What is the difference between cost per order (CPO) and cost per acquisition (CPA)?
Cost per order (CPO) is the average amount that your brand spends to drive any customer to purchase a product or service. Cost per acquisition (CPA) is the average amount that your brand spends to drive a new customer to purchase a product or service.
Is CPA the same as CAC?
No. But in practice, they are sometimes used interchangeably.
Cost per acquisition is the marketing cost (usually the paid media cost) to acquire a new customer. Customer acquisition cost (CAC) is the sum of marketing costs and other related costs such as tools used, vendor cost, and team salary. The majority of the time, brands will use these numbers interchangeably to represent the marketing costs associated with acquiring a new customer.
When should you use CPO vs CPA, and which metric is more important?
Choosing to track and calculate CPO vs CPA depends in part on the stage of your business. If your business 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 cost per order will likely be the best move.
As you build your customer base but are still in growth mode, you should start tracking cost per acquisition, too. That way, you will understand how much it is costing your business to acquire customers vs retain customers.
In short, neither metric is more important. The question of CPO vs CPA is all about which is more useful at different stages of your brand’s growth and development .
What is the cost per order (CPO) formula?
The cost per order formula is variable marketing cost / all orders in the same period:
Cost per order can be calculated based on the marketing expense across all marketing channels, or it can be segmented by channel or marketing activity. Reviewing by segments or activities may indicate where a company should spend more or less to generate the highest return.
What is the cost per acquisition (CPA) formula?
The cost per acquisition formula is variable marketing cost / new customers acquired in the same period:
Cost per acquisition also can be calculated based on all brand data, or it can be segmented by channel or marketing activity. It’s not uncommon to have certain activities or channels delivering different volumes of new customers at different costs.
As a rule of thumb, a first purchase from a new customer is always more costly than a purchase 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 does ROAS mean, and what is it used for?
ROAS is the abbreviation for return on ad spend or revenue on ad spend. ROAS helps to determine which marketing efforts are driving the most revenue for a business.
What is the ROAS formula?
The ROAS formula is revenue / marketing spend:
ROAS is represented in a number of different ways. Some people represent it as a dollar figure, such as $3.12 (for every dollar spent in marketing). Others represent it as a percentage, such as 312%. Others represent it as a number: 3.12. It also may be written as a multiplier, such as 3x.
When to use ROAS vs CPO
Use ROAS instead of cost per order if your company sells a large catalog that has widely varying price points. In instances when product price varies, average order value (AOV) can be misleading, and measuring with a single metric like cost per order can be costly.
For example, if your cost per order 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 a smaller sale. ROAS helps to relate actual revenue to how much is spent on marketing, leading to more effective budget management.
An alternative approach to using ROAS when product price varies is to set category or subcategory cost per order targets. If your average cost per order is $30, your cost per order target for $10 items might be $6, and your cost per order target for items that retail over $100 may be $50.
How to determine your CPO or CPA goal
Determining your cost per order or cost per acquisition goal depends on your business and financial objectives. Here are some questions to consider when determining your cost per order or cost per acquisition target:
- What is your average customer lifetime value?
- Is your brand willing to invest to acquire customers who take months or years to profit from?
- Does your average revenue or margin per order vary across categories or customer types?
- What types of sales or marketing activities does your brand currently or plan to invest in?
- Are those activities upper funnel (awareness generating) or lower funnel?
Bonus Section: What is a good cost per order (CPO)?
A good cost per order depends on your brand’s financial goals. For a new company, cost per order is typically much higher because the brand has low awareness, so more money is required to drive potential customers to buy. If you have fast growth goals, a higher cost per order will be acceptable because you have to quickly gain significant market awareness.
Established or more mature companies tend to have a lower cost per order. This is because repeat customers tend to buy more through lower cost channels such as direct, branded search, or email. These channels bring overall cost per order down.
Typically, a growing brand will have a cost per order that’s equivalent to 10-20% of their Gross Sales. Established brands typically strive for cost per order that is lower than the product gross margin.
The best way to use CPO, CPA and ROAS
The best way to use cost per order, cost per acquisition and ROAS is based on your brand’s objectives. Work with your marketing and finance teams to create cost per order, cost per acquisition, and/or ROAS goals that best fit your objectives.
If you are looking to aggressively acquire new customers, a higher cost per acquisition/cost per order and lower ROAS will be tolerable. As you grow and look to become more profitable, you will want to reduce your cost per acquisition and cost per order, and you will want to increase your ROAS.
Segmenting by channel, category, or product can give more flexibility and greater accuracy, and it can increase profit. When segmenting, ensure that your team understands the methodology being used to determine acceptable ranges and communicate any updates to your model. Ultimately, there is no wrong way to use these metrics, but segmenting should yield the most positive results.
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