How to Calculate Cost Per Order for Your Online Store

Running a successful online store involves understanding various metrics to ensure profitability and sustainability. One critical indicator is the Cost Per Order (CPO), which calculates the average cost of generating each order. However, with so many variables such as marketing, fulfillment, and shipping costs, how can online stores reliably quantify how much profit they make per order? 

Understanding and accurately measuring your CPO is critical for optimizing business operations, identifying areas for improvement, and ultimately increasing your profitability. In this guide, we’ll look at what CPO is, why it matters, how to calculate it, and how to optimize it for your online store. We’ll walk you through the steps of calculating the cost per order (CPO) for your e-commerce business. 

What is the Cost Per Order (CPO)?

Cost per order (CPO) is a key metric that measures the total cost associated with acquiring a single customer order. Cost Per Order is a key performance indicator (KPI) used by e-commerce businesses to assess the effectiveness of their marketing and operational expenses in driving sales. It indicates the overall cost divided by the number of orders received during a given period. It includes all expenditures associated with generating sales, such as marketing, advertising, production, shipping, and handling.

Why is CPO Important?

Calculating CPO gives valuable data on the productivity and profitability of your e-commerce business. CPO plays an important role for online merchants since it gives information about the performance of their marketing campaigns and general operational efficiency. Knowing the precise cost of each order allows you to make informed decisions about how to optimize operations, manage resources more effectively, and maximize your return on investment (ROI).

What Are the Factors Affecting CPO?

To accurately calculate your CPO, it’s crucial to break down and analyze each component contributing to the total cost. Here are some key factors that influence the Cost Per Order, including:

Cost of Goods Sold (COGS)

The cost of acquiring or producing the products sold on your online store directly impacts CPO. When COGS is high, it raises the entire cost structure of the business, possibly leading to higher CPOs. High COGS may cause businesses to increase product prices to remain profitable, resulting in higher order values and, as a result, higher CPOs. 

Furthermore, if COGS is not appropriately managed, margins might be impaired making it difficult to absorb other costs associated with order fulfillment, such as shipping and packaging, which increases the CPO. Lowering COGS can help lower the total cost per order. Lowering COGS can help reduce the overall cost per order. Factor in the costs of manufacturing or sourcing your products, including raw materials, labor, packaging, and overhead expenses.

Overhead Costs

Rent, utilities, salaries, and administrative expenditures are all operational costs that have an impact on CPO. Overhead costs can have a major impact on Cost per Order (CPO) in various ways. First, overhead costs such as rent, utilities, and administrative charges contribute to a company’s overall cost structure. When overhead costs are high, they raise the total expenses that must be assigned to each order, increasing the CPO.

Finding ways to streamline operations and reduce overhead can positively impact the bottom line. Consider fixed and variable overhead costs, such as rent, utilities, employee salaries, software subscriptions, and other operating expenses.

Marketing Expenses

Investments in marketing channels such as paid advertising, search engine optimization (SEO), and social media advertising contribute to increasing CPO. Marketing expenses, also referred to as customer acquisition cost (CAC), are the amount of money you spend on marketing and advertising to get consumers to make a purchase. CAC consists of the costs associated with internet marketing campaigns, social ads, and other marketing platforms. For example, if you spend $10 to get one customer and your average purchase value is $30, your marketing expenses would be $10.

Analyzing the performance of each marketing channel is crucial for optimizing spending. Include expenses related to advertising campaigns, social media promotions, influencer partnerships, and any other marketing initiatives aimed at driving sales.

Shipping and Fulfillment Costs

This accounts for expenses associated with packaging, shipping, delivery, and handling of customer orders, including shipping fees, fulfillment services, and returns processing. 

Calculating shipping and fulfillment costs and allocating them to the cost per order may involve:

  • Packaging materials (boxes, envelopes, tape, etc.).
  • Shipping labels and printing supplies.
  • Labor costs associated with packaging and handling.
  • Labor costs for warehouse staff not directly involved in order fulfillment.
  • Freight charges from carriers.
  • Insurance costs (if applicable) for shipments.

How to Calculate CPO?

When calculating order costs, e-commerce businesses typically account for the cost of goods sold (COGS), overhead costs, shipping costs, storage costs, and more. While these are important sets to assess, there are also additional costs to consider. 

CPO is calculated by adding up all of the costs connected with acquiring and fulfilling orders and dividing that total by the number of orders received during a given time. The formula to calculate CPO is as follows:

The formula for Calculating CPO

The formula for calculating Cost Per Order is: CPO=Total Cost/Number of Orders

Example Calculation

Suppose your online store incurred various costs in marketing expenses and operational costs for a single month, where resulting in 500 orders that each brought in $20 worth of revenue. 

To calculate CPO is as follows:

Calculating the total cost:

COGS – $1,000

Overhead – $500

Marketing Expenses (CAC) – $2,000 

Packaging – $100

Shipping costs – $1,100

Fulfillment costs – $300

Total costs = $5,000

Calculating the CPO:

CPO=$5,000/500=$10 (your cost per order)

In this example, the Cost Per Order is $10.

Calculating the profit:

$20 in revenue per order – $10 cost per order = A total profit of $10 per order

Strategies to Reduce CPO

Now that you understand how to calculate CPO and its components, let’s explore some strategies to reduce your CPO and improve overall profitability.

To lower CPO and improve profitability, consider implementing the following strategies:

Improve Conversion Rates

Once you know what your average CPO is, you can make better decisions about where you can reduce costs to achieve the targeted profit per order. Optimize your website for conversions by improving product descriptions, streamlining the checkout process, and providing incentives to drive sales.

Additionally, build long-term relationships with your customers to boost their lifetime value. Offer customized experiences, loyalty programs, and incentives to drive repeat purchases and referrals.

Optimize Marketing Channels

Online tools and resources are available to help businesses calculate and track their CPO effectively. Some popular options include Google Analytics, Shopify Analytics, and specialized e-commerce analytics platforms.  

Identify ineffective marketing channels, reallocate funds into high-performing channels, negotiate better pricing with advertising platforms, and prioritize focused campaigns. Analyze the performance of each channel and allocate your budget to those that yield the highest ROI.

Optimize Operations

Reduce overhead costs by renegotiating contracts with suppliers, automating repetitive tasks, optimizing inventory management, and improving logistics and fulfillment processes. There are many unseen improvement opportunities in your retail order fulfillment processes. 

Work with your pickers and warehouse staff to see how you can reduce costs by improving routing, picking, inventory storage, and other day-to-day processes throughout the order fulfillment process.

Improve Fulfillment Efficiency

Reduce overhead and labour costs by streamlining your order fulfillment process. Running a more effective e-commerce warehouse can help reduce expenses. Faster order processing means you pay less for order fulfillment because there is less labour and time required. Invest in automation technologies, improve inventory management, and negotiate lower delivery costs with carriers. Send orders to the warehouse nearest to the customer for faster order fulfillment and lower fulfillment and shipping expenses.

Reduce the Cost of Goods Sold

COGS is the direct costs of producing the goods sold by a company. If you’re seeing high COGS, talk with your manufacturer to see if there are ways to cut costs and production lead times. Negotiating better terms with suppliers or seeking alternative suppliers can lower the cost of raw materials and components. Implementing lean manufacturing principles to minimize waste and improve productivity can also reduce manufacturing costs. 

Additionally, investing in technology and automation can streamline production processes and lower labor costs. Optimizing inventory management to prevent overstocking and reduce carrying costs can contribute to lowering COGS. 

Negotiate Supplier Contracts

Negotiate with suppliers to secure better pricing, terms, and discounts on raw materials and production costs. Explore alternative suppliers and partnerships to lower procurement expenses. Shipping rate discounts are very helpful if you can get them. If you ship in large volumes, major carriers will provide shipping rate discounts. If you start working with a 3PL, many of them also offer discounted rates due to their volume.

Outsource to a 3PL

While you may believe that managing fulfillment in-house is more cost-effective and efficient, collaborating with 3PLs allows many e-commerce companies to grow faster while lowering costs. A 3PL (Third-Party Logistics) partner can significantly lower shipping and fulfillment costs by leveraging volume discounts with carriers, optimizing shipping routes, and improving warehouse efficiency through advanced technology and automation. Partnering with a 3PL provider, businesses can optimize their shipping and fulfillment operations, reduce costs, and focus on core competencies to drive growth and profitability. 

Additionally, 3PLs offer multi-channel integration, efficient inventory management, and value-added services such as returns management and packaging customization, all of which contribute to cost savings and operational efficiency. Furthermore, 3PL services are scalable and integrate technology solutions for real-time tracking and data analysis, enabling businesses to reduce fixed overhead costs, streamline processes, and make informed decisions to drive growth and profitability in their fulfillment operations.

SPExpress is your strategic 3PL partner in Canada. At SPExpress, we offer efficiency, scalability, and comprehensive warehousing solutions to businesses of any size, easing the burden on businesses. We are ready to take your fulfillment game to new levels. Contact us today to learn how we can assist you with your warehousing and order fulfillment strategies.

Common Mistakes to Avoid

  • Neglecting to track and analyze CPO regularly
  • Overinvesting in ineffective marketing channels
  • Focusing solely on acquiring new customers without considering repeat customers
  • Ignoring opportunities to optimize operational efficiency
  • Ignoring overhead costs
  • Poor inventory management
  • Inadequate supplier management

Calculating Cost Per Order helps online merchants evaluate the effectiveness of their marketing and operational expenses. Understanding CPO and implementing optimization tactics can help businesses improve profitability and achieve long-term success in the competitive e-commerce sector.

Measuring the cost per order and applying cost-cutting strategies will help you enhance competitiveness and achieve long-term growth. Take control of your CPO today and get ready for your company for long-term success.

At SPExpress, we offer efficiency, scalability, and comprehensive warehousing solutions to businesses of any size, easing the burden on businesses. Contact us to find out more about how we can make order fulfillment and warehouse management simple for your business today!

Read more:

Shift From In-House To Outsourced Fulfillment – When it’s Better & How to Do it Right

How Third-party Logistics Services Can Ensure E-Commerce Growth?

The Top 6 Reasons For Outsourcing in Supply Chain Management For Your eCommerce Business

At SPExpress, we offer services from order fulfillment to supply chain management services that include freight forwarding, transportation, warehousing, picking and packing, inventory and supply chain management, and order fulfillment. We work closely with our customers to ensure their 3PL needs are being met properly. Since we understand how valuable working with a reputable 3PL provider can be, and how it can help our customers to focus on growing their businesses. 

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