Cost per order, also called cost per purchase, is the cost of internet advertising divided by the number of orders. Cost per order, along with cost per impression and cost per click, is the starting point for assessing the effectiveness of a company's internet advertising and can be used for comparison across advertising media and vehicles and as an indicator of the profitability of a firm's internet marketing.[1]
The purpose of the "cost per order" metric is to measure the advertising cost required to acquire an order. If the main purpose of the ad is to generate sales, cost per order is the preferred metric.[1]
CPO is most often calculated when dealing with online resources.[2][3] If text or banner ads are displayed, many users see them, but not every display triggers a click or purchase. With CPO, it becomes possible to measure the actual success of ads in pay per click or per thousand click models.[4] CPO is also focused on the profits generated. Companies that sell expensive products can usually afford higher CPO values. At the same time, small margins are more likely to be compatible with low margins. In fact, the goal of the organization in both cases is to keep the cost of the order as low as possible. The CPO model is superior to other concepts that don't take into account the actual value of an online campaign.[5][6][7] This is because a high volume of targeted traffic, number of impressions, and click-through rate do not necessarily lead to sales, even if these metrics are important from a digital marketing perspective.[8] Thus, CPO reduces the risk of spending too much on advertising with poor results and is especially important for companies that have a small budget but want to spend it effectively.
The advertising budget of a campaign can be used to calculate Cost per Order in the context of determining profitability.[9][10][11] However, the metric is hardly used as a KPI from a business perspective. Rather, it is needed to determine the effectiveness of all campaigns in relation to the funds used for them. This approach is used quite often in affiliate marketing. The cost of an order there often includes a fixed amount or percentage of the sale that is paid to the affiliate. While some budget is allocated to affiliates, it is the affiliates who make their resources available for advertising to potential clients.[12] Typically here, CPO is closely tied to the commission paid by the product seller to place ads with affiliates.[13]
This is the cost to generate an order. The precise form of this cost depends on the industry and is complicated by product returns and multiple sales channels. The basic formula is: