Our Five Key Points:
- Cost per order means the total cost to provide goods or services to a buyer.
- The cost-per-order formula is a simple methodology for calculating this.
- There may be hidden or forgotten costs, such as marketing, storage, or returns.
- Collating and integrating business data helps provide as much information as possible for the cost-per-order formula.
- Integrate.io helps online retailers connect to their entire e-commerce tech stack to gain access to all their business data.
You have a customer. They want a product: you sell that product. It’s simple, but how do you know if you’re charging the right amount for that product? Knowing how to calculate the cost per order is essential in helping you set the correct prices for your products and services. As an e-commerce retailer, you’ll naturally have lower overheads than a brick-and-mortar store. However, there are still plenty of metrics to consider every time a customer orders from your webshop. This article explains everything about the cost-per-order formula, why it’s essential for calculating your bottom line, and how a proper data integration platform like Integrate.io can help you with accurate cost and pricing calculations.
Table of Contents
- Cost-Per-Order Formula - What is it?
- Advertising and Marketing
- Branding and Packaging Costs
- Storage and Shipping Costs
- After-sale Costs
- Cost-Per-Order Formula is Moore Accurate With Integrate.io
Cost-Per-Order Formula – What Is It?
The cost-per-order formula allows businesses like online retailers to figure out exactly how much it’s costing them to produce and deliver each order. Many companies may mistakenly assume that the cost is all wrapped up in the raw materials of a physical product or the labor costs for services provided. Essentially, it seems that if a product is low-cost to produce, the cost per order will also stay low. However, a lot more goes into providing your customers with what they need than the product or service itself.
Fully understanding every aspect of the cost that goes into delivering your product to your customer means you get a clear understanding of precisely what profit you’re making. As well as helping keep accurate reports and financials, this also helps drive marketing campaigns, draw investors, and keep stakeholders apprised of growth or shrinkage.
As a starting point, the cost-per-order formula is [total cost]/[units sold or number of orders] = cost per order. By this methodology, if you know you’ve spent $5,000 producing your goods and you’ve sold a total number of 100, the current cost per order is $50. However, this cost-per-order formula only gives accurate results when you have all the data available regarding every aspect of producing, marketing, shipping, and delivering this product.
Need to gather all your business data into a single destination? Integrate.io is a new ETL platform designed for e-commerce businesses.
Advertising and Marketing
One of the first and most important layouts to consider when calculating your cost-per-order formula is how much you spend on promoting your products. There are so many variable costs when it comes to marketing. You may have a fixed advertising budget, but you have to take into account other factors like time spent building a social media presence, targeted campaigns, and even research into key demographics. Without data pipelines integrating your business data, this can become a very time-consuming process.
If you have a dedicated marketing team, their cost to your company has to fit into your cost-per-order formula somewhere, too.
Branding and Packaging Costs
Does your product come in beautiful bespoke wrapping with your brand logo printed on it? Or is it fragile, requiring specific boxes or packing material to prevent breakages? Do you provide your customers with the option for insurance in case a breakage happens in transit? Do you manage that cost yourself, or do you go through a third party?
One particular online novelty retailer provides its customers with the option to add “Melt Protection” for its candy products. During the summer months, there’s the genuine risk that gummy or chocolate candies can melt while being delivered. Customers who receive melted candy aren’t likely to shop with that retailer again. The retailer is upfront about this risk and offers specialist ice-packing during the summer months at an additional cost. Ensuring the customer covers this cost — and only if they choose to — increases the customer experience and the potential profit on each order.
Storage and Shipping Costs
Depending on your business model, storing your products and shipping them to your customers can have wildly varying costs. If your products have to be delivered within a particular time frame, you may work with a third-party logistics or 3PL company to ensure this happens. Some 3PL companies handle both storage space and transport, allowing e-commerce retailers to focus on the online aspects of the business. Whatever you spend on storage and shipping, you need to be subtracting that from your profits. In other words, add this into your cost-per-order formula to keep it accurate.
These costs may be quite difficult to surmise, particularly if you don’t have an effective data integration solution linked to your e-commerce SaaS and apps. In recent years, more and more consumers are taking advantage of generous return policies, particularly after busy periods like the holidays. In fact, recent estimates suggest that after the 2021 holidays, as much as $66.7 billion in online purchases were returned. Returns negate any profit from these orders and increase a company’s operating costs, as they have to process these returns. Additionally, there’s a large amount of customer service involved. You or your team may have to contact customers about replacements and refunds or simply to provide incentives to shop with you again — which also can increase the cost per order.
Whenever you produce a new product, you may want feedback from your initial customers. Do they think it’s high quality? Does it fit in with the rest of your brand? Would the customer expect it to have a lower cost? Performing this type of research may be essential to company growth, but it can also add to the average cost per order.
Cost-Per-Order Formula Is More Accurate With Integrate.io
It’s clear that having access to all your business data allows you to run a cost-per-order formula to a higher level of accuracy than when you just have your raw material costs and pricing data. Understanding the increases and decreases in the various costs associated with your product or service means you gain clearer insights into how your company is performing. In addition to drawing in the right data for your cost-per-order formula, data integration can help you see how a marketing campaign has performed over a particular period or what revisions you should be making to your online content to keep it pulling in those all-important clicks. It helps you create reports, graphs, charts, and literature to fuel more incisive decision-making.
That’s where Integrate.io comes in. Integrate.io is a new, highly innovative ETL platform designed to help your e-commerce business integrate with all the relevant SaaS and app providers. Out-of-the-box data pipelines allow for fast customer data capture (CDC), while API generation and management mean you can connect to new services as and when you need to, bringing all your business data to a single location, such as your data warehouse or data lake. From there, Integrate.io allows you to use reverse ETL to send critical consumer data out to your CRM or business intelligence tools for the kind of insights that really boost your profit margins. Schedule a demo today to find out more.