Cost Per Order: What It Is, Formula and Tips To Reduce It

Introduction

Are you aware of how much every order costs your business? Is it in the hundreds? Or thousands? Now, no one’s a fan of keeping up with numbers but knowing your expense for each order is crucial to help you know if you’re overspending. 

Today, we’ll uncover what “Cost Per Order” really means, how you can easily calculate it, along with three tips to help you lower your average cost per order!  

What is the Cost Per Order? 

Let’s start with the basics. Cost per Order (CPO) is the complete amount of money your business spends on every order. Right from sourcing your raw materials, storage, labor, packaging, and shipping, to the final-mile delivery, everything is included. 

Once you have your expenses aligned, you can go ahead and calculate your average Cost per Order. The main idea behind this calculation is to help businesses understand how much profit margins they’re able to maintain on each order. 

Primary Expenses That Create Cost Per Order

There are four primary expenses that add up to create the final Cost per Order—order fulfillment, shipping, marketing, and post-sales costs. Let’s check out what each of these expenses is all about in greater detail. 

1) Order fulfillment cost

The first one on the list is your order fulfillment cost. This begins as soon as a customer places an order in your store. Once placed, your team works to get a product delivered in the quickest and most efficient manner to the end user. 

However, it isn't a one-step process. In fact, fulfilling an order also incurs multiple other costs such as packaging, labor, and any software subscriptions such as warehouse management software (WMS). 

If your business provides customized packaging, then you might notice that your average packing expense is higher than other businesses. It’s important for every eCommerce store to ensure that they’re not heavily involved in this stage since it can easily consume heavy hours and cause them to not focus on more important tasks such as marketing.

2) Shipping cost 

Your shipping cost is basically the sum of all the money you pay to your carrier and other partners to transport products from a warehouse to a fulfillment center. These can vary a lot from business to business since couriers worldwide provide multiple shipping methods.

Depending on the type of shipment (freight, international, domestic), your shipping cost will either increase or decrease. Online stores can make use of fixed-rate shipping to ensure that they only pay a standard amount for one mode of transport. 

Your shipping cost will also change based on how quickly you want to deliver a product. For instance, same-day domestic deliveries will cost you more compared to making a usual three-day delivery. Ensure that you’re well aware of how much your carrier charges for different shipments.

3) Marketing cost

Marketing costs are another important factor to consider when calculating your Cost per Order. This is because it shows how much you’re spending on convincing customers to take action and buy your product. 

Marketing costs can generally involve: 

• Paid ads 
• Offline marketing (if applicable) 
• Monthly subscription charge when partnered with a marketing agency

If your business relies more on organic search then you won’t have to spend a lot of money on PPC advertising. Once you calculate how much you’re spending on each conversion, you’ll be able to budget things out better. 

4) Post-sales cost

The final cost is your post-sales cost. Now, this one’s interesting because it doesn't always have to come into the picture. However, when it does, you can expect to shell out more than expected. This cost mainly deals with return orders. 

When a customer returns an order, you have to make arrangements to pick up and deliver the product to your warehouse. When a return is placed, you immediately lose out on making a profit due to the shipping expense. 

Additionally, your team has to provide extra benefits to encourage that same customer to buy from you again, which can easily increase your marketing expense, and in turn, your Cost per Order again. Keeping your returns at a minimum will help you capitalize on each order’s profit and ensure that you’re maintaining a high customer satisfaction rate. 

How Can eCommerce Stores Calculate Their Cost Per Order?

Calculating your store’s Cost per Order isn’t rocket science! In fact, the formula is quite simple and only requires two steps: 

Let’s use an example of a clothing online store that’s received 150 orders in a month to help you understand better. 

First, all monthly expenses will be added up. 

• Order fulfillment: $1000
• COGS (Cost of Goods Sold): $2000
• Marketing: $1500
• Shipping: $1200
• Post-sales: $300

3000+1500+1200+300=6000 

The store uses $6000 each month to produce and sell products. Now, divide this total by the number of orders received in the same month which is 150. 

6000/150=40 

Hence, the clothing store’s total Cost per Order for one month is $40. If each order generated $43 in revenue, then:

43-40=3. Hence, you make a $3 profit on every sale. 

Best Tips to Ensure Your Cost Per Order is Accurate 

While calculating your store’s Cost per Order may be easy, it can’t be accurate if you’re negligent with your financial data. Here are three tips to help you ensure your Cost per Order always hits the mark! 

1) Ensure all data is up to date 

First and foremost, keep all data up to date. Don’t let the busyness of your store pull down your team to update data. Right from sourcing to returns, ask them to keep a record of every order and add them at the end of each month to get your monthly expenses. 

Updated data will help you calculate the Cost of Order precisely and ensure that your team is able to create better, more optimized budgets in the future. 

2) Use software for calculating 

Instead of asking your team to record all transactions and do the math themselves, get software that can do the numbers for you. Using software will significantly reduce the amount of time you spend on calculating and tracking important data such as Customer Data Capture (CDC). 

3) Centralize all data in one platform 

Don’t make the mistake of noting down data in different places. Make sure that you have all the necessary information in one place. Create one document where you add all your monthly/yearly statistics and provide access to only those who need it. 

Centralizing all data on the cloud is a great option for eCommerce stores since there’s always a backup that you can rely on. Additionally, cloud-based storage is much safer than traditional methods like physical storage. 

How Can Businesses Lower Their Average Cost Per Order? 

So, you’ve got a good grasp of what Cost per Order is and how you can calculate it. But, what if your Cost Per Order is higher than your liking? Here’s what you can do to keep it at a minimum. 

1) Make order processing quick 

When you pick, pack, and send out goods quickly, you lower the amount of labor cost involved. You can even employ multi-node fulfillment strategies to ship items to a hub in proximity to your customers. 

The more efficient your order processing is, the more orders you’ll be able to sell in the same amount of time while lowering logistics costs for both storage and shipping. 

2) Leverage shipping discounts 

Partner with carriers that offer heavy discounts for specific shipments. Depending on how much you ship each month, choose a courier company that is more profitable for you. For instance, if your monthly order volume is low, then partnering with a carrier that charges per parcel makes more sense. 

However, if you’re an established brand that has a higher order volume, then using fixed monthly rates is better. You can even use 3PL platforms to avail discounts from multiple carriers in one place. 

3) Optimize packaging 

Don’t provide customized packaging to every customer you sell to. Instead, use a subscription model or provide better packaging to loyal, repeat customers. This ensures that you’re actually profiting from each sale and not bearing overhead costs for lower-value products in your store.  

Do Online Stores Really Need to Calculate Their Cost Per Order? 

In case you’re wondering whether you even need to calculate your Cost per Order then here’s your answer: Yes! Every eCommerce store should know how much every order costs their business. 

Doing so helps you understand whether your current fulfillment method is efficient or not. Or whether your current content marketing strategy is able to convert the amount of prospects you desire. 

Once you’re aware of such statistics, you can easily create monthly reports and make better decisions for your store. When you don’t bother with your Cost per Order, you lose out on increasing your profit margins and scaling your business higher. 

Final Words 

Cost per Order is a crucial metric for every eCommerce store out there. It helps you understand how much you’re spending on every stage of fulfillment and how you can optimize them. You can use the tips we’ve mentioned above to easily calculate your Cost per Order and reduce your current expenses on multiple fulfillment processes!