In plain words
The first-order loss is the gap between what it cost to win a customer and what their first order kept. If acquisition cost $30 and the first order's margin was $4, the customer starts $26 down.
Most subscription offers run a first-order loss on purpose. The first box is discounted, carries a gift and ships free, all to get the subscription started. That is a reasonable trade as long as the loss is known and the renewals are enough to cover it.
Formula
- First-order loss = customer acquisition cost − first-order margin (0 when the first order covers the cost)
Worked example
The coffee subscription's first order sells for $32.00 with a gift mug and keeps $3.79. Against a $30.00 acquisition cost, the engine puts the first-order loss at $26.21.
Each renewal keeps $11.68. The loss is what those renewals have to earn back before the subscriber is worth anything.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
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 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
A first-order loss is not a loss-making offer
It is an investment with a known size. The offer loses money only if the renewals never cover it. The danger is not knowing the figure: a first order that looks profitable because its acquisition cost sits in another report.
Using it
Put the first-order loss next to the renewal margin and the first renewal's rate. Those three numbers describe a subscription offer better than any single metric. If the loss is more than three or four renewals' margin, check how many subscribers reach that many renewals before spending more to acquire them.
In Offer Suite
Offer Suite's payback calculation starts from this figure: the acquisition cost less the first order's margin, or zero when the first order already covers it.
Source: Offer Suite's margin engine.