I hate Cost Per Order (CPO) as an acquisition metric. There, I said it. Boo and hiss at me all you want, but I firmly believe that in todays ever changing commerce landscape this metric is a gigantic blinder placed in front of the eyes of merchants everywhere. I see and hear about it every day. It doesn’t matter how smart or experienced you are, at some point this number is going to rear it’s ugly head and send you on a wild goose chase.
Why is CPO So Bad?
Where To Begin?
Most importantly, it’s quite possibly the most short sighted metric available. It effectively reduces your business down to the cost of an individual order instead of focusing on the value of the customer associated with that order. Even my best clients can get obsessive about the cost (margin) per order/transaction instead of the cost per acquisition (CPA). Somehow CPO magically equates to profitability. If only it were that simple!
I’m talking about the cost to acquire the order (e.g. marketing spend).
Let’s look at some math so we understand fully why I hate CPO so much! We’ll use Google Adwords (PPC) as our primary cost structure associated with acquiring an order since the math is pretty simple. (See Brendan’s post on Reviewing your Monthly PPC Performance)
One Month Sales Data from Google Adwords
A – Gross Sales – $100,000
B – Order Volume – 1,000
C – Gross Cost (Total Ad Spend) – $13,500
D – Average Order Value – $100
Gross Margin (C / A) = 86.5%
Cost to Acquire Each $100 Order = $13.50
If this number is the one you focus on, then you are going to calculate whether or not you are profitable spending $13.50 on each order. Chances are you aren’t profitable if you are a multi-brand retailer in a low margin business.
Let’s introduce another number:
E – Net New Customers = 100 (keeping my math simple)
Still not clear on why CPO sucks? Let’s add another number:
F – Lifetime (12 Months) Value of a Customer = $200
Why is this important?
Because it shows that CPO is the bloody devil! 100% of the customers acquired in this case are brand new to your business. If each customer is worth $200 to you in a given 12 month period, your actual acquisition cost just went down a hell of a lot didn’t it? In this case, your margin would go from 86.5% up to 93.25%.
When you think of the value of the customer, the math changes dramatically. The above example only looks at the value of a customer over 12 months. Most of our sites keep customers for years and years! You say you love your customers, why don’t you start measuring your business like it?
start looking at your numbers for the people behind them.
Perhaps in a world where you’ve acquired every possible customer, the cost associated with acquiring an order means something? I’d also venture to guess that at this point most of your costs associated with acquiring orders from new customers are as near-zero as possible, so measuring them might not actually be worth much except to bean counters.
Or maybe you are the kind of business that can only sell something to a customer once and never again? Maybe a tombstone?
Going into 2014 let’s all make sure we understand CPO vs. CPA!