A Guide to Using Average Order Value for Ecommerce Success
Have you ever heard the term average order value? If you’re running a fulfillment center or DTC business, it should be top of mind.
If your business is selling many items, but the value of those items is low, naturally you want to bring the value up. That means you’re trying to increase your customers’ order value, or the amount a customer spends per order. Increasing the average amount every customer spends is one of the most critical metrics for DTC operators. This concept is known as average order value.
Let’s take a closer look.
In this guide, we’ll explore:
- What Is Average Order Value?
- How Does Average Order Value Work?
- Why Is Average Order Value Important?
- Pros and Cons of Average Order Value
What Is Average Order Value?
Average Order Value (which is also sometimes referred to as AOV) is an important KPI that tracks the average amount of money that a customer typically spends when they come to your website or mobile shop.
To look at this another way, if you have 100 products on your site that are $5 and one product on your site that is $500, your average order value is likely to be closer to $5 than it will be to $500. This is because more of your customers are likely to spend money on the $5 items (rather than the $500 one), and it’s highly unlikely that they will buy $500 worth of $5 items.
This may happen, of course, but the likelihood is low.
Average order value is more than just a KPI that helps you track profit. It can help you understand the habits of your customers when it comes to purchasing from your site.
Once you know your company’s AOV, you will be able to evaluate how effective your marketing efforts and item price points are. Once you have the AOV, you’ll have the metrics that are required to determine if you have repeat customers or if people are only buying from you once.
From this, you’ll be able to see if any changes need to be made to your product line to influence consumer behavior. You’ll also be able to set goals to help you pivot your business into a more profitable direction.
Before you read further, the average inventory formula with all necessary definitions is in Logiwa Blog. To learn more about how to calculate your average inventory, keep reading our article!
What is the Average Order Value Formula?
When it comes to calculating your AOV, there’s a specific formula that you can use. To determine your AOV, divide the total revenue you’ve earned by the number of orders that customers have placed during a specific period.
Let’s pretend that you’re looking at June as your sample period, and let’s say you made $30,000 across 500 orders. You’ll take $30,000 and divide it by 500, meaning that your average order value is $60.
Now, once you have that information, you have to determine what it’s telling you about your business. If you’re trying to either (a) make more money or (b) drive more sales, you’ll have to look at your business model.
Ask yourself: are your prices too high? Too low? Do you need to fine-tune your marketing to get more people to interact with your business? Are there specific items that people are gravitating towards? Utilizing the average order formula will assist you with these considerations and making these decisions.
Seeking out the answers to all of these questions can go a long way toward helping you determine if your current business model is working for you or if you need to change things in the future.
Once you have an idea of how to adjust your business, consider it a trial period. For example, let’s say that you’re hoping to make a higher profit, and you’re finding that your AOV is extremely low despite you getting a lot of traffic to the site.
This might mean that people are seeing what you’re selling and they’re engaging with it, but they aren’t spending much money. At this point, you could try a tactic such as implementing a minimum order quantity (MOQ) on your website. A minimum order quantity will raise how many items each customer is buying per order. For inexpensive bulk items, imposing a minimum order value is a common practice in ecommerce.
When you start tracking your metrics and your average order formula, another thing to look into is how much shopping cart abandonment is occurring on your website. This is when customers come to your site and add things to their cart, but then they don’t purchase those items.
Cart abandonment can be very frustrating, but it can also be a good metric. Perhaps you need to introduce coupons into your business model or find some way to ensure prospective customers complete checkout when they visit your site.
Why Is Average Order Value Important?
Average order value helps you determine the health of your business. If your business is doing well, your AOV will likely be relatively high. However, if you find that it’s lower than what you expect (like in our above example, where the AOV is closer to $5 than $500), there might be something you need to change in your business.
Without knowing the AOV, you will never be able to adjust your products to entice consumers. You won’t understand your inventory patterns or your customer’s budget sensitivity. With the average order value, you can learn specific – and helpful! – information such as economic order quantity or even forecasting to estimate how certain products will do going forward.
Practicing the average order formula and tracking critical metrics is key to your business’s health and wellness. And so doing consistent checks of it can help keep you in the black rather than dipping into the red.
Other Methods to Increase Average Order Value
By now, it’s evident that increasing AOV is a great way to positively impact revenue. With the level of competition ecommerce brands are facing today, it can be complicated to give your business an edge. Below are a few methods DTC brands, fulfillment centers, and ecommerce companies have utilized.
1. Offer Free Shipping
Anyone that has ever shopped online has very likely seen this tactic (and taken advantage of it). By offering free shipping with a minimum purchase value, you can entice your customers to spend that extra little bit and increase cart averages. For example, if you know your customers spend $50 on average, and you offer free shipping at $60, that might be enough to boost your average spend by $10 per cart.
2. Create Customer Loyalty Programs
The cost of attaining a new customer is more significant than retaining repeat customers. Thus, it is advantageous to keep them coming back. If customers get a free gift for being loyal to your brand and spending a set amount, it makes sense that they would spend more. It also makes sense that they would come back for repeat purchases.
3. Package Products Together for Discounts
You might be thinking: “Aren’t we trying to raise the average order value? Why would we offer discounts? Well, the simple answer is by bundling products together and offering a discount, there is a greater chance consumers might buy two bundles.
If you can focus on those that are already spending on your site or app, there’s a better chance you can impact their behavior and get them to increase their spend.
Pros and Cons of Average Order Value
Even with all the benefits that knowing the average order value can offer, there are some downsides to it as well. It’s important to know both the positives and negatives of monitoring AOV.
- Can help you determine the health of your business.
- Gives you insight into how many customers you have and how much (amount) they’re buying.
- Can inform you about shopping cart abandonment.
- Many people determine the AOV monthly, however, this means that you might have a really good month (and assume you don’t need to change anything) followed by a really bad month (so you think you need to change everything). Because of how the AOV can fluctuate, especially around specific dates and holidays, it can make you think your business is doing better/worse than it is.
- The longer your periods are for determining AOV, the better it’ll be for your business, but if you’re in a rush to know, you may get inaccurate data.
Why is average order value important?
Average order value can help you determine the health of your business. It can help you look into making new goals. If your AOV isn’t as high as you’d like it to be, it can also force you to keep iterating and improving your business model so that you’re constantly keeping up with your competitors. (Or even better, surpassing them).
What is the formula for average order value (AOV)?
The formula for AOV is your total profit (over a specific period) divided by how many orders you received during that same period.
What is the average order value in ecommerce?
Average order value in ecommerce is the method that businesses can use to determine how much (on average) a customer spends when they visit the website or shop. It allows ecommerce shops to understand the average cart value of their site’s shoppers.
How can I increase my AOV?
There are some blanket ways to try and increase your AOV. One of them is changing up how you handle your shipping services. Looking into ecommerce warehouse management or order fulfillment software can go a long way towards increasing the health of your business.
When you entrust your products to these sorts of services, it puts them in charge of getting the item to the customer. This can remove shipping delays and other elements that might turn a customer away from your business.