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Average Order Value (AOV)
Knowing how well your online store is performing is vital for the development of your ecommerce business. To understand its current state and see what aspects of your business should be improved, you must be aware of the key metrics that tell you this. One of the most important metrics is the Average Order Value (AOV). In fact, it is one of the most crucial metrics in the whole ecommerce industry.
What is Average Order Value (AOV)?
Average Order Value (AOV) is an ecommerce metric that shows how much money each customer spends per transaction in your online store. How to calculate average order value? To calculate the average order value in your store, you need to divide your total revenue by the number of orders.
Here is an example. Let’s say that in April you had the total revenue of $25,000, and the total number of orders has accounted for 1,000. Your average order value would be $25.
Note that your average order value is perceived by the revenue per order and not by the revenue per customer.
AOV is an essential part of online business that shows the purchasing habits of your customers. To increase your AOV, you’ll have to find a way to influence your customers to purchase more items, or to purchase more expensive items.
If you put more effort into increasing this metric you’ll receive more profit. In addition, key indicators like ROI (return on investment) and ROAS (return on ad spend) will also increase.
AOV and the most crucial aspects of your business
While increasing your AOV will definitely boost your revenue, it will also have an impact on other business aspects.
Evaluating your current AOV, you’ll see if you need to increase your conversion rate, spend more on advertising, or improve your pricing strategy. What’s more, you’ll get a clearer picture of your average customers and their behavior. AOV is a crucial metric to look at upon ascertaining the current state of your business.
If you have high conversion costs but your average order value is low, then, most likely, you are losing revenue. If the cost of acquiring a customer through conversion is $30, but the AOV is the same or even lower, then that’s a bad sign for your business and you need to change your business strategy quickly.
The AOV of your business should be at least two times higher than your customer acquisition or your conversion costs.
How much are you spending on advertising and how is it affecting your average order value?
If your spendings are equal to AOV (or even higher), it means it costs you too much to acquire a customer. In any case, you need to carefully check and see if, after the sale is done, you are making a profit. Thoroughly think through your:
- Advertising costs
- Shipping costs (if any)
- Product ordering costs
Growth or decrease in your product prices can also have a negative or positive effect on your AOV. Depending on how you position your online store, whether it’s a luxury or an economy one, alter your pricing accordingly. If you’re somewhere in the middle, it can harm your business as a whole.
The reason why average order value matters so much is that it gives you the metrics needed to understand and measure the value of each of your customers. And it helps you evaluate the efforts that you put into your marketing strategies and how they are working.
How to increase the average order value (AOV)
The following strategies help ecommerce businesses to improve their average order value:
Free shipping threshold
Probably one of the easiest ways to increase the average order value is to offer a free shipping threshold. For example, you can offer free shipping on all orders that are over $60.
According to experienced ecommerce entrepreneurs, it is best to offer a threshold with a 30% increase from your AOV. For example, if your AOV is $100, by adding the mentioned 30%, you’ll get the shipping threshold of $130.
A smart way to use this idea is to add notifications to customer’s carts when their total purchase doesn’t quite reach the necessary amount for free shipping.
Another helpful tactic that can help increase the AOV is offering discounts. The trick here is also to establish a minimum amount of money a buyer needs to spend in order to receive such a discount. Something like $5 off upon spending $50 or more.
You can also add volume discounts. To put it short, $5 off upon spending $50 or more, $15 off if you spend $100 or more, and $25 off if you spend $150 or more.
This will work great if your goal is to make your customers purchase more items. Offer bundled products for a price that is smaller than the total cost of all these products purchased separately.
Or you might offer gifts for purchasing a specific amount of products. Although, the products that you choose to give out the need to have a price that can be covered by other products so that there won’t be a large impact on your profits.
After a customer successfully makes a purchase, you can give out a gift card with a certain amount. By offering gift cards you can ensure that customers return for future purchases. However, remember that the product prices need to be high enough so that the gift card doesn’t result in a free purchase as that will have a negative impact on your profit.
First time offers
You can offer a one-time discount coupon on the first purchase to the people who are new to your online store.
Upsell or cross-sell complimentary items
Add product suggestions to your customers’ shopping experience. Though, don’t just add random popular items: select the products that pair well, and complement the customer’s already selected products. These can be various accessories and add-ons or products that are more expensive and satisfy more needs.
Create a loyalty program
This is a great strategy to not only increase your average order value but also to create a strong relationship with your customers. This helps retain your customers and encourages them to make future purchases, thus increasing your average order value.
By creating a loyalty program, you create a sufficient customer base that will be cheaper and much easier to advertise to.
Don’t implement these strategies all at once. A smarter way is to segment your customer base. For example, identify small and big spenders, low and high-frequency buyers, or simply divide your audience by the types of products they are ordering. For instance, big spenders can be offered to join a loyalty program, while small spenders can be targeted with upselling and cross-selling offers. Now you can target each customer group with different offers and see what is the most effective and works best for your online store.