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What does average order value (AOV) mean?
Average Order Value (AOV) is a metric that calculates the average value or amount customers spend on each transaction or order. To calculate the company’s average order value, we simply need to divide total revenue by the number of orders placed in a specific period.
For an instance, an online store has made sales of $5000 against 100 orders in a week. So the average order value for that week would be $50.
Average order value is one of the most important metric to gauge the performance and success of your business/store and also helps calculate your customer lifetime value. Higher AOV is directly proportional to higher gains and profits. It indicates the overall effectiveness of the marketing or sales strategies and investments made towards these activities, whether they are influencing the AOV over a period or not.
However, the Average Order Value can be misleading if there are high differentiation and non-uniformity in the order patterns, which generally happens if the product & price range is too varied. IKEA's online store could be the best example here as they have a plethora of products categories with different pricing, at the same time they cater to various sections of the market.
“An increase in the average order value for an online retailer has a strong correlation to an increase in profit. When an eCommerce retailer can sell more on each order, that retailer tends to make more profit overall. Thus, online retailers that are able to increase average order value — AOV — should also become more profitable.”
- Armando Roggio, Director of Marketing and eCommerce at D&B Supply
How to calculate the average order value (AOV)?
To compute the average order value, divide the total revenue of the period by the number of orders received.
Average order value (AOV) = Total Revenue/ Number of orders
Average order value calculation
Let's take an example, say in December 2021, the total revenue generated by the store was $2,45,000, and you've received a total of 1250 orders over that period. $2,45,000 divided by 1250= $196, so the average order value for December would be $196.
Average order value formula
Why is average order value important?
As mentioned above, the average order value is the amount customers are spending per transaction and is an indicator of the health of a business/store. Knowing and evaluating the company's average order value helps you understand and correlate overall marketing efforts and pricing strategies.
Companies put in a lot of effort and spend too much money on attracting and getting more traffic to their websites or online store that sometimes fails to bring the desired results. Rather than that, the efforts should be directed more towards increasing the average order value that will directly add up to the revenues and profits of the company.
AOV is determined using average sales value per order and not per customer. Repetitive or multiple orders from the same customer would be factored in or counted as individual orders. It also doesn't talk about gross profits and margins but the average sales per transaction.
AOV also reflects the behavioral aspect of customers as in what they generally order and in what quantity, what are the offers or bundle offers they are choosing, or anything that impacts the buying preference. And accordingly, focus on bringing strategies that can increase the AOV and customer value in the long run.
For example, a shoe retailer sells a vast variety of shoes ranging between $15 to $25, with an AOV of $18.5.
This indicates two trends about customer behavior:
- Customers are not buying multiple items.
- The low-end shoes represent the majority of sales as it's more toward the lower cap of pricing.
These facts can help decision-makers to help in adapting strategies that will influence the buying behavior of customers and increase the average value per order.
What are the other key metrics you need to take care of?
Profit
Possibly the most important metric for your business. Profit is a great way of indicating the cost efficiency of your business and it can help track it over time, by setting specific benchmarks.
Average basket value
The average basket value is a similar metric to AOV. Rather than measuring how much customers spend per transaction, this metric tells you how many items are generally sold per transaction.
Customer lifetime value
This metric tells you how much each customer is worth throughout their entire relationship with your business.
Conversion Rate
The number of users who actually bought your product or service compared to the number of users that visited your website (traffic) is called the conversion rate. The more effective your content is, they better your conversion rate will be. Having very high traffic with very low conversion rate doesn't really make sense.
What is the difference between GMV and AOV?
GMV is a measure of the total value of all goods sold, over a given period of time. It includes the value of all items sold, including shipping and handling charges excluding discounts or returns. GMV is a key metric for e-commerce businesses because it reflects the overall size and growth of the business.
AOV measures the average value of an order placed. AOV can be useful for businesses because it helps them understand the value of their customer's orders and can help them optimize their pricing strategy and marketing strategies.
Both AOV and GMV are important metrics for e-commerce businesses, but they measure different things. AOV focuses on the average value of individual orders, while GMV looks at the overall value of all goods sold.
How to increase average customer value?
1. Cross-selling products
Often, customers are so focused on buying one of your products that they neglect the other offerings and products. Cross-selling is one of the efficient ways to bring those products to their notice and increase the value per order. For example: selling a pair of socks or shoe polish worth $5-10 with shoes worth $100, will add up to the cart value.
2. Up-selling products
AI & chatbots are helping businesses to get deeper into customer behaviors & insights, which are now enabling businesses to put across recommendations and make up-selling easier.
For instance, giving them a recommendation for a pair of jeans for only $15 more than the pair in their cart.
3. Volume or bundle discounts
It's one of the common strategies adopted by offline and online retailers across industries to increase sales. Offering a small discount on the purchase of bundles or custom packages can really increase the AOV as it increases the perceived value of transactions.
4. Free shipping
Keeping a slot or a minimum order cap against free shipping & deliveries increases the chance of customers spending more money and adding more products to the cart. It’s very common that we end up adding products to our carat while ordering from food apps or shopping brands just to save or dodge the shipping cost.
5. Loyalty programs
Creating a customer loyalty program is a retention strategy that helps businesses to create relationships with their customers, which will eventually encourage customers to purchase again and shop more.
6. Return policy
Often customers drop products from the cart with the fear of stringent or no return policies. Having a lucrative return policy can help customers to buy and try the products and increase trust in the brand.
