The most significant advantage of starting an ecommerce firm is that profit margins are typically higher than in traditional commerce since you don’t have to rent expensive retail spaces. This allows you to provide high-quality items at a reasonable price. Even with reduced overhead costs in starting an online store, there are additional expenses(cost per order) to selling a product online that you may not be prepared for. How can an ecommerce business determine how much money they’re making per order when there are so many variables like marketing, fulfillment fees, and shipping rates? Let’s look at an example of a client order and its associated costs. We’ll go through how to calculate the real costs of a single customer order, how to lower them, and how partnering with a 3PL might help boost your bottom line.
What is cost per order?
The total calculated price that a client pays for an item, as well as the profit made from a single order, is known as the cost per order (CPO).
Common overlooked order costs
Ecommerce companies typically include the cost of goods sold (COGS), shipping expenses, storage costs, and other factors in order-cost calculations. While they are crucial to include, there are a few more expenditures that must be considered.
This is how much money you spend on marketing and advertising to get customers to make a purchase. Unsurprisingly, it’s one of the most crucial ecommerce metrics to understand. It’s also known as your customer acquisition cost (CAC).
The total cost of acquisition (CAC) is made up of what you pay for online marketing campaigns, social advertisements, and other marketing channel costs. You may make better decisions about how much money you spend upfront to improve conversions by tracking this statistic.
Let’s consider a scenario in which you invest $100 to acquire one customer and your average order value is $80. You’ll lose 20 dollars on each purchase, not including the cost of fulfillment.
Costs may quickly increase if you use any sort of packaging. Customized, branded packaging can make a significant difference in the unpacking process, and it makes sense for high-quality, luxury items. However, if it isn’t cost-effective, it might become an unnecessary expense if you’re selling a low-cost product.
In general, the cost of packaging should not exceed 5% of your average order value.
How do you establish a cost per order (CPO)?
Customer acquisition costs, fulfillment and delivery expenses, and other costs are all included in calculating your cost per order. To determine cost per order, total up all of your order costs — everything you spend to acquire, fulfill, package, and ship orders over a certain period of time – for a given time frame.Then, divide your order costs by the total number of orders you received during the same time period to arrive at a percentage.
The cost per order formula
(Customer acquisition costs + packaging costs + fulfillment costs + shipping costs + COGS + storage costs in a time period) / # of orders in that same time period.
A CPO example
Let’s look at an example of how to establish a cost per order for a single month, in which you received 300 transactions that generated $25 in income:
- Marketing/ads (CAC) – $4,000
- Packaging – $180
- Shipping costs – $900
- Fulfillment costs – $100
- Storage costs – $100
- COGS – $1,000
Total costs = $6,280
$6,280 in total costs / 300 total orders = $20.93 CPO (your cost per order)
$25 in revenue per order – $20.93 cost per order = A total profit of $4.07 per order.
Learn more by reading our other articles on this topic.