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.

What is Cost per Order?

Broadly, ACPO is the average revenue generated from a sale minus 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 remain 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.

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Cost per Order Calculator

The cost per order is dynamic. Initially, you will use estimates to determine the allowable cost per order, but as time goes by and the details are refined, the cost per order becomes more accurate. It will never be perfect, only my wife is perfect, but understanding your cost per order is 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.

Cost per Order Formula

This section will explain how to calculate cost per order. Broadly, you remove the fixed and variable costs and desired profit from the average order value. What’s left is the allowable cost per order, or what you can spend to secure an order profitably.

Let’s look at the cost-per-order formula more closely.

Average Order Value

This is the product’s value and any additional revenue generated in the sales funnel. It could include an order bump, “Would you like fries with that?” an upsell offer designed to appeal to the target audience, or 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 of how to calculate the average order value:

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: $75 + $2.50 + $37.50 + $35.00 = $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.

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

The allowable cost per order is a profit-first concept. The profit you wish to generate is included on the cost side of the cost-per-order calculator. It’s not the result of marketing activity.

How to Calculate Cost per Order in the Real World

Now that you have your allowable Cost per 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.

Cost per Order Example

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.

Your 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 clients 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 for assessing and managing digital marketing. Knowing it 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 or understand how to calculate it. Hopefully, this post will remove you from this group and allow you to use the metric to better manage your next digital marketing campaign.

Author: James Hipkin

Since 2010, James Hipkin has built his clients’ businesses with digital marketing. Today, James is passionate about websites and helping the rest of us understand online marketing. His customers value his jargon-free, common-sense approach. “James explains the ins and outs of digital marketing in ways that make sense.”

Use this link to book a meeting time with James.