PRICE IT BEFORE YOU RUN IT — The First Offer

Platform ROAS divides revenue by ad spend. It doesn’t know what the product cost, what shipping cost, how many orders came back, or whether the customer ever ordered again. An offer judged on ROAS alone will reliably pick the one that gives the most away.

Contribution margin per new customer

The number to price an offer on is what the first order leaves after every variable cost, per new customer:

first-order contribution =
    price paid after discount
  − product cost
  − pick, pack and shipping
  − payment fees
  − expected refunds and return costs

Put your acquisition cost next to it. If first-order contribution covers acquisition cost, the offer pays for itself on day one. If it doesn’t, the gap has to come back in reorders, and you need to know how many and how soon.

ROAS tells you the ad worked. Contribution tells you the offer did.

Three costs teams forget

The discount is taken off revenue, not cost. 30% off an $80 order with $28 of product cost isn’t a $24 discount on a $52 margin; it’s a $24 discount on what was left after product and shipping, which may be $40. The discount can be most of the margin.
Mechanics don’t cost what they look like. A buy-one-get-one doesn’t double your cost: the second unit adds its product cost and a pick fee, not a second parcel. A free gift costs its product cost, not its retail price. Model each mechanic with real costs (chapter 12 has a tool).
Returns belong to the offer. An offer that brings buyers unsure about fit brings returns. If the return rate for first orders differs by offer, it belongs in the comparison.

Break-even acquisition cost

Divide nothing; subtract. The most you can pay to acquire a customer on this offer and break even on the first order is the first-order contribution. The most you can pay and break even over twelve months adds the contribution from expected reorders. The gap between the two is what retention is worth to your media buyer, and it should be written into the targets they’re given.

Targets have to move when the offer moves. Switch the core offer from a $30 single to a $70 set and the right acquisition cost roughly doubles. Judge the new offer against the old target and you’ll kill it. Every offer change should trigger a target review before anyone reads the results.

Run your numbers

Offer economics and payback

Example numbers. Replace with yours.

Full price of the first order

First-order discount

Product cost

Pick, pack and shipping

Payment fees

Refunded on first orders

Acquisition cost per new customer

Reorders per customer in 12 months

contribution from the first order

break-even acquisition cost, first order only

break-even acquisition cost, with 12 months of reorders

to pay back acquisition

Reorders are priced at full price with the same product and shipping cost, spread evenly across the year. Refunds are taken as a share of first-order revenue with no product recovered, which is the cautious case.

Wrong for you if

Rank your last three offers by first-order ROAS, then by 180-day contribution per new customer after acquisition cost. If the two rankings match, ROAS is a good enough proxy in your business and you can judge offers faster. In accounts IIn accounts I’ve worked on, they often don’t.rsquo;ve worked on, they often donIn accounts I’ve worked on, they often don’t.rsquo;t.

Do this

Run the tool on your current first offer with real costs from finance, not estimates from marketing.
Give your media buyer two numbers, the first-order and twelve-month break-evens, and agree which one they’re held to.

This is one chapter of The First Offer, which is free and readable in full on a single page with no form in front of it.