Average Order Value (AOV) is an essential e-commerce and marketplace metric. It is one of the two levers that influence revenue, the other being the number of orders.
Read on as we explore what AOV is, why it is an important metric, and how you can increase your AOV to ultimately increase your revenue.
Average Order Value (AOV) is the average dollar amount customers spend each time they place an order on your e-commerce business or marketplace website.
Tracking this metric is a great way to understand the purchasing behavior of your customers, especially when it is paired with other metrics, such as Monthly Recurring Revenue (MRR). It can also be helpful when calculating Customer Lifetime Value (CLV).
Similarly, you may find it useful to track AOV across individual customer segments in order to identify which are generating the highest profit margins. For example, you may find that customers who arrive at your online store after clicking on a marketing email have a higher AOV than customers who arrive organically. This can give you important insights into your marketing strategy.
Figuring out your AOV is simple and straightforward. This means you can easily keep track of it monthly, weekly, or even daily.
To calculate AOV, simply add up your total revenue across a specific time period and divide this number by your total number of orders placed in the same time period. Here’s the formula:
Total revenue ÷ Total # of orders = AOV
Let’s illustrate this with an example. Say your customers placed 500 orders during the month of March, while your total revenue for the same time period was $5,000. This would mean your AOV would be $10:
$5,000 ÷ 500 = $10
There are really only two ways to increase your revenue. You can either increase the number of orders you receive, or you can increase the amount of each of those orders (your AOV). While many companies tend to focus on increasing orders by investing in new customer acquisition and reaching out to new markets, AOV can actually be a much more effective, as well as easier and cheaper, way of increasing revenue.
The reason for this is simple. Every transaction comes with a cost. In order to make that transaction happen in the first place, you have to make a variety of investments, including developing the product, marketing it, and possibly even shipping it. While increasing orders also increases these investment costs, the same is not true for AOV. Instead, when you increase the value of each order, you are helping to maximize your previous investments. This, in turn, is a much more direct and impactful way of increasing profits.
Measuring AOV can also help you develop more effective marketing and pricing strategies. As you track this metric over time and across different customer segments, you will be able to see which types of customers, marketing campaigns, and pricing points generate the highest AOV. This will make it easier to increase the long-term value of individual customers.
There is no one way to boost your AOV. Instead, the best strategy for increasing AOV will depend on your particular business model, the type of product or service you offer, and the qualities of your customers.
Here are six strategies you can use across the sales funnel to help nudge your customers to spend more.
Multiple studies have shown that free shipping is an effective way to entice customers. After all, it can feel like you’re getting something for free. So using free shipping as an incentive for shoppers to add to their current order can be a good way to increase your AOV.
One of the best ways to do this is to set a minimum order amount they must meet in order to qualify for free shipping. Promote this across your website to make customers aware of the offer. And make sure to remind them again of this free shipping threshold as they check out.
Products rarely exist all on their own. Instead, they are often paired with other products. For example, a customer buying a new pair of shoes may also want some socks. Someone purchasing a computer could probably also use a mouse.
Offering similar, related items like this is called cross-selling – and it is often most effective when presented at the moment of purchase. Since the customer is already prepared to spend money, they will likely be less resistant to adding on a related product to enhance their experience. Even better, they’ll probably be thankful for the suggestion.
Upselling is when you convince a customer to purchase a more expensive product. This is one of the most straightforward ways to increase your AOV. But doing this effectively can be tricky. After all, no one wants to spend more money.
That’s why you should upsell customers while they are on your product page. This is where they are comparing options while they consider a purchase. So when they see a product that is only fractionally more than the one they are already looking at, it won’t seem as expensive. As a result, they’ll be more likely to spend more.
This is when you offer to sell groups of products at rates that are lower than if the customer bought each item individually.
This strategy is similar to cross-selling because it pairs related products together, such as a new light bulb with a lamp. However, by offering a volume discount, it further entices the customer to spend more than they were originally intending.
As long as this discount doesn’t put you below your profit margin, this will help increase your AOV.
Payment plans are when you allow customers to purchase items using a series of smaller payments, or installments, rather than one large payment.
This has long been a common practice for expensive goods, such as cars or furniture, but it has become increasingly common with a variety of other items. Customers who might normally be put off by the high price of a good may be more likely to purchase if they can spend less upfront.
Temporary discounts give customers a limited and usually time-sensitive opportunity to purchase a product at a lower price. For example, you might offer a 50 percent discount on items over $500 for the next hour only.
The effect of this strategy creates a sense of urgency that can convince customers to make a purchase they might otherwise be hesitant about. This can be particularly effective when it comes to higher priced items you are attempting to upsell. For instance, if a customer is looking at a mid-price option, you may be able to convince them to purchase a more expensive option by presenting them with a temporary discount.