Merchants
What is Average Order Value & How Can You Improve it?
One of the best ways to bring more revenue into your business as an eCommerce retailer is to understand average order value (AOV) and implement ways to improve this metric.
One of the best ways to bring more revenue into your business as an eCommerce retailer is to understand average order value (AOV) and implement ways to improve this metric. Traditionally, eCommerce businesses have focused on generating more revenue by increasing their customer base and making more sales. However, the lingering impacts of the pandemic, supply chain crisis, current economic conditions, and growing competition have made customer acquisition costs higher than ever before.
If you’re among the many businesses looking for a more efficient way to increase your revenue through your existing customers and within your established budget, you’re in good company. This concept of maximizing your budget has surged to the forefront, with 95% of eCommerce leaders listing cost optimization as a priority in 2022. To optimize your budget, understand average order value (AOV). This key performance indicator measures your customers’ spending habits. By discovering ways to improve AOV, you can increase your business’s income stream significantly.
We’ll share what is AOV and exactly how to calculate your business’s AOV. Plus, we’ll provide actionable steps with insightful examples to help you increase average order value per customer and, in turn, boost your bottom line.
Average Order Value (AOV) is an eCommerce metric used to measure the average amount customers spend each time they place an order and make a purchase.
To calculate the average order value, divide the revenue by the number of orders for a certain time period. Mathematically, the formula can be stated, “Revenue divided by the number of orders equals AOV.”
For example, let's say that your store generated $1,000,000 in monthly revenue from 2,000 orders. To calculate the AOV, you would divide $1,000,000 by 2,000, which would give you an AOV of $5,000.
You can track AOV manually in a spreadsheet or use the tools provided by your eCommerce platform. For example, if you’re a Shopify customer, you can find this number in your Customer Reports. WooCommerce, Wix and BigCommerce also provide this information.
The time period over which you monitor AOV will depend on your business goals and the specific context in which you are using the AOV metric. In general, it's best to monitor the AOV over a consistent time period, such as a week, a month, or a quarter, so that you can compare the metric over time and track any changes or trends.
As many people know, averages don’t always paint the full story. Although AOV is the most commonly cited metric, to get a full picture, as well as the “average” value, you should also look into the “median” value and the “mode” value. The median value is calculated by ordering all of the individual order values from smallest to largest, and then selecting the middle value, and the “mode” value is calculated by finding the most frequently occurring value of all the orders placed.
eCommerce retailers can benefit from calculating this metric as it provides valuable insights into customer purchasing behaviors and patterns. In 2022, 47% of eCommerce executives listed Average Order Value (AOV) as their highest priority KPI to measure. AOV can inform strategic business decisions and marketing strategies, including advertising budgets, product pricing, and developing promotional campaigns. By closely monitoring AOV businesses can make adjustments in response to trends and market fluctuations.
Businesses that focus on improving their AOV can enjoy the following benefits.
AOV metric doesn’t exist on an island by itself. To get the full picture of your customer’s purchasing behaviors and willingness to spend on each order, compare related key performance indicators (KPIs) with your determined average order value.
The following metrics impact and correlate with AOV, resulting in a more informed profile of customer spending.
The math is simple. The more your business can encourage customers to spend, the further your business can stretch its budget and increase its revenue. Fortunately, businesses have many options for improving their average order value. These tactics can work in tandem or be used singularly depending on time of year and consumer spending patterns. Businesses can increase AOV by applying the following tactics.
To increase the chance your customers will purchase more items, try creating a bundle of products that costs less than the total of buying each individual product separately. Bundling is a win-win. Your business sells more products, and the customer gains a sense of getting more value for their purchase. Bundling can be especially effective when you’re able to provide everything a customer needs to solve an issue or enjoy an experience.
You’ve most likely seen the phrase “free shipping with minimum purchase” often when checking out online. No one likes to pay for shipping. This tactic leans on the psychology that customers would rather add extra items to their cart than pay for shipping. The customer feels as though they’ve received more items for a similar price. And you, the business, sell more products at a higher average order value. However, for this tactic to work, the minimum must be set at a threshold customers are willing to pay, or you’ll see an uptick in abandoned cart rates.
Businesses that earn customers' trust through exemplary customer service tend to increase sales. These eCommerce sites provide a means for their customers to interact with their business. And they make purchasing low-risk by offering free returns. Consider providing live chats. Customers may add up to 10-15% more per cart after engaging in a live chat. Also, testimonials, product reviews, and other forms of social proof increase customer trust in a company or product resulting in more sales and higher amounts spent per sale.
It doesn’t have to be Black Friday or Cyber Monday to excite customers into making a purchase or buying more than they intended to boost your AOV. Consider offering a limited-time promotion. The time-sensitive nature of the promotion adds an urgency that may result in customers making snap decisions and impulse buys. Also, adding a freebie to a purchase or an upsell item can entice purchasing. And, of course, every customer loves a coupon code. To improve your AOV, place a minimum purchase threshold to receive the savings.
Insurance is a great way to offer peace of mind and protection to consumers for high-cost purchases. Consumers are often looking for ways to protect their purchases and merchants can take advantages of this desire by offering insurance at the point-of-sale. Offering insurance at point-of-sale can increase the AOV by making customers feel more confident in their purchase. By providing customers with insurance coverage, you can help them feel more secure in their decision to purchase from your store, which can ultimately lead to higher AOV. In addition, merchants can also benefit from referral fees, as well as boosting the sale of high-value items during the claims cycle, which can increase AOV.
At Oyster, we strive to be a leading voice in retailer insights. Book an appointment with Oyster to discuss how selling insurance can increase your business’s average order value.
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