What is the difference between CPO and CPA?
The difference between Cost per Order (CPO) and Cost per Acquisition (CPA) is whether the transaction is from a new customer or any customer. CPO is a commonly used metric among companies in many industries. It is easy to calculate and easy to understand. Cost per Acquisition requires knowing if the transacting customer is a new customer to the business or not. You might also hear or see the metric CAC which is the same metric, standing for Cost per Acquired Customer.
Which metric is more important?
Determining which metric between CPO and CPA is most important for your business depends in part on the stage the business is in. If a company is brand new and in high growth mode, the majority of orders are going to be from new customers, so the two metrics will be very similar and focusing on CPO is likely easier to access. As a company builds it’s base of customers but is still in growth mode, breaking out the two metrics will be important to understand how much it is costing the business to continue acquiring customers. Neither metric is more important than the other, they simply are more useful at different stages of growth.
What is the Cost per Acquisition formula?
The cost per acquisition formula is variable marketing cost / new customers acquired. This metric can be viewed across the company or segmented by channels or marketing activations. It’s not uncommon to have certain activations or channels delivering different volumes of new customers to file and at different costs. As a rule of thumb, a first transaction from a new customer is always more costly than a transaction from an existing customer. When testing new audiences or new methods of reaching prospects, results can vary wildly. A good practice is to check in on results and costs early and periodically.
What is the Cost per Order Formula?
The cost per order formula is variable marketing cost / all orders in the same period. This metric can be viewed across the company or segmented by channels or marketing activations. Different activities will yield different results. Reviewing by segments or activities may indicate where a company should spend more or less to generate the highest return.
What does ROAS mean and what is it used for?
ROAS is an abbreviation for Return on Ad Spend or Revenue on Ad Spend. It helps to determine which marketing efforts are driving the most revenue for a business.
What is the ROAS formula?
The formula to determine ROAS is Revenue / Marketing Spend. There’s no ‘right’ way to represent it. Some people represent it as a dollar figure, such as $3.12. Others represent it as a percentage, such as 312%. And still others represent it as a number, 3.12. It also may be written or referred to as 3X, loosely translated to 300%.
When to use ROAS vs. CPO
Use ROAS rather than CPO if your company sells a large catalog that has widely varying price points. In instances when product price varies largely, average order value can be misleading and measuring by a single metric like CPO can be costly. For example, if the CPO target is $30, and you sell items that retail for $5 and $10, you could be paying upwards of $30 for an order that only drove $10 in revenue. In this case, you lost money on the sale. Using ROAS instead helps to relate actual revenue to how much is spent on media, leading to more effective budget management.
An alternative approach to using ROAS when product price varies is to set category or sub-category CPO targets. Perhaps the average CPO is $30, but CPO targets for $10 items might be $6 and CPO targets for items that retail over $100 may be $50.
How to determine your CPO or CPA goal
Determining what your CPO or CPA goal should be depends on your business and financial objectives. Some questions to consider when determining what a CPO target should be are:
1 What is the average customer lifetime value?
2 Is the company willing to invest to acquire customers that take months or years to pay back?
3 Does the average revenue or margin per order vary across categories or customer types?
4 What types of sales or marketing activities does the company currently or plan to invest in?
5 Are those activities upper funnel (awareness generating) or lower funnel?
What is a good cost per conversion?
A good cost per conversion depends on your company’s financial goals. For a new company, cost per conversions are typically much higher as the brand or product has low awareness. If there are fast growth goals, a higher cost per conversion will be tolerated. Established or more mature companies tend to have lower cost per conversion both because the brand may be more established and repeat customers buying through low cost channels such as directly, branded SEM or email help to bring the overall cost per conversion down.
Established brands typically strive for cost per conversion that is lower than the product gross margin.
The best way to use CPO, CPA and ROAS
The best way to use CPO, CPA and ROAS is based on business objectives. Work with category or finance leaders to determine what an acceptable CPO or CPA should be to meet financial objectives. Segmenting by channel, category or product can also give more flexibility, greater accuracy and increase profit. When segmenting, ensure stakeholders understand the methodology being used to determine acceptable ranges and communicate updates. Ultimately, there is no wrong way to use these metrics, but segmenting should yield the most positive results.
If you need help determining the right metrics for your brand, contact us today!