How Knowing Your Allowable Cost per Order Gives You Freedom

If you are using digital marketing, then knowing your Allowable Cost per Order (ACPO) is important. It gives you an answer to the question:

“How much can I spend?” (And the answer isn’t 10% of sales.)

This may seem like a how-high-is-up question, but it’s actually pretty easy to determine how much you can spend to secure an order, otherwise known as the Allowable Cost per Order.

Broadly, ACPO is the average revenue generated from a sale less the product cost (cost of goods) plus the profit desired. For example, the average order value is $150. The cost of the goods, including amortized fixed costs plus variable costs and profit, is $75. This means you can spend up to $75 ($150 – $75) to generate the order and still be profitable.

Average Order Value $150 – (Fixed Costs $50 + Variable Costs $15 + Profit $10) = ACPO $75

Said another way, if you achieve your allowable cost per order, you will meet your profit objective.

Allowable Cost per Order Calculator

ACPO is a dynamic thing. Initially, you will use lots of estimates to determine the ACPO, but as time goes by and the details are refined, it becomes more accurate. It’s not perfect but it’s a much better place to start than just guessing or the traditional idea that “10% of sales should be used for advertising.”

Let’s look at each piece in more detail.

Average Order Value

This is the product’s value and any additional revenue generated in the sale. This could include an order bump, “Would you like fries with that?” an upsell offer designed to appeal to the target audience, and perhaps a down-sell offer, which could be the upsell offer split into multiple payments or something else altogether. For a more thorough understanding of the sales funnel, read our post: What is a Sales Funnel?

To make it real, here is a hypothetical example:

Product Value: $75
Order Bump: $25 x 10% buy the order bump = $2.50
Upsell: $750 x 5% buy the upsell = $37.50
Downsell: $500 x 7% buy the down-sell = $35.00
Average Order Value: $150

Fixed Costs

These are the costs of all the materials required to have the product you are selling, the costs incurred regardless of how many units are sold. This will depend on the product being sold. This could be the wholesale cost plus overhead like agency fees.

If an eBook costs $1500 to produce ($1000 for copy and $500 for design) and you plan to sell 250, then the fixed cost is $6. There may be other costs you want to include, overhead, for example, or the monthly fees you pay your agency, which might add $4 to the fixed costs.

Allowable Cost per Order is arguably the most important metric you have to assess and manage digital marketing. Do you know yours? #digitalmarketing Click To Tweet

Variable Costs

These are the costs that are directly associated with marketing efforts. Delivery costs, cost of the creative, media commissions, contracted campaign-related labor, etc., are all included in the variable costs. Divide the total by the number of units you plan to sell.

Profit

Allowable cost per order is a profit-first concept. The profit you wish to generate is included in the cost calculation. It’s not the result of the activity.

How to use ACPO in the Real World

Now that you have your allowable Cost Pre Order, $75 in this case, and you plan to sell 500 units, then you have an ad budget of $37,500 (75 x 500).

But is this realistic?

Move back through your Marketing Funnel to be sure it pencils.

Start with $25,000 for top-of-funnel engagement ads that generate 10,000 clicks at $2.50 Cost per Click.

Budget $12,500 for mid-funnel retargeting ads that generate 2,500 leads at a Cost per Lead of $5.

Our total ad spend is $25K + $12.5K = $37.5K to generate 2,500 leads. Twenty percent of the leads convert for a total of 500 orders with an average order value of $150 for total revenue of $75,000.

A total of $37,500 spent on ads divided by the 500 sales generated equals a Cost per Order of $75.

Of course, these numbers are made up. Your situation will be uniquely yours. But we’ve helped many customers determine their campaigns’ allowable cost per order. They find that they are always better off knowing. In knowledge, there’s freedom.

Allowable Cost per Order – Conclusion

ACPO is arguably the most important metric you have to assess and manage digital marketing. Knowing the ACPO gives you freedom because it gives you a clean, profit-first benchmark to use to plan and assess digital marketing.

Surprisingly, many (most) digital marketers don’t know what their ACPO is nor understand how to calculate it. Hopefully, with this post, you are no longer in this group and can use the metric to better manage your next digital marketing campaign.