order should be considered in relation to the revenue generated from each order. A low cost per order is not necessarily good if it doesn’t generate enough revenue to cover the costs to the business. Therefore, a low CPO that allows the business to generate enough revenue to cover its costs and turn a profit is considered to be good.
CPO should ordinarily be compared within the business; against targets, campaigns and previous results, as it can be very specific to the type of product sold. CPO should be used in conjunction with other metrics as it doesn’t take into account repeat order rate or lifetime value of a customer.
What does CPO look like?
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How do you calculate CPO?
The formula to calculate CPO is:
CPO = Total marketing costs / Number of orders in the same period
This will give you the average cost per order.
CPO worked example:
If a company has total marketing costs of £39,000 and received 3,650 orders in the same month, the CPO would be £10.68, calculated like this:
CPO = £39,000 / 3,650 = £10.68
Now let’s consider the same company where it’s segmented marketing costs and attributes them to two different campaigns. Consider the below marketing spend and orders for those two campaigns.
While the above doesn’t take into account other factors such as lifetime value, simply looking at CPO, campaign A shows a better return on investment when looking at purely CPO than campaign B.
Conclusion
CPO measures the effectiveness of a business’ sales and marketing efforts. Understanding this metric can help businesses make informed decisions about where to allocate their marketing budget and how to optimise sales and marketing efforts to reduce costs and increase revenue.
CPO is an important metric for businesses to track, and it can help them understand the efficiency of their sales and marketing efforts and help make informed decisions about how to allocate resources in the future.
