Cost Per Order: Definition, Calculation and Hacks to Minimize - TrueProfit

Cost Per Order: Definition, Calculation & Hacks to Minimize (2023)

There’s a catch to selling on eCommerce.

A hidden cost that could “eat up” your profits, ruin your chances of success, and it’s something you need to know before starting a business: Cost Per Order (CPO).

So, how can you effectively determine how much money your eCommerce store is making on every order when there are so many various expenses involved?

In this article, we will discuss how to determine the real average amount of money you have to pay per order and tips on how to minimize it to maximize profits. Scroll on!

What Is Cost Per Order?

Cost Per Order (CPO) in eCommerce refers to the expenses incurred when a customer makes a purchase or places an order. Cost per lead or cost per sale are other names for the cost per order.

It is a metric used to assess the effectiveness of marketing initiatives and is frequently applied to affiliate marketing and online advertising.

Why Is The Cost Per Order Important?

1. Measure customer acquisition budget

To make sure you don’t waste more money on acquiring customers than they are spending with you in return, you should be aware of your cost per order.

In other words, it enables you to determine how much profit you are making off each order after deducting all expenses related to the sale and fulfillment.

2. Examine marketing campaigns’ effectiveness

The CPO is a good tool for comparing the effectiveness of various marketing efforts because it is simple to compute for each advertising campaign.

This makes it easier for you to compare the prices and rentability of, let’s say, Facebook campaigns, Google advertisements, or banner advertisements.

💡 A high CPO does not necessarily imply that your online marketing techniques are ineffective, even while a low CPO suggests that they are. It can be more appropriate than low-priced offers if your goods and services are relatively expensive.

3. Data-driven insights for Business Growth

When growing your business, it’s crucial to avoid relying on estimates. A common mistake is to increase marketing spending without first ensuring a sustainable Return on Investment (ROI).

As you add new product lines, marketing, and other costs may increase. It’s crucial to accurately calculate the profit these new lines are generating.

By doing so, you can identify areas where costs can be reduced and reallocate those funds to drive growth. This could include investing in product development or new branded packaging to enhance your brand’s image.

How to Calculate Cost Per Order?

In this part, we will show you how to calculate CPO and what costs should be included in your calculation.

#1. What costs should you consider when calculating Cost Per Order?

Cost Per Order includes 5 different costs: cost of goods sold (COGS), fulfillment costs, value-added fulfillment costs, shipping costs, and marketing/advertising costs.

Depending on exactly what you want to know, you may or may not include some costs in your cost-per-order calculation.

1. Cost of Goods Sold (COGS)

The underlying costs necessary to prepare your inventory for sale are referred to as the Cost of Goods Sold (COGS). This includes production costs as well as the extra expenses that are simple to forget, like:

  • Materials
  • Labor cost
  • Transportation
  • Handling
  • Taxes
  • Utility costs

2. Cost of order fulfillment

An entirely new workflow begins when an online order is placed in order to fulfill it as rapidly as possible for the end user. Order fulfillment is a multi-step procedure that requires a range of expenses to carry out successfully:

  • Intake of inventory
  • Facilities for storing and packing orders
  • Technological support
  • Administration
  • Labor
  • Picking/packing
  • Return management

Along with direct costs, fulfilling orders on your own has non-financial costs as well. For instance, there may be significant lost opportunities if you spend too much time managing fulfillment rather than developing other aspects of your business.

Although it might be challenging to include this in your CPO, hidden costs are crucial to consider when comparing the cost-effectiveness of in-house versus external eCommerce fulfillment.

3. Value-added fulfillment costs

It is crucial to distinguish between the basic fulfillment expenses (those mentioned above) and the value-added services that some retailers decide to include in their workflow for order fulfillment.

It is because those value-added services like custom-branded packaging are not strictly necessary to deliver orders to your customer. Yet, they can help you create a memorable unboxing experience that encourages customer loyalty.

However, you need to keep track of these optional costs to make sure you don’t incur a loss on purchases. Costs for value-added fulfillment include:

  • Kitting/subassembly
  • Custom packaging
  • Gift-wrapping
  • Specific packing material
  • Free samples
  • Advertising Inserts

4. Shipping costs

The cost of shipping is a key component of CPO and can vary greatly depending on your delivery strategy. For instance, as flat-rate shipping is less likely to experience shifting rates than conventional delivery, many eCommerce sites choose to use it instead.

The following factors can also affect shipping costs:

  • If you charge your buyers for shipping
  • How far your customers are from your fulfillment facility
  • If your products are big or weighty
  • If you are eligible for bulk discounts from package carriers

5. Marketing costs

Customer acquisition cost (CAC) is an important metric that you need to track and ensure that this is also factored into your CPO calculation.

For instance, your store may rely heavily on paid advertising to reach potential customers if you have low organic reach on Google and social media platforms. Due to this, customer acquisition costs will soar considerably, which will raise the order’s overall cost.

The following will be included in your marketing costs:

  • Pay-per-click ads
  • Offline marketing
  • Sponsored social media posts or ads
💡 Optimize your marketing expenses with our guide on LTV:CAC Ratio: What Is It; How to Track & Improve Yours!

#2. Cost Per Order: Formulas

Your cost per order comprises all expenses, including those related to customer acquisition as well as fulfillment and delivery.

You must first total up all of your order expenses over a specified time period in order to determine the cost per order. After that, divide your order-related costs by the overall number of orders you got within the same time period.

CPO = Total costs / Total number of orders

However, this statistic on its own won’t be helpful. Unless you also know how much revenue you made from those orders.

Hence, you should calculate your average order value (AOV) throughout the same time period to achieve this:

AOV = Total revenue / Total number of orders

You may then calculate your average profit per order by subtracting the CPO from the AOV.

Average Profit per Order = AOV  CPO

Overall, you can detect if something’s wrong if your CPO is higher than your AOV or lower than the profit margin you anticipated.

💡 Pro tip: If you are running a Shopify store, you can install our TrueProfit tool to figure out your cost per order more quickly.

You can find all the necessary costs related to your CPO in the Order Analytics section. What’s more, all the numbers are tracked and displayed on a real-time basis, so you can get the current picture of your business.

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8 Practical Tips to Minimize Your CPO

As an online retailer, it could seem as though some costs are unavoidable, but there are actions you can take to rationalize these costs.

Along with improving your profitability, lowering the cost per order is a wonderful method to eliminate fulfillment and shipping process inefficiencies that are slowing down your business.

Thus, here are 8 tips to minimize your CPO. Let’s take a look!

1. Faster order processing

A practical tip to minimize CPO is to speed up your order processing. You can do this by:

  • Use technology to automate workflow, such as order processing software, barcode scanners, or automated systems.
  • Ensure standard operating procedures (SOPs) of the workflow, define responsibilities, set priorities, and monitor performance.
  • Optimize the picking and packing process. You can do this simply by using the right equipment and tools.
  • Conduct quality checks, such as verifying the order accuracy, quantity, and quality before shipping.
  • Optimize the warehouse layout, strategically placing the most popular or fast-moving items near the packing area, or using vertical space and racks.
  • Ensure the right packaging, use the appropriate size, material, and protection for the products, or add branding elements or personalized notes.
  • Place the correct shipping labels, remember to choose clear and legible fonts, barcodes, and addresses; as well as select the best shipping method and carrier.

2. Offer free shipping at certain minimum orders

An enormous financial burden that can drive up your online brand’s cost per order is paying for shipping on every order. Yet, many merchants feel they have little choice because online buyers overwhelmingly favor supporting brands that provide free shipping.

Hence, instituting a free shipping threshold is a great way to deal with this problem.

You can encourage customers to pay more to get their products delivered for free while you can take a portion of that amount to partially cover your shipping costs.

More importantly, this tip helps you increase profitability and prevent losing money on small order volumes.

L’Occitane en Provence offers free shipping if customers reach a certain threshold - Cost Per Order
L’Occitane en Provence offers free shipping if customers reach a certain threshold

3. Implement the multi-node fulfillment strategy

Multi-node fulfillment is when you fulfill and ship orders from many locations, or “nodes,” that are close to important customer centers, as opposed to simply one main location.

For eCommerce businesses with national customer distribution, multi-node fulfillment is quite advantageous because it prevents orders from passing through various delivery zones. As a result, transportation costs are reduced and transit times are shortened, which boosts customer satisfaction.

4. Leverage your customer insights

Analyzing your customer data is one of the best tips for reducing the cost per order.

You can figure out how much inventory you should store for a specific product using the customer’s purchase insights. After that, you can apply the information to cut expenses by only ordering the items that customers actually want.

With existing customers, you are aware of their preferences as well as future purchases. Additionally, since they already like and trust you, they are less likely to switch to your rivals in search of the best offers.

5. Outsource non-core tasks

While there are many tips to lower the cost per order, outsourcing non-core tasks is one of the most efficient. An affiliate service provider can help you save money while giving your customers top-notch goods and services.

You can work with a business that focuses on non-core duties. Creating and managing customer accounts, processing payments, and offering customer assistance are all tasks that the third-party business will take care of.

Outsourcing non-core tasks will enable you to concentrate on expanding the business while also lowering your overall operating costs.

6. Build upselling and cross-selling campaigns

Your cost per order in eCommerce can be considerably influenced by the average order value.

Therefore, you need to develop cross-sells and upsells that are specifically catered to your customers in order to improve your Shopify average order value.

A bundle offer from iHerb - Cost Per Order
A bundle offer from iHerb

Cross-sells and upsells are effective sales-boosting strategies. They motivate customers to make larger purchases from you.

Each cross-selling or upsell should deliver something of greater value than what is offered in the primary product area.

7. Optimize your marketing plan

E-commerce marketing advertisements are a vital tool for increasing sales. Customer acquisition costs (CAC) can be very expensive, though, if advertisements are not properly optimized.

CAC covers everything from marketing to customer service. The cost of acquiring a single new customer for an eCommerce business averages around $58.64; therefore, CAC represents a significant component of the cost per order.

In other words, to lower your cost per order, you must first optimize your marketing plan.

Your cost per order is largely made up of marketing advertising. If you want to reduce your cost per order, you need to boost sales while concentrating on enhancing customer lifetime value.

Instead of relying on an ad campaign to bring people in the door just once, you need to create advertising that encourages them to make more purchases or repeat purchases over time.

8. Lower product returns

Returns are not only expensive, but they also have a bad impact on consumer satisfaction. Even if the return was not your fault, it is likely that you were still responsible for paying the shipping and handling fees.

Here are some suggestions on how to decrease returns so that you won’t be charged money for making a mistake:

  • Ensure that your item meets the needs of those who purchase it. For instance, if you sell shoes, ensure the size and color are accurate before shipping.
  • Prevent missing packages by using tracking numbers, especially when sending items internationally. That will ensure the customers receive their orders as soon as possible.
  • Give simple directions for product returns. How long buyers should hold off before returning a product should be specified in the instructions.
  • Ensure that your packing is secure with all of the elements tightly bound in order to prevent loss or damage while in transit.

FAQs

1. What is an example of cost per order?

Let’s take a look at an example of how to get the cost per order for a single month if you had 500 orders, each generating $30 in revenue:

  • Marketing/ads (CAC) – $6,000
  • Packaging – $200
  • Shipping costs – $800
  • Fulfillment costs – $150
  • Storage costs – $120
  • COGS – $2,000

Total costs = $9,270

  • CPO = Total costs / Total number of orders = $9,270 / 500 = $18.54
  • $30 in revenue per order – $18.54 cost per order = A total profit of $11.46 per order.

2. How do you calculate the cost per order?

You need two important numbers to compute the cost per order: the overall cost of a marketing campaign and the number of orders it resulted in.

Then, you plug these 2 numbers into this formula:

CPO = Total costs / Total number of orders

3. What is the cost per order in eCommerce?

Cost per order in eCommerce is a calculation you can use to determine how much money your eCommerce business spends on each sale. This enables you to determine the precise profit you make on each order.

Conclusion

Are you fully prepared to assess your business’s Cost Per Order? If so, be sure to pay close attention to your order fulfillment, shipping, and warehouse processes to see if your increased efficiency can translate into more profit per sale.

You may accomplish conversion optimization, which is the best ad distribution across channels and audiences that fit your consumers’ needs, by tracking your CPO.

Don’t forget to stay tuned on TrueProfit for more insightful articles on business and financial analytics!

Discover what proper profit-tracking looks like at trueprofit.io