Cost per Order (CPO)
Cost per order (CPO) is used to calculate the average cost of marketing per sale. This includes advertising and shipping costs, for example. CPO is also commonly used as a pricing model for internet advertising. It means that an advertiser only pays a fee when an actual purchase occurs and is often applied in affiliate marketing.
Formula and calculation
In order to calculate the cost per order, you need two key figures: the total cost of a marketing campaign as well as the number of orders generated through this campaign. Dividing these two numbers results in the cost per order.
To give an example: an internet ad campaign costs 500 dollars and generates 50 sales. 500/50 equals 10, which means the cost per order is 10 dollars.
Why is the CPO important?
The cost per order allows you to assess the success of your ad campaigns. If you spend 200 dollars for a well-written and designed newsletter that leads to only a few conversions, this indicates that the campaign might have its weaknesses. However, you should keep in mind that you need more than just the CPO to judge your business model’s rentability. To get meaningful numbers, you need to include variables like the cost of production, service costs, as well as other expenses, like personnel costs.
Because the CPO is easy to calculate for each ad campaign, it is a suitable tool to compare the impact and success of multiple marketing campaigns. This helps you to compare the costs and rentability of campaigns on Facebook and Google Ads or simple banner ads, for example. While a low cost per order indicates that your online marketing strategies are efficient, a high CPO does not have to mean the opposite. If your products and services are rather high-priced, a higher CPO is more justified than with low priced offers.
Advantages and disadvantages of CPO as a pricing model
Using the CPO model for internet advertising has multiple benefits. One advantage is that you only have to pay for actual transactions. There are no further expenses besides the costs for the production of your ad materials. This means that you can virtually eliminate scatter loss by using CPO. Reduced scatter loss allows you to accept a higher cost per order, particularly when trying to acquire new customers. Usually, advertisers and their business partners agree on whether the CPO will be charged per business transaction or as a percentage of the generated turnover. In either case, you can include these costs as a fixed component in the overall calculation of your business model.
The cost per order model tends to cause higher fees than other payment options. This leads to the second advantage of CPO: the fact that website operators can potentially generate higher revenues than with other pricing models. For example, if a website targeting fishermen offers its advertising space to providers of expensive fishing holidays, high commissions can be expected.
However, a major disadvantage of the CPO model is the fact that website operators have to rely on the honesty of their business partners. It is almost impossible to track if the advertising partner reports the number of sales correctly. Allegedly high return rates or few sales despite a high number of clicks can indicate that the paying site is trying to trick the website operator to reduce costs.
Another disadvantage of the cost per order model: in the initial agreement, neither business partner knows whether the other side will really deliver what is promised. Does a blog that offers ad space really have as much reach as claimed? Is the provided ad material of such quality that it actually leads to sales? CPO as a billing model only leads to a win-win situation if both parties work fairly and transparently on optimizing the cooperation.
Alternatives to CPO
There are various alternatives to the cost per order model you can choose from that are closely related. As an example, the differences to cost per sale (CPS) are marginal. Cost per action (CPA), cost per click (CPC), and cost per lead (CPL) are basically variations of CPO with one important difference: advertising fees are paid as soon as traffic is generated or data from potential customers is supplied. A similar model is cost per view (CPW), which focuses on the number of views and is used for advertising in videos or online games, for example.