What is Cost Per Order?
Cost per order (CPO) is the average marketing spend needed to drive any purchase to your store. Therefore, it includes both new and returning customers. Cost per order is sometimes confused with cost per acquisition (CPA), which only calculates the cost to acquire only new customers.
How to calculate cost per order
To calculate cost per order, divide your brand's variable marketing cost by the number of orders. Variable marketing cost means the money spent on a particular ad platform (Google, Facebook, TikTok, etc.). Here's the formula:
A key eCommerce profitability strategy: setting cost per order targets and leveraging cost per order for other targets
The most successful eCommerce brands understand their historical spending, track their current spending, and forecast future spending. In the context of cost per order, this means looking at past and present data, and a rarely-covered topic: setting spending targets on cost per order.
In practice, this means having a deep understanding of the economics of your business (i.e., all of your costs), making choices around when you want to break even with sales (Breaking even on first sale? After 12 months?), and how you treat different marketing channels.
Understanding all your costs
To ensure that your cost per order doesn’t erode your profits on each sale, it’s crucial to have a thorough and accurate understanding of your non-marketing costs. So, this means that you fully understand and track your...
- Shipping costs
- Operations costs
- Variable costs
...and how those costs break down to an individual order basis.
This means having accurate readings of your brand’s AOV, Gross Margin (and/or Gross Margin Percentage), and your marketing spend per order (i.e., cost per order), contribution margin (sales price minus variable cost), among other things that we’ll get into shortly.
Now, let’s look at different examples of setting some targets.
Breaking even on your first order
This example shows the KPIs to be aware of if you were to target breaking even on a first order. You could also factor in additional costs that you may have, such as certain fixed costs. In this example, if AOV, gross margin %, and gross margin were kept the same, and you added $3 of fixed costs, that would reduce your max marketing spend (i.e., your CPO) to $22, unless you were comfortable losing money on a first order in order to get a new customer in the door.
Breaking even after 12 months
Setting a cost per order target may become more complex over a longer timeframe, and it becomes vital to understand your customer lifetime value and how it impacts the numbers. If you know that on top of $25 in initial gross margin, you’re going to get an additional $25 in gross margin (i.e., customer lifetime value) from those customers, that’s a total of $50 in gross margin. This means that your cost per order could be $50.
Achieving 20% contribution margin in 12 months (Facebook vs. Google)
To make things more complex (and more realistic), let’s take an example of a 20% contribution margin goal on two different marketing channels: Facebook and Google. Consider the example below:
In this example, most of this business’s metrics are different in Facebook versus Google. Facebook leads to a higher AOV, so they can afford to have a higher marketing spend on Facebook.
In this situation, gross margin per order is $32.50 per order on Facebook and $25.00 on Facebook. This cohort of customers has repurchased once, so their Avg. 12-month customer lifetime value is double the gross margin ($65.00 and $50.00 respectively).
Now, as opposed to the previous examples, where marketing spend is maxed out, and there is no contribution margin left*, this example shows the marketing spend (CPO) that this brand could spend on Facebook and Google and still achieve a 20% contribution margin. If the brand wanted to increase their contribution margin per order, they would have to decrease their marketing spend per order.
*Note: These are extreme examples, and would only really occur with investor-backed businesses who can afford to only break even or even lose money on some orders, in order to acquire a gigantic number of new customers.
2 common cost per order mistakes
- Not tracking and understanding cost per order by channel
Stronger marketing budgeting: A surprising number of brands guess, spend, and check their work and numbers (after it’s too late) when it comes to cost per order. Having detailed breakdowns of spend by channel will prevent any unwanted surprises down the road when you’re figuring out your profitability.
Marketing channels behave differently, and their performance and cost varies from brand to brand. Facebook is different from Google, which is different from Snapchat, which is very different from TikTok—the list goes on. Don’t take the same spending strategies from one channel and apply them to another: testing is required. Additionally, don’t assume that because one brand may have success (or have a certain cost per order in one channel) in a particular channel that you will too.
How marketing channels strengthen each other: It’s also vital to consider how the channels may play off of each other and improve the performance of each other. For example, if you look at your cost per order for Facebook and see that it’s much higher than your cost per order for Google, you might consider just putting more money into Google, and lowering your paid social budget.
It may seem logical, but doing so could hurt your marketing efforts and overall performance.
There are people who are going to see your product(s) in paid social who will never see your product(s) in Google (and likewise with other customers only seeing your products in specific places). They’re not going to go out and search for your products without having first seen a social ad.
Your new customer rate could be much higher in Facebook, and you may be approaching a different audience there that you simply won’t interact with in different channels.
As a result, cutting your Facebook spend may lower the number of new customers coming in the door. Additionally, while everyone may not necessarily click through a Facebook ad to make a purchase, advertising on Facebook may create brand awareness that brings people to Google.
- Weaker organic rankings = a higher cost per order
eCommerce brands often forget the remarkable impact that SEO has on overall business performance. In short, weak organic rankings will end up pushing people into paid channels. That means you’ll have more people clicking on ads, and that will drive up your cost per order.
Working on your organic rankings is a slow process, and it requires testing, effort, and investment of time. To give your brand a boost in organic presence, feed Google more (valuable) content on your website to work with, beyond product pages and “About Us.” Can you have a section of your site on customer stories? Extended FAQs? A help section? A blog? By writing and spreading the good word about your brand, you may find that you’ll lower your cost per order over time.
How Daasity helps eCommerce brands with cost per order
As part of Daasity’s customizable marketing dashboard, checking and tracking your cost per order is stress-free. We automatically pull your vendor-reported cost per order and provide clear visualizations that make it easy to visualize and analyze this metric. Although this sample graph only shows Facebook and Google ads, you can also add other ads, such as from Amazon, Snapchat, Pinterest, and more.