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FutureNow Article
Tuesday, Oct. 30, 2007

Unlocking Key Performance Indicators: Order Acquisition Ratio

By Ronald Patiro
October 30th, 2007

And a side of revenue, please...Now that we’ve taken a look at Take Rate and Bounce Rate, it’s time to look at another very important metric: Order Acquisition Ratio. Simply put, this performance indicator is used to measure the effectiveness of your marketing.You’ll need three numbers to calculate your order acquisition ratio:

1.) Visits to your site

2.) Number of orders placed

3.) Total marketing expenditures (which can include fixed costs associated with maintaining the site, but let’s focus primarily on marketing expenses)*

With these variables in mind, we will get two contributing metrics with which to calculate order acquisition ratio.

Cost per Visit (CPV) = Marketing Expense / Visits

CPV measures how much you’re paying to attract each single visit to your site.

Cost per Order (CPO) = Marketing Expense / Number of Orders.

CPO tells you how much you’re paying in terms of marketing budget to get a visitor to your site who converts and becomes a customer. This is directly related to your Conversion Rate.

Order acquisition ratio is then calculated by taking the CPO and dividing it by the CPV.

Order Acquisition Ratio = (Marketing Expense/Number of Orders) / (Marketing Expense/Visits)

It should be a positive number (if not, you’re in trouble). The lower the ratio, the better your marketing budget is being used. Some of the best ways to lower OAR include:

  • Boosting conversion! Increasing conversion lowers your CPO. Since conversion is the website’s primary goal, there are literally thousands of factors that affect conversion. (Conversion is so important to online health and wellness that improving is integral to everything we do for clients.)
  • Improving organic search rankings with relevant content. When you spend the time and money to create relevant content, the CPV and CPO should both drop — and you’ll further lower CPO by converting more visitors.
  • Targeting quality traffic sources. In your analytics, segment your site’s incoming traffic by source in order to identify where to put those marketing dollars. (Bounce Rate is a great starting point for this.)
  • Optimizing PPC campaigns. With an effective PPC campaign, you’ll be able to convert more visitors. While this will increase your CPV, but when done correctly, it will yield a larger decrease in CPO by converting a higher percentage of traffic.**

Order Acquisition Ratio is based on more traditional bored boardroom metrics because it has a close relation to traditional financial statements. It has nothing to do with “Web 2.0,” “Web 1.0,” or Facebook. So, it’s great for sharing with your boss since it’s directly tied to the bottom line. There’s even a cousin to this metric; a non-ratio, cold-hard-cash version of the Order Acquisition Ratio known as the Order Acquisition Gap. To calculate it, simply subtract the CPO from the CPV to get a negative number. This number shows how much money you waste in marketing dollars on visitors that don’t convert.

Order Acquisition Gap = CPV – CPO

There are other close relatives in this family of metrics, all of which focus on costs associated with generating new customers. To calculate these similar metrics, you’ll need to be able to track the same figures discussed above — except they need to be further segmented. Track the following numbers, and you’ll also benefit from a few additional metrics (listed in the bullet points below):

  1. New visitors to the site.
  2. Number of orders placed by new customers.
  3. Total new customer marketing expenditures.

With these figures you can see the effectiveness of your new customer acquisition efforts:

  • Customer Acquisition Cost = (New Customer Marketing Expense) / (Total New Customer Orders)
  • New Customer Cost per Visit = (New Customer Marketing Expense) / (New Customer Visits)
  • Customer Acquisition Gap = (New Customer Marketing Expense/New Customer Visits) - (New Customer Marketing Expense/Total New Customer Orders)
  • Customer Acquisition Ratio = (New Customer Marketing Expense/Total New Customer Orders) / (New Customer Marketing Expense/New Customer Visits)

[*Regardless of the expenses you include, it's crucial to set a standard and stick with it in order to accurately measure and account for the specific impact of such changes.]

[**When monitering your order acquisition ration, never tolerate any increase in the cost per visitor without an accompanying decrease in cost per order.]

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Comments (16)

  1. Hi Ronald,
    Good article. I have a question though. If you have many sources of visitors to your site, how can you tell where the sale originated from unless you ask every customer ? it is hard to know where your marketing dollars are working best. I would appreciate your advice.
    Simon

  2. Simon,

    Web Analytics programs allow you to segment your traffic by the sources that deliver it. You should make sure that you have an analytics program running on your site. You can always use Google Analytics it’s free, or use a paid service like Omniture.

    If you are talking about tracking offline marketing efforts then you may have to implement a question on your site or make assumptions based on short term questionnaires to find out where your visitors are originating from.

  3. Thanks for your reply Ron. I have added Google Analytics a month ago and am perhaps still a novice using it, but maybe you can explain how I can track where an on line sale came from (eg: an organic search or blog or link from another site ).

  4. Simon,

    I strongly recommend investing time into gaining an understanding of how to analyze your site or working with someone who does. Here is a great place for you to start educating yourself in understanding Google Analytics.

    Best of luck to you.

  5. A good web analytics program for your site can really work wonders for your site. Its one important field you must master and give consideration to.

  6. Mathematically, this equation simplifies down to the inverse of conversion rate.

    In other words, if you have a 4% conversion rate, you have a 25 OAR (1/0.04), correct?

    Mathematically, you have marketing expense in the numerator and denominator of your equation. By default, marketing expense cancels out, leaving you with the inverse of conversion rate.

    So by default, improving conversion rate improves this metric!

  7. Kevin,

    Improving conversion rate does indeed improve this metric as they are mathematically inverse. However, taking that one shortcut while explaining this ratio would have ignored our marketing expenses. We don’t want to take the money out of our explanation because it gives us other useful metrics like Cost per Order and Cost per Visitor with which other metrics like Order Acquisition Gap can be calculated. Thank you for reading and commenting.

  8. Do you have any metrics for what are ranges of these metrics by industry. E.g., what’s a good order acquisition gap; and what does it mean if you have an order acquisition gap that’s negative. should this be on unique visitors or visits? etc.

  9. Tara,

    Great questions! There are no published benchmarks for this metric. If you order acquisition gap is negative then you better have a long life time value for that customer, because one order does not make up the amount you paid to drive them to your site. As far a if it should be unique or just visits; depends on your organization and the rest of your metrics. You should be consistent across all metrics.

  10. [...] Order Acquisition Ratio = (Marketing Expense/Number of Orders) / (Marketing Expense/Visits) [...]

  11. Hi,
    I am trying to set up a goal funnel in Google Analytics. The problem I am having is my checkout is done through PayPal and my web developers are telling me that the Google Analytics code cannot
    be placed on the PayPal pages. Is this correct ? If so, how the heck am I supposed to work out my cart abandonment rate ?
    Can anyone help ?

  12. Simon,

    Google recently created the ability to track “events” on a given page. In your case you would make the click of your Paypal button the event you want to track. Good luck to you.

  13. Hi Ron,

    Thanks for your reply.

    Do you mean the add to cart button on our site ?
    I think you are saying that this will tell me how many people add something to their cart, and I then deduct this # from my total # of sales to get the abandonment rate. Is that right ?

    The problem with this is I have no way of finding out why they abandoned the cart if I cannot track the four or five steps in the 3rd party PayPal checkout. Is there a way round this ?

    Thanks
    Simon

  14. Simon,

    If you want to know why they may be abandoning on Paypal’s site, go through Paypal’s process and take notes on all the possible reasons someone would leave. You may be able to address some of the problems on your site before they get to Paypal by making sure they don’t have any unanswered questions. Examples – return policy, shipping costs, gift wrapping, etc.

    I referred to “event tracking” as a way to measure how many people click on a specific link, in your case the Paypal button on a page. This will be able to measure how many people are going to Paypal, but once they are on Paypal’s site you will not be able to know what they do there.

    Good luck to you Simon.

  15. It seems like many people forget that it isn’t about how many visitors we can get to our website, but how much “relevant” traffic we can bring. 5000 irrelevant visitors to a website is useless. I would rather get 30 relevant visitors to a website, than 5000 irrelevant visitors, because those 30 relevant visitors can convert into sales much, much higher.

  16. Do you have any metrics for what are ranges of these metrics by industry. E.g., what’s a good order acquisition gap; and what does it mean if you have an order acquisition gap that’s negative. should this be on unique visitors or visits? etc.

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