No metric in e-commerce is 100% foolproof. That’s why store and business owners should rely on several metrics to boost their sales and revenues. One of those metrics is the average order value (AOV).
Average order value isn’t new. It’s actually quite common but many businesses aren’t aware of it, how to use it, and how to make more profit with it.
How many business owners do you know who don’t want to make more money?
Personally, none that I ever heard of.
Let’s get to know what this average order value is and how it benefits store and business owners like you.
Understanding Average Order Value
Put simply, average order value is the metric used to calculate the average value of orders made by customers.
The average order value is calculated by dividing your revenues at the end of a time period, say a month, with the total number of orders.
For example, if you sell beanbags, and you made 50 sales at total revenue of $10,000 at the end of October then to calculate your average order value for that month, you’d need to divide $10,000 by 50 resulting in $200 per purchase.
Businesses generally rely on AOV to understand their customers’ buying habits and to create a general estimate of monthly earnings.
Average order value can be calculated for any period of time, a week, a month, a quarter, a year.
You can use measure your average order value on a monthly basis to see when customers buy the most or the least.
Average Order Value vs Other Metrics
You now know what average order value is here are two more metrics you need to be aware of:
- Conversion rate
- Customer lifetime value (CLV)
- Revenue per visitor (RPV)
- Average basket size
In the world of e-commerce, a conversion is when a customer completes a purchase. In other words, it’s when a customer checks out of your store.
To calculate your conversion rate, you’ll need to divide the number of checkouts by the number of unique visitors.
Conversion Rate = Number of Checkouts/Number of Unique Visitors
Let’s say your online store got 1,000 visitors in September. Of this number, 50 visitors completed purchases. This means your conversion rate is 5%.
The other metric is the return per visitor, which is a combination of both the conversion rate and the average order value.
To calculate RPV, you’ll need to divide your total revenue by the total number of unique visitors (or checkouts).
RPV = Total Revenue/Total Unique Visitors (checkouts)
However, “RPV is deceptively simple,” says VWO.com. RPV “tells you how much revenue each unique visitor is driving. The trick here is to understand RPV from a different perspective.”
The RPV equation can, therefore, be rewritten to look like this:
RPV = (AOV x Conversions)/Total Unique Visitors
- Customer lifetime value (CLV)
Customer lifetime value (CLV) is a metric that allows businesses to measure lifetime value of their customers.
By calculating customer lifetime value, business owners can estimate how much a customer is going to be worth during their relationship with the business or store.
Customer lifetime value also tells businesses which customers are more likely to pay more during their business relationship compared to others.
By understanding CLV, businesses can then work on increasing their customers’ lifetime value and lengthening their relationship with the business or store.
- Average basket size
Another important metric store owners need to consider is the average basket size or average cart size.
The average basket size entails the number of items sold in a single purchase.
The equation is: number of units told divided by the number of invoices.
The importance of the average basket size differs based on the type of business.
The Benefits and Downsides Average Order Value
Now that we have clarified other and similar e-commerce metrics, let’s get back to AOV and its pros and cons.
Let’s start with the pros or benefits.
For starters, it helps you understand your customers’ buying habits and seasons. In addition, knowing your customers’ average order value helps you measure and evaluate your marketing and pricing strategies.
AOV also allows you to measure your customers’ long-term value or their CLV.
In addition here are three main areas where AOV benefits your business:
- Higher revenues and profits
- Cost-effective marketing
- Sell more from your inventory
“As a benchmark of customer behavior, the AOV helps you set goals and strategies and evaluate how well those strategies are working,” explains Optimizely.
Let’s take an example. As a business, you’ve probably used online ads to drive traffic to your store and get customers to buy your products and to increase your sales, right?
However, a better strategy would be to increase these customers’ average order value.
You see, “increasing traffic typically costs money, while increasing AOV does not,” says Optimizely.
By achieving a higher AOV, you’d be making higher revenues and profits.
Here’s what Oberlo has to say about the matter:
“The more you earn per order, the more your business makes altogether. If you can see a positive change in average order value, you’ll be able to reinvest more money into your business’ growth and pocket more too.”
In terms of marketing, if you spend $20 and you have an AOV of $50, then you only make around $10 after deducting marketing spend and other expenses.
But if you spend $20 and your average order value is $100 then you’re netting around $60 per transaction.
However, as you focus your efforts on increasing the average order value in your store or online business, you’ll begin to notice that your overall profits are on the rise, while your marketing is no longer taking a large chunk from you.
In terms of inventory, if you raise your AOV, you’ll be able to clear out your inventory.
The Downsides of AOV
Metrics generally tend to have pros and cons. Where they are good in one aspect, they fall short in another.
Average order value is no different. And that’s why businesses try to use it to their advantage while taking other metrics into consideration.
In other words, it’s best not to rely on a single metric to measure the success – or failure – of a brand or business.
AOV “will only give you a partial picture of your customer’s purchase behavior,” marketing agency Common Thread Collective’s co-founder Taylor Holiday tells Shopify.
Increase AOV in Your Store
So, yes, AOV is an important metric for online stores. Not the only metric, but an important one nonetheless.
Many customers tend to go to stores to buy what they are looking for. Imagine Sarah who is looking for a pair of shoes. But then she goes into a store and what happens?
Here are a few scenarios:
- She doesn’t find what she’s looking for and leaves
- She doesn’t find what she’s looking for but browses other options
- She finds what she’s looking for and makes a purchase
- She finds what she’s looking for and is tempted to buy something else alongside it
So how do you get Sarah to choose options three or four and how do you increase AOV in your store?
Remember, higher average order value = higher revenues and profits.
Here are six ways to increase AOV:
- Offer free shipping when orders exceed a certain figure: Many times customers a tempted to buy a couple of additional items to save the cost of shipping. This happens a lot in grocery stores and other business industries.
Put a minimum purchase value that helps you sell more while at the same time is reasonable enough that customers might be willing to add one larger item or several small ones to save on shipping.
- Offer a discount or coupon for ‘next time’: Get your customers to buy for a certain value to get a discount the next time they buy from you. “Spend $50 and get $5 off your next purchase.”
- Consider bundles/bulk order saving/packages: Let’s say you’re selling face towels. One towel costs $9 whereas by buying three towels, the customer gets a 20% or 30% discount. Instead of your customer buying one $9-towel, they’ll not buy three towels for $21.5 (at 20% off). Mission higher AOV accomplished.
- Use a loyalty program: Customer loyalty programs are great ways to increase customer retention and average order value.
By having customers accumulate points on purchases and other actions taken in your store, you turn one-time and occasional buyers into loyal customers.
With Gameball, for example, you can create challenges to engage customers and get them to buy more per transaction, which means higher AOV.
- Cross-sell items: By cross-selling you’ll be ‘suggesting’ products for your customer to buy along with their current purchase.
Here’s a bit of advice from Shopify: “Offer low-value upsells to increase the likelihood of purchase.”
It’s unlikely that customer who is coming to your store to spend $50 to $100 will buy another product for $100 but if you suggest a product for $10 or $20, they wouldn’t mind the extra purchase that complements their current one. If someone is out to purchase $50-$100 of goods, it’s hard to convince them to purchase another $100 but easy to convince them to add a $20 product that complements their purchase.
For example, if your customer is buying a pair of running shoes, you might suggest a pair of socks or bundle of to go with them.
- Up-sell items: Upselling is also making a suggestion to your customer but for a higher value product.
Let’s go again with the running shoes example. Your customer is planning to buy running shoes for $100, you suggest an upgrade or better alternative for $120 or $130. That’s an up-sell and it means that instead of making a $100-purchase, your customer grew their average order value to $130.
It is important to remember that cross-selling and up-selling shouldn’t be something that you all the time. You’re making the suggestion like a friend would but overdoing with suggestion makes you look too salesy.
By constantly repeating and suggesting additional purchases, you turn your up-sell into an irritation that may backfire.
Another important thing to remember, according to Optimizely, is that “optimizing your AOV can take place across all steps of the sales funnel.”
Average Order Value and Loyalty
One of the ways you can increase average order value is by creating a loyalty program, which in turn offers major benefits in customer retention.
Generally speaking, loyalty programs are an essential part of your customer retention strategy. But they are also great in getting customers to buy more and increase their average order value.
The loyalty program will entice to not only return to your store once, twice, and several times, but you can use it to encourage customers to get benefits and discounts when they buy more.
It’s a great way to build a long-term relationship with your customers.
Remember the minimum limit with free shipping option? You can include that in your loyalty program. That way when customers make a purchase:
- They accumulate points that they can use later as a discount or voucher (10% off your next purchase)
- Get free shipping on their current purchase
- If you are using Gameball, they can collect badges and complete challenges along the way
One of the things you should be wary of when creating your loyalty program is how it benefits your customers.
Yes, you want them to keep coming and to buy more from you, but you need to offer them incentives in return, otherwise your loyalty program might be labelled as a bad one.
When you focus on those who customers who already know you and buy from you, you’re also focusing on people have no barriers against your business.
They already know and trust you so making up-selling and cross-selling suggestions don’t seem too odd.
“The beauty of focusing on Average Order Value is that you’re concentrating on visitors who already want to buy. They’ve come to your site with high intent; they may even have items in their carts. All you have to do is help them discover and buy other items relevant to them,” notes Shopify.
Rewarding those customers along the way reduces even further barriers. You’re asking them to be loyal to you and in return you’ll reward them for their loyalty.
It’s a win-win for you and your customers.
Start your loyalty program with Gameball today and get customers to keep coming back while also increasing your AOV.