Average order value is an important KPI for every business. Not only that, but it’s vital to examine this figure in order to see if it may be improved. How can you improve your average sale? Why do your consumers buy particular items? Do customers seek product add-ons and upsells that are similar? These are all excellent questions, to begin with.
Investment in publicity is one thing, but understanding what products are selling and developing them is more beneficial. Today we’ll talk about average order value and why it matters.
What Does Average Order Value (AOV) Mean?
The average order value is the average amount each customer spends when placing a purchase on your website. Retailers now see AOV as one of the most significant indicators. The reason is that it gives valuable data. And this data may guide their company’s pricing strategy.
If you can increase the average order value, your revenue should increase as well. The average order value also assists merchants in understanding consumer behaviour.
Retailers, for example, may better customize their price and digital marketing efforts by better understanding how much customers invest in each order.
It’s also worth mentioning that client acquisition expenses are high. Therefore, focusing solely on acquiring new consumers–rather than increasing the AOV of your existing customer base – might be counterproductive for merchants. This is because they must constantly grow website traffic, which can be costly.
See the differences between customer acquisition and retention marketing
To create revenue, eCommerce businesses can use various tactics. Some of these boost average order value while also improving customer loyalty.
Customer loyalty strategies frequently involve measures. Such measures are loyalty programs, upselling, and providing free shipments to customers.
Benefits Of Tracking Your Average Order Value
It is critical to determine your AOV in eCommerce. This is because it acts as a starting point for calculating revenue and assists brands in making critical business decisions. Let’s dig deeper into why this is such a vital eCommerce KPI.
1. AOV Helps Us Understand Customer Behavior
Tracking average order value provides insight into an average customer’s buying behaviour. This insight may then assist businesses in figuring out how to get extra out of every sale. For instance, a shoe store may sell a bargain choice for £50.
It also sells a mid-range option for £100 and a quality product for £200. If the AOV for this store is £70, it shows that most customers prefer the cheapest product. Also, it implies that people often purchase only one item.
In addition, it shows that present buyers are budget conscious. Also, it signifies that the company’s offerings require additional uniqueness. And it can achieve this through creative branding, style, or USPs.
Because of this one discovery, the shoe company might change its ad targeting. It might change its messaging and other aspects to increase the revenue generated by each sale.
2. It Enables Brands To Set Customer Acquisition Cost Objectives
Realizing how much money is spent on every order informs marketers how much they can invest in customer acquisition.
Typically, the average order value should be far greater than the cost of acquiring each new client. That’s not always the case for new businesses. However, they might utilize their AOV to set future client acquisition cost goals.
3. It Influences Your Brand’s Earnings
Tracking your average order value through your sales channels allows you to use pricing models. Not just that, you can use discounts and other AOV marketing approaches to improve that worth.
Companies that can accomplish this without compromising their order volume will experience a significant rise in income. It will also increase their marketing ROI and ROAS.
The Benefit of Average Order Value as a Metric
Revenue is highly linked to AOV. Therefore, increasing it means bringing in more money. And this can be done without increasing spending on customer service, logistics, or conversions.
Focusing on AOV will be the most cost-effective strategy for growing income in certain circumstances.
Furthermore, AOV calculates how much a client spends with you throughout their lifetime. That’s a robust understanding that can influence how you approach pricing.
The Drawbacks of Average Order Value as a Metric
If you sell various items over a wide price range, AOV may not be the most accurate indicator. Unusually large or tiny orders can warp it. Similarly, it is critical to place this measure in its proper perspective.
For instance, if your client retention is poor, your AOV may appear unnaturally inflated. A spike of clients at particular year periods may even make it appear low. Let’s look at how different indicators can help you understand what’s going on with your AOV.
Metrics Associated With Average Order Value
When you measure AOV regarding other pertinent metrics, it becomes more valuable. With this in mind, it should fit perfectly with your other eCommerce KPIs.
AOV works particularly well with lifetime revenues per client. And this is the average worth of everything a client spends throughout their relationship with you.
Thus, if this number is low, consumers buy a few things from you. In fact, it will make your AOV appear suitable. But it won’t turn into much income as you may expect. The essential metrics to consider with AOV include:
1. Lifetime Revenue Per Visitor
This represents each customer’s overall worth. It also includes the average amount they’ll order. So, if that’s too minimal, buyers will be less likely to make subsequent purchases. Thus, it results in a reduced return on all advertising expenses.
2. Cost Per Conversion
This indicator shows how much it takes to convert each client. When you deduct your cost per conversion away from AOV, it will determine the accurate value. Also, it will decide whether you need to do more to retain consumers beyond the first conversion.
3. Conversion Rate
Another good option is the conversion rate. This is yet another situation where poor conversions might artificially increase your AOV. Healthy conversions provide you with a more realistic view.
Average Order Value Formula
To determine your AOV, start by dividing your entire income by the overall number of orders.
AOV = TR / O
- Where “AOV” is the average order value,
- “TR” is the total revenue
- “O” is the total number of orders
For example, you run an internet company that sells chocolates. Then the total sales in October is $2.500, with 200 packets of chocolates ordered.
Calculation; $2500 / 200 = $12.5
In short, $12.5 is the overall amount a customer spends on average for each purchase made from your store.
How to Increase Average Order Value
It’s essential to calculate the average value of all orders. But that’s not the only technique to do so. For instance, one can divide customers into several categories depending on their purchasing history. Most retailers divide their client base into three – low, medium, and high spenders.
Though customers can also be segmented based on order frequency, product kinds purchased, or any other approach that meets their needs.
In addition, you might target customers with marketing relating to their category after division. Also, enrol the high-spenders in a loyalty program to reward them. And target the low-spenders with offers and cross-sells to increase their value.
Other ways to increase the average order value include:
- Upselling, bundling, and cross-selling additional products.
- Adding a free delivery level that isn’t too much above the usual order amount. But it should be high enough that the firm can afford it.
- Setting a minimum order value and giving discounts.
Don’t attempt all the methods for increasing the order value simultaneously. Instead, try each alternative to see which is the most successful for the particular shop. And then stay with what works.
Average order value is one knob you can use to expand a company’s bottom line. It’s also the one that requires the least amount of additional marketing and advertising investment. Use our professional advice above, and your average order size and income will skyrocket.
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Godsfavour is a passionate content strategist with an excellent flair for writing on various niches. With a bachelor’s degree in Accounting. Her natural knack for details, coupled with her love for the English language, helps her weave and spin words together to create a masterpiece. She’s passionate about business growth and development.