Glossary of offer economics
The words behind offer profit, each with its formula, a worked number computed by the margin engine in Offer Suite's own code, and what it is not. Where Offer Suite pins a term down in its own records, the entry says so.
The example order
A $40.00 bag of coffee with a $12.00 unit cost, shipped free
Revenue $40.00 to contribution margin $15.36 (38.4%)
Revenue
$40.00
Cost of goods
−$12.00
Pick and pack
−$1.18
Packaging
−$0.50
Shipping label
−$7.50
Card fee per order
−$0.30
Refunds
−$2.00
Card processing
−$1.16
Contribution margin
$15.36
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
| Gross revenuethe bag, shipped free | $40.00 |
|---|---|
| Cost of goods sold | −$12.00 |
| Gross marginsubtotal: revenue less cost of goods, 70.0% | $28.00 |
| Fulfilment costpick and pack, packaging, the label | −$9.18 |
| Card fees2.9% + $0.30 | −$1.46 |
| Refund reserve5% of revenue | −$2.00 |
| Contribution margin38.4%, after every cost | $15.36 |
| Profit per visitorat 3.0% conversion | $0.46 |
Margin and profitWhat an order keeps, and the ways of stating it.
- Break-even priceThe lowest price at which an order still covers its own costs. Below it, every sale loses money before any fixed cost is counted.
- Contribution marginWhat an order keeps after every cost that grows with it: product cost, fulfilment, shipping, card fees and refunds. The number an offer should be judged on.
- Contribution margin per orderThe contribution margin of one order, in money. The same product earns a different amount as a single, in a bundle or on a renewal.
- Contribution margin ratioContribution margin as a share of revenue. It says how much of each dollar of sales an order keeps, and how fast a discount eats it.
- Forecast profitThe profit an offer should make per order or per visitor, worked out from its prices and costs before any order exists.
- Gross marginRevenue minus the cost of the goods sold, as a share of revenue. The accounting margin: it leaves out shipping, fulfilment and payment costs.
- Margin waterfallAn order's revenue stepped down cost by cost to the margin it keeps. It shows which cost takes the most, and which an offer would move.
- MarkupProfit as a share of cost, where margin is profit as a share of price. The same product has a markup far larger than its margin.
- Realized profitThe profit orders actually made: revenue net of refunds, minus the cost of every unit shipped, per offer and per option, first orders and renewals apart.
- Unit economicsThe revenue and costs of one unit of sale: an order, a customer or a subscriber. For an offer, the unit that matters is the order, then the customer.
CostsWhat an order costs, at the grain each cost is charged.
- Actual fulfilment costWhat an order really cost to ship, from the warehouse's or carrier's own charge, in place of the estimate the forecast used.
- Billable weightThe weight a carrier charges for: the parcel's weight rounded up to the next step. A few ounces over a step costs the whole step.
- Cost grainThe level a cost is charged at: per unit, per parcel, per order or as a share of revenue. Counting a cost at the wrong grain misprices every bundle.
- Cost ledgerA record of every cost with the date it applies from, added to and never overwritten, so each order is costed at what was true on its date.
- Cost of goods sold (COGS)What the units you sold cost you to make or buy. In an offer calculation it is charged per unit, gifts included, at the cost in effect on the order's date.
- Cost restatementRepricing past orders after a cost is corrected or backdated, while keeping what they were booked with. Both numbers stay, so the change is traceable.
- Cost viewOne of two ways to cost a past order: with the costs known when it arrived, or with everything known today. They differ whenever a cost was corrected.
- Fulfilment costWhat it costs to get an order out: pick and pack, extra picks, the box and the label. Charged per order or parcel, which is why bundles and gifts change it.
- Inventory shrinkageStock you paid for and cannot sell: damaged, expired, lost or miscounted. Usually costed as a small percentage on top of each unit's cost.
- Landed costA unit's full cost on your shelf: the supplier's price plus inbound freight, duties and brokerage. The unit cost an offer should be priced on.
- Missing costA cost that was never entered, so the calculation reads it as zero. The order then looks more profitable than it is, by exactly that cost.
- Packaging costThe box, mailer, fill and tape an order ships in. Charged per parcel, and it steps up when an order outgrows its box.
- Payment processing feeWhat the payment processor keeps from each order: a percentage of the amount charged plus a fixed fee. The fixed part weighs most on small orders.
- Pick and pack feeWhat a warehouse charges to pull an order's items and box them: a base fee per order plus a smaller fee for each extra item, gifts included.
- Refund reserveA share of revenue set aside, in a forecast, for the refunds that will come. It turns an unknown future cost into a rate you can price an offer against.
- Shipping costWhat the carrier charges you to deliver a parcel. A cost per parcel set by weight and distance, whatever the customer was charged for shipping.
- Split shipmentOne order sent in more than one parcel. Every per-parcel cost, the label above all, is paid again for each parcel.
- Variable costA cost that exists because an order does: product, pick, box, label, card fee. It is what contribution margin subtracts, and what an offer changes.
Offer mechanicsWhat an offer changes on the order: price, units, gifts and shipping.
- Add-onA second product offered alongside the main one, to go in the same order. It pays only its own cost and a pick, so most of its price is margin.
- Buy one, get one (BOGO)Buy a unit and get a second free. The price of one order pays the costs of two units, so it works out as a 50% discount on a two-pack.
- Discount allocationHow a discount on a whole order is divided among its lines. It decides each product's revenue, and so each product's margin.
- Discount stackingTwo or more discounts applying to one order: a sale price, a subscription discount, a code. Each looked affordable alone; together they may not be.
- Fixed-amount discountA set sum off the order, such as $10 off. It costs the same on every order, so it weighs far more on a small order than a large one.
- Free shippingCharging the customer nothing for delivery. The carrier still gets paid, so it is a revenue decision that costs what shipping used to bring in.
- Free-shipping thresholdThe order value above which shipping is free. It costs the shipping revenue of every order already above it, and pays only if enough smaller orders top up.
- Gift with purchaseA free item added to an order to win the sale. It leaves the price alone and adds a unit cost, a pick and sometimes a heavier parcel.
- Offer optionOne choice a visitor can buy inside an offer: a single, a bundle tier, a subscription. Each option has its own price, costs and margin.
- Percentage discountA share taken off the price. It comes off revenue in full while most costs stay put, so it removes a much larger share of the margin.
- Post-purchase upsellAn offer shown after payment and before the confirmation page, added to the order in one click. It cannot cost the original sale.
- Product bundleSeveral units sold together at one price, usually below the sum of their prices. It earns more per order because the units share one label.
- Quantity breakA discount that deepens as the customer buys more units: buy two, save 10%; buy three, save 15%. Each tier is its own order with its own margin.
- Shipping revenueWhat the customer pays for delivery, after any shipping discount and before tax. It is revenue of the order, separate from what the label costs.
- Threshold top-upA customer adding to their cart to reach a free-shipping or gift threshold. What it gains depends on how far below the threshold they started.
Measuring an offerComparing offers on the visitors they share.
- Average order value (AOV)Total order revenue divided by the number of orders. Useful for spotting a trend, misleading for setting thresholds because it hides the shape of your orders.
- Break-even conversion liftHow much more an offer has to convert to earn, per visitor, what another offer earns: the gap a cheaper offer, a gift or a discount must close.
- Cohort simulationRunning a group of customers through a plan many times, with chance and uncertain inputs varied, to get a range of outcomes instead of one number.
- Conversion rateThe share of visitors who buy. An offer test's most reported number and its least sufficient: a better-converting offer can earn less.
- Goal seekWorking backwards from a target to the input that reaches it: the price, acquisition cost or renewal rate at which a plan pays back.
- Profit per visitorThe profit an offer earns for every visitor who sees it: margin per order times conversion rate. It weighs a lower price against more buyers fairly.
- Revenue per visitorRevenue divided by the visitors who saw an offer: price times conversion. Better than conversion alone, and still blind to what the orders cost.
- Sensitivity analysisMoving each input of a plan up and down by the same step to see which one changes the result most. It shows where to spend effort.
- Split testShowing two versions of an offer to randomly divided visitors over the same period, and comparing what each earns. Also called an A/B test.
- Take rateOf the people who buy an offer, the share who choose a given option. It sets the offer's blended margin as much as any single price does.
- What-if analysisRecomputing an offer's profit with one input changed, such as a cost or a price, and everything else held as it is today.
SubscriptionsFirst orders, renewals and what a subscriber is worth.
- Churn rateThe share of subscribers who leave in a period, or between one order and the next. The complement of retention, and it compounds the same way.
- Cohort analysisFollowing a group of customers who started together, month by month: how many remain, and what they have earned so far.
- Customer lifetime value (LTV)The profit a customer brings over the orders they stay for: the first order's margin plus each later order's, weighted by who is still buying.
- Intro offerWhat a new subscriber gets on the first order only: a deeper discount, a gift, a free trial. It buys the subscriber and is repaid by renewals.
- One-time purchaseAn order with no subscription attached. It earns its whole margin on day one, and nothing afterwards unless the customer chooses to return.
- Renewal curveThe renewal rate at each order number: who takes the second order, the third, the fourth. It starts low and settles higher as the casual leave.
- Renewal orderA subscription order the subscriber didn't place by hand, billed by the subscription contract. Priced at the renewal price, without first-order-only costs.
- Retention rateOf subscribers who received an order, the share who receive the next one. Each renewal's profit is weighted by it, so small changes compound quickly.
- Subscribe and saveA standing discount for buying on subscription, often with a deeper first-order discount. Its cost has to be priced over the renewals, not the first order.
- Subscriber lifetimeHow many renewals a subscriber is expected to take before leaving. Churn puts a ceiling on it, and on what a subscriber can ever earn.
- Subscription app feeWhat a subscription app charges per recurring order, often a percentage plus a fixed fee. A cost of subscription orders that one-time orders never pay.
- Subscription intervalHow often a subscription ships: every 30 days, every 60. It sets how many renewals fit in a year, and so how fast a subscriber pays back.
- Welcome giftA gift or insert that ships only with a subscriber's first order. A cost of winning the subscriber, which renewals do not carry.
Acquisition and paybackWhat a customer costs to win, and when that comes back.
- Allowable CACThe most you can pay to acquire a customer and still be paid back by a chosen month. A ceiling for the ad account, set by the offer.
- Break-even ROASThe return on ad spend at which an order's margin exactly pays for the ads that won it: one divided by the contribution margin ratio.
- CAC payback periodHow long a customer takes to earn back what they cost to acquire. With churn counted, it is later than the simple division suggests.
- Customer acquisition cost (CAC)What it costs to win one new customer: spend divided by customers won, or the cost of a visitor divided by the share of visitors who buy.
- First-order lossWhat a customer still owes after their first order: acquisition cost minus the first order's margin. The sum that later orders must earn back.
- LTV to CAC ratioWhat a customer is worth divided by what they cost to win. Above 1, acquisition pays for itself within the horizon; how far above is the return.
- Peak cash needThe most cash an acquisition programme has out at once before renewals catch up. A profitable plan can still need more cash than you have.
- Return on ad spend (ROAS)Revenue attributed to advertising divided by what the advertising cost. A revenue ratio: it says nothing about whether the orders made money.
Orders and revenueHow a real order's money is counted.
- Cancelled orderAn order cancelled after it was placed. It is not a sale: no revenue, refund, cost or profit should count for it, whether or not money was refunded.
- Gross revenueAn order's revenue as Offer Suite books it: line prices after discounts plus shipping charged, tax excluded, frozen at the sale as placed.
- Net revenueRevenue after refunds: what orders brought in, less what was given back. The revenue that profit is worked out from.
- Refund rateRefunded revenue as a share of revenue. A point of refund rate costs more than a point of margin, because refunded orders keep their costs.
- Refunded revenueThe part of an order's revenue given back, counted after discounts and before tax, and never taken off the order's cost, because the goods already shipped.