A complete guide to Average Order Value
When you are looking at ways to track your success as an online retailer, what metrics should you turn to? While there are many ecommerce metrics that you can (and should) track, there’s one metric you need to consider if you want to look at your customer’s buying habits.
This metric is called AOV – or Average Order Value. It is a great way to keep track of your customers if you want to scale your profits and promote revenue growth. AOV can help you plan pricing and digital marketing strategies to transform your bottom line.
In this guide, we will go over all you need to know about AOV and how to leverage it in your online business. More specifically, we will look at:
What is Average Order Value (AOV)?
Average Order Value (AOV) tracks the average amount a customer spends when they place an order on your online store. By measuring AOV, you can track your efforts to increase customer engagement to scale profits and increase your gross profit.
How to calculate AOV
Once you decide to track Average Order Value, it’s a straightforward metric to calculate. All you need to do is divide your total revenue by the number of orders over a set time period.
When you make changes to improve your total revenue, AOV gives you an easy way to track your progress.
AOV = Total revenue / Number of orders
For example, you have an online clothing store, and you want to track AOV over the last month. The total revenue from the last month was £400,000. The total number of orders was 4,234. Now you have all the info you need to calculate AOV:
£400,000 / 4,234 = £94.47
Therefore, your AOV for the last quarter was £94.47.
Why do you need to track AOV?
Average Order Value is an important metric which can be used in numerous ways to improve your company. One of its more important uses is that it provides you with information to help understand more about your customers’ buying habits.
Knowing their habits allows you to make more data-driven business decisions. It can help do things like formulate better inventory forecasting methods or develop more effective marketing campaigns.
The average AOV for ecommerce businesses is £88.36, which is up 22.36% from this time last year. Tracking this metric can also become one of your most valuable key performance indicators (KPIs) in your ecommerce business. AOV will vary depending on the price of your products. If you change your prices, your AOV will shift, which will impact your profit margin.
Knowing customer habits can help you gauge success in your:
- Marketing strategies
- Website design and user experience
- Pricing strategies
You can also use Average Order Value in conjunction with other business metrics. This can give you a complete picture of your profitability and the ways you can improve.
Challenges of Average Order Value
AOV is a useful metric, but it’s not without its limitations. Like most metrics, it does not always provide a complete picture if you don’t take other data into account. Here are a few things to look out for when you are tracking AOV.
Since AOV only takes averages into account, it can be misleading. For example, if one of your biggest sale items is £8, but you have a small percentage of customers buying one of your more expensive products priced at £120. Depending on your sales over a quarter, and how many customers are buying your expensive items, this could drastically skew your AOV.
The moral of the story is that outliers can have a significant impact on the average. To combat this, use metrics like average basket value, to get an idea of customer behaviours. You can also look at the price of your most frequently sold items and the value of your highest and lowest orders.
By taking the price range of your products into account, you can get a more accurate view of buying trends. Remember, in 2021, you don’t have to keep track of everything yourself. There are plenty of robotic process automation, or RPA tools, available to you. These tools allow you to track large amounts of data in real-time without ever needing that pesky lunch break.
You can increase AOV with strategies like decreasing prices, but it means nothing if your overhead is too high. Since Average Order Value looks at the number of orders and revenue, it doesn’t consider the costs of goods sold (COGS). Also, your profit margins most likely vary between products.
The good news is that you are probably closely tracking your overhead costs already. When you are looking at your AOV, keep an eye on your profit and COGS. Higher AOV isn’t always better, so be sure that there is a balance between your metrics.
What metrics to track with Average Order Value
AOV can be leveraged alongside other metrics. What exactly should you use? Let’s go over your options and discuss why these metrics can provide you with important data to help you improve your company’s bottom line.
Conversion rate measures the percentage of visitors who perform a certain action on your website. By calculating conversion rate with AOV, you can calculate your gross revenue and assist with conversion rate optimisation. However, there isn’t one way to measure conversion rates.
Depending on your company’s goals, you can define a “conversion” in different ways, such as customers:
Depending on your company’s goals, you can define a “conversion” in different ways, such as customers:
- Making a purchase
- Adding items to their shopping cart
- Registering on your site
- Submitting a “Contact Us” form
- Engaging with your site on social media
Take a look at this funnel analysis to get an idea of how you define “conversion” affects your conversion rate:
Use this formula to measure conversion rate:
Conversion rate = (Conversions / Total Visitors) x 100%
For example, your ecommerce business is tracking conversions of the number of customers who made purchases this month. Your website had 400,000 visitors last quarter with 10,000 making a purchase. Your conversion rate would be:
(10,000 / 400,000) x 100% = 2.5% Conversion Rate
Now that you’ve calculated your conversion rate, you can use it together with AOV to measure your gross revenue. This helps you better understand your bottom line and track your growth – and in doing so, give you a solid number to present at your stand up meetings to give your team a snapshot of how you are meeting your benchmarks.
To calculate gross revenue:
Total visitors x Conversion rate x AOV = Gross Revenue
For example, if you had 400,000 visitors last quarter with a conversion rate of 2.5% and an AOV of £94.47, your gross revenue would be:
400,000 x 2.5% x £94.47 = £944,700 for last quarter
Other useful metrics related to Average Order Value
- Purchase frequency: This shows the average number of orders placed by a single customer.
- Average basket value: Also known as average basket size, it measures the number of items sold per order. When combined with AOV, you get a more holistic view of your sales trends.
- Customer lifetime value (CLV): This metric measures the total profit your business makes from a customer over their entire relationship with your company. It gives you insight into how valuable your customers are.
Best practices to improve your Average Order Value
Now that we’ve discussed the basics of AOV and other factors you should consider, let’s look at the ways you can improve your Average Order Value. If you aren’t satisfied with your current numbers, there are many ways you can increase them.
From promotions and marketing strategies to guided selling, there are strategies you can use to increase your AOV and, ultimately, your gross revenue. Here are some of the best strategies for improving your AOV.
In order to optimise your Average Order Value, you should turn to your current prices. Make sure you methodically evaluate price sensitivity to find the optimal price for your products. You want to figure out what your customers are willing to pay for any given product without alienating them.
Another way to optimise your pricing is to decrease your COGS. That doesn’t mean you should cut corners. However, sometimes shopping around for new suppliers or outsourcing certain processes enables you to lower your prices to attract more customers to the product without compromising your profits. You can also offer volume discounts.
When you go about the process of finding this optimal price, you can do it in multiple ways. You can offer different prices for different colours. For example, if your online company sells a dress in five different colours, you can vary the prices slightly to see if one price sells more items. If you use this strategy, be careful that you take into account your more popular shades when they are the same price.
To test prices, you can also alter the prices of one product over time and track sales. No matter what strategy you choose, make sure to keep the user experience in mind. Completing these tests require proper inventory management to do it properly. You don’t want to run out of stock on the item you’re testing. That needs to be weighed against your goal to not have any dead stock.
Offer bundles and packages
One sure way to have customers purchase more is to offer product bundles that save them money. Bundling increases your AOV by encouraging your customers to purchase more items. While they may be getting a small discount, they will have a larger order overall.
Offering bundles and packages not only increases your AOV and your overall profit, but also makes for a better customer experience. You can create these packages to cater to your customers' specific needs and cultivate specific experiences with your brand.
You can also have your customers build their own bundle, like with Scentsy’s cleaning products. The company allows its customers to build their bundles with only the scents they want. Having customisable bundles increases the chance of you making the sale and also offers more personalisation for your customers.
Create threshold-based discounts and free shipping
Another essential strategy for increasing AOV is to have threshold-based discounts and free shipping. All that means is that customers need to hit a minimum purchase value in order to receive a certain benefit.
In ecommerce today, the most popular version of this is free shipping. Customers hate paying for shipping costs because it is just an added expense that they aren’t rewarded for. Many of your customers will be willing to pay an extra £10 to save £2.50 in shipping. This is a straightforward offer that may increase your conversion rate and AOV simultaneously.
Instead of establishing a free shipping threshold, you can also offer other discounts. For example, you may decide that you want to offer £10 off a customer’s total order if they spend £100 or more. Chances are, they’ll spend the extra money, especially if they were relatively close to that total already.
The best part of this strategy is that you can set it based on your AOV and other goals. For example, if you want to increase your AOV, you can set your threshold to 30% over your current amount.
While not everyone will take part in your offer, it should immediately improve your AOV and overall sales. Be careful to take into account your shipping costs, especially if you ship heavy items, and your COGS. You don’t want to end up spending more money than the extra you’re bringing in from the higher AOV. Remember, an increased AOV should not come at the expense of your gross revenue.
Make product recommendations
Personalisation is the driving force behind successful ecommerce marketing strategies. Now you have more flexibility than ever to make recommendations to your visitors based on which product pages they visit or what they have ordered previously. You can do this on your website, application, or email remarketing.
On your website, you can make recommendations by offering your customers complementary products on the product pages they visit. On your home or landing page, you can also show them additional products they have not visited, based on their previous orders or browsing history.
With a mobile app, your company can make product recommendations even if your customers aren’t actively looking to make a purchase. This is done primarily through push notifications. Based on certain triggers, like days since their last activity, you can send notifications to your users with recommendations of products you think they will like.
Finally, email remarketing or behavioural emails is a great way to make product recommendations to your customers. This is a place where you can send personalised content based on that individual customer’s profile. For example, if your customer ordered from your store a month ago, it may be beneficial to send them an email with related products based on their last order.
The power of personalisation doesn’t have to stop at product recommendations. You can also do A/B testing to match different user experiences to different customer profiles to see what customers respond to the best. Just make sure you have an established software test methodology to ensure that any changes you make to the site don’t negatively impact the user experience.
Have a customer loyalty programme
Customer loyalty programmes offer benefits to both yourself and your customers, including increasing your AOV. Customer acquisition costs need to be taken into account in contextualising your Average Order Value. By having higher customer retention rates, you get higher overall value to your customers and your AOV number.
Maintaining a loyal customer base costs significantly less than onboarding prospects. In fact, 82% of marketers have stated that “active customer retention” is one of the most important objectives for their CRM team.
You can reconnect with inactive customers and reward your brand advocates through your customer loyalty programme. You can offer bonuses like discounted add-ons, free shipping, or money off their next purchase after a certain amount spent or points earned.
Companies like Amazon have made an entire business model around their loyalty programmes. Amazon Prime offers things like free shipping, access to free content, and special pricing. It also has the options for add-ons, like channels, for an additional monthly fee.
This example shows how creative you can get with your loyalty programme. When you create your programme, consider using an online whiteboard to collaborate with your team to work out the details. Be bold and make sure it is working to improve your AOV alongside other metrics.
Loyalty programmes work because they don’t only encourage customers to come back to your company – they reward the customers who are working as your most reliable brand advocates.
Tips for optimising your AOV
While these strategies are great for improving your Average Order Value, they don’t encompass all of your options. Here are some tips to make the most out of your AOV metric.
Upsell and cross-selling
When you are recommending products or creating packages, think about upselling and cross-selling. This is just another easy way you can encourage customers to buy complementary or upgraded products based on what they already intended to purchase.
Within this, consider the following advice for upselling and cross-selling:
Offer low value upsells: This will increase the likelihood they will add it to their cart.
Don’t overdo it: Make your customers feel like you are only interested in their wants and needs. By upselling too much you risk your customers feeling like they are being sold to.
Make sure you know your customers: Using CRM software or personalisation tools helps you know your customers better and therefore make you more capable of selling to them. Before you try to upsell or cross-sell to your customers, know what they want.
Take advantage of the latest technology
Making changes to your marketing strategies can be a daunting task. Luckily, there are plenty of tools out there to improve your AOV along with other key performance indicators (KPIs).
With tools like Ve’s Digital Assistant, you can:
- Enable rapid experimentation with behavioural insights
- Build positive customer sentiment
- Create a dialogue with your customers
- Guided selling to help customers choose the best products for them
These tools allow you to process data faster and gain more holistic insights about your customers. Automation also means that there is less pressure on your team to manage all aspects of personalisation and promotions by themselves.
Communicate with your team
The only way you are going to improve your AOV is through collaboration and effective teamwork. Most companies already use enterprise phone systems that provide users with advanced features, like conference calls, but there are other tools you can use to work effectively, even if you’re a dispersed workforce.
Other tools include:
- Collaborative workspaces (like Google Docs)
- Team chat services, like Slack
- Video conferencing software
Even with the help of digital assistants and connected media tools, your efforts to improve your AOV still need the human touch. Having regular and open communication with your entire team will promote more creative ideas and make all teams more accountable to meet your company’s goals when it comes to AOV.
Offer the best in customer support
Another tip for optimising your AOV is to provide excellent customer support. Customers who know that their purchase comes at no risk with buying more. Great ways to provide that support are:
- Return shipping labels included in the package
- Live chat on your website
- Email support with quick turnover rates
- Phone customer support
If you do provide phone support, make sure you are also utilising call center analytics alongside your ecommerce metrics. Having poor customer service over the phone will lead to decreased AOV and higher cart abandonment rates because your customers will abandon the products they had questions about.
You want your customers to reach you quickly and have an excellent customer experience. Some metrics you can track to gauge that include:
- Abandoned call rate (ACR): How often are the calls dropped before a customer’s question is resolved?
- Average handle time (AHT): How long does it take your team to handle a call from start to finish?
- Customer satisfaction: How satisfied are your customers by the end of their support call?
- Average transfer rate: How often does your team transfer a call? Make sure your employees know how to do a call transfer successfully. Otherwise, this high metric will lead to higher rates of all the above call centre metrics.
Start improving your AOV today
You now have all the tools you need to calculate your Average Order Value and use it to improve your business.
The beauty of leveraging AOV as a KPI is that you’re focusing your energy on the customers most likely to make a purchase. All you have to do is figure out the best strategy to guide your prospects through their journey and help them discover and purchase items relevant to them.
Remember, you are not alone. Here at Ve, our experts are available to help you get started with email remarketing, connected media, and a personal assistant to help you optimise your Average Order Value and your profits.
If you have any questions about how these services can be useful to you, don’t hesitate to contact us or request a demo by filling out the form below.