Average Order Value (AOV) is one of the metrics used to understand revenue and profit growth for your business. Let’s take a look at average order value meaning and the AOV formula. Why is AOV important for your company?
What is Average Order Value?
No matter how good your traffic is, it’s more important if those people are buying your products. Traffic is a good first step, but by itself, won’t increase your bottom line.
When looking for ways to improve revenue and profits, one metric we look at is Average Order Value (AOV).
AOV is determined by dividing total revenue by the number of orders over a period of time, or:
AOV = Revenue/Orders
AOV can be calculated over a day, month, or more. You can also limit it to specific customers. For example, Customer A bought 5 whatsits during the month of November. These whatsits cost $20 each. In this case, the average is $20. But what if each whatsit was a different price? If 3 whatsits were $20, and 2 were $30, the AOV is $24.
If you have two different customers buying whatsits, the total AOV calculation is helpful, but looking at the AOV for each customer is also enlightening. If Customer A buys 3 whatsits for $20, and Customer B buys 2 whatsits for $30. We already know that the total AOV is $24. Customer A’s AOV is $20, but Customer B’s is $30. This raises the question of “why does Customer B spend more than Customer A?”
According to Optimizely.com,
AOV is a key performance indicator that online businesses measure to understand their customers’ purchasing habits.
Many companies try to increase their AOV, which results in higher revenue. However, if higher revenue doesn’t increase your profit, then it hasn’t improved anything.
Another way to look at AOV is in context with the following:
- Mean: the average value of all orders (what we traditionally call Average Order Value)
- Median: the middle value of all orders
- Mode: the most frequently occurring order value
If the mode is lower than the average, a better strategy to increase the AOV is to increase the mode. As the mode goes up, so will the AOV over time.
Why Does Average Order Value Matter?
The more you know about your customers and their behavior, the more you can personalize your sales and pricing strategy for them. One factor is your AOV.
Understanding your AOV will help you determine how to market and price products to better engage with individual customers.
You can tailor your marketing to encourage long-term relationships with customers, and measure their purchasing behavior. In general, an increase in AOVs for online retailers correlates strongly to an increase in profit.
AOV values offer a window into online shoppers’ behaviors and what they are willing to spend on your products.
You will always have transaction costs for each customer’s order, but if you increase the AOV of an existing customer’s orders, transaction costs will decrease, which in turn increases profits for that customer.
One of the reasons that increasing the AOV is possible, is because you’re selling to people who are interested in buying. After all, they are on your website to buy something you sell.
5 Tips on How to Increase AOV
1. Packages and Bundles
When bundling products, you are “increasing the perceived value of a customer’s purchase. One great approach to product bundling is by offering a package of products that create the all-in-one solution for the desired experience.”
There are several ways to bundle:
- Create related bundles for popular products, like selling a bundle of pet food and toys to customers who own pets
- Allow customers to create their own bundle from a select group of items. Arby’s does this a lot by creating a $1 menu with a limited group of items
- Give customers a reduced price for buying 2 or more of an item. For instance, “Buy one get one for half price.”
- Reduce prices of add-ons for custom products
2. Order Minimums
You can increase your AOV by offering customers free shipping or another gift when they reach a minimum order. Free shipping is a proven strategy for increasing order size, but make sure that you stay profitable by covering your shipping costs when deciding your minimum order value.
A good rule of thumb is to increase 30% over your most frequent order value or your modal value.
3. Upsell or Cross-sell
“Would you like fries with that?” is a common phrase heard when dining out, especially at fast food restaurants. A similar upsell question is “Would you like a drink with that order?” Pretty much every restaurant has some form of these questions.
But you don’t have to work at a restaurant to upsell or cross-sell. You can add gift wrap or a card to an order, or even a gift card for a discounted price. Or add a box or case for a product like a smartphone case. Your best upsell idea is one that works in your industry and is relevant to the original purchase.
4. Volume Discounts
Volume discounts work the best for items that people buy in quantity. For instance, greeting cards and paper products are often bought in quantities, so offering a discount for buying 10 makes sense. Buy one postcard for $1.50, but if you buy 10, they’re only $1. Volume discounts don’t work for every industry, but discounts can start even if customers just buy two instead of one.
5. Donations
Offering customers the opportunity to donate to a charity when shopping is a good way to increase AOV. This technique works best if you let customers know that a percentage of the profits will go to a specific charity upfront. When calculating the transaction, show the customer how much of their payment is going to charity. You can encourage them to buy more in order to donate a higher amount.
