What is Average Order Value (AOV) and why is it important?
You might think that if you’re attracting lots of traffic to your online retail site with a good conversion rate, that you’ve basically nailed it. But there’s another metric you should be paying close attention to – the average order value or AOV. If traffic and conversion rates are high and AOV is low, that’s a sign you’ve got a bit of a problem.
AOV has become one of the most important ecommerce metrics, and retailers keep a very close eye on it. It gives them essential insights into their customer base, over and above the mere fact of customer acquisition. Some retailers are preoccupied with the latter but still tend to overlook the importance of a healthy AOV.
In this in-depth guide, we’ll take a closer look at average order value and explain just why it’s so important in helping you assess the performance of your retail business.
What is average order value?
Average order value is, quite simply, the average amount each customer spends when they make an order via your website. Retail businesses increasingly view AOV as one of the most important metrics because it provides them with important insights which can inform their marketing and pricing strategies.
If you can increase your average order value, your revenue growth should also grow accordingly. Average order value also helps retailers dig deeper into consumer behaviours. In particular, by giving them a clearer idea of how much customers spend on each order, retailers are in a stronger position to tailor their pricing and digital marketing efforts.
It’s also worth noting here that customer acquisition costs can be substantial, so a strategy that’s focused entirely on winning new customers – rather than boosting the AOV of your existing customer base – can be counterproductive for retailers. This is because it requires them to continually increase website traffic, and this can cost a good deal of money.
There are a number of tactics that ecommerce businesses can use to increase revenue by boosting average order value, while also fostering stronger customer loyalty. Customer loyalty tactics often include methods such as loyalty programs, upselling and offering customers free shipping. We’ll discuss these in more detail later on.
How to calculate average order value
Now we’ve explained what average order value actually is, we need to look at how you calculate it. It’s quite simple: the average order value is, as we’ve noted, the average value customers spend (the average dollar amount, or pounds, or euros, or whatever other currency) during a single transaction.
So, for example, let’s say that your total revenue in a particular month is £75,000, and there were a total of 1,250 orders altogether. To calculate the average order value, we’d need to divide the total revenue (£75,000) by the total number of orders (1,250). This gives us an average order value of exactly £60.
We can express the aforementioned calculation in the form of a formula. So, the formula for calculating the AOV of a customer’s typical shopping cart would be as follows:
Total revenue ÷ The total number of orders = Average order value
Bear this in mind for future reference; it’s a straightforward and easy calculation, but it’s one that could provide an important benchmark for how your retail business is performing.
Metrics when evaluating AOV
There are also other metrics you should take into account when evaluating average order value. We’ll discuss them in greater detail in the next section, but these are the conversion rate and revenue per visit. These metrics are commonly used in tandem with AOV to evaluate how retail businesses are faring and to inform strategies to increase AOV.
As well as looking at your average order value (which is the mean order value), you might also wish to consider the median (the middle value when taking all orders into account) and the mode (i.e. the order value that occurs most frequently). This should help to give you a more rounded picture of customer behaviour.
Considering these three measures together should put you in a better position to boost your profit margins. As important as the mean or average order value is, it would be unwise to treat it as the only metric worth taking into account. A more holistic approach can be highly rewarding for you and your business.
How is AOV different from conversion rate and revenue per visit?
We previously mentioned conversion rate and revenue per visit, so let’s delve more deeply into what they mean and signify. These are two important metrics and can serve as useful, insightful complements to the insights provided by average order value.
Your conversion rate measures the percentage of visitors to your website who complete a certain goal (i.e. fulfil a transaction) out of the total number of users who visit. Conversion rate optimisation is important for online retailers: this refers to the various techniques involved in increasing the conversion rate.
To calculate your business’s conversion rate, divide the total number of visitors to your website by the number of conversions (i.e. transactions) completed. It might be the case that your average order value is increasing while your conversion rate is simultaneously falling, which is likely to be an indication of a pretty serious problem.
Revenue per visit
You might be wondering what the difference is between average order value and revenue per visit – surely they amount to much the same thing? Well, not quite. In fact, revenue per visit (RPV) is concerned with the value of every visitor going to your online store. The higher your revenue per visitor, the more qualified traffic your website is receiving.
You can calculate RPV by dividing your total revenue by the total number of visits to your site. This is slightly different to AOV, of course, which is calculated by dividing total revenue by the total number of orders.
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9 tips to improve your ecommerce average order value
It’s all very well knowing how to calculate your average order value and the other metrics you should be looking at, but as a businessperson, what you really need to know is how to improve it. Ensuring a higher AOV is a major preoccupation for online retail businesses, and there are various ways you can go about achieving this goal.
In this section, we’ll look at some of the most effective ways of boosting AOV – and with it, other key yardsticks including customer retention, customer lifetime value and gross profit. Here are PureClarity’s top tips for increasing average order value.
- Offer free shipping
Shipping costs are a major bugbear for consumers. Because online retail giants like Amazon have made free shipping a major selling point, this has raised consumer expectations. For a lot of consumers, if they can’t get free shipping from one online retailer, they’ll simply take their custom to another retailer that does provide it.
If you can offer free shipping, it could do a lot to boost AOV, encouraging shoppers to buy more with each transaction. If you set a minimum purchase requirement as a free shipping threshold, this should give customers an incentive to purchase more than they otherwise would. Amazon offers free shipping on transactions of £20 or over, for example.
- Pricing control
Another effective way of increasing average order value is to offer great prices. Consumers love a good bargain, and they’re always on the lookout for a saving. If you can offer prices that are better than those of your competitors, this is obviously going to be a good incentive for consumers to buy more per order.
Even if you charge less for specific items than your competitors, lower prices can entice customers to buy more in one go – which therefore helps to push your average order value that bit higher.
- Upselling and cross-selling
One effective tactic to improve AOV is to upsell and cross-sell. The point of upselling and cross-selling is to give customers a little subtle encouragement to buy more expensive products, add-ons, or complementary products. In this respect, upselling and cross-selling are similar to bundling, which we’ll come to next.
Be careful, though. Over-reliance on these tactics can mean that they deliver diminishing returns; in other words, they may become less effective over time if you bombard customers with them.
You can nudge customers to buy more – increasing the total value of their order – by bundling additional products into the deal. So, if buying a particular product means that other, complementary products come at a lower price (or even for free), you can see how a lot of customers would be tempted to stick it in their shopping cart.
Of course, it is important to ensure that bundled products are genuinely complementary to one another. If a customer wants to buy a pair of headphones from you and you try to tempt them with a discounted camping stove, this isn’t likely to work. You could also allow customers to create custom bundles, choosing their own features and add-ons.
- Limited-time offers
We’ve discussed how customers are always on the lookout for great deals, and limited-time offers can be a very good way of pushing them to go through with a purchase. If customers feel that they must order swiftly to take advantage of a particular offer – whether it be a discount, a product bundle or next-day delivery – they’re more likely to do so.
Offering time-limited offers can create a sense of urgency in the consumer’s mind: after all, they can’t be sure how long it will be until another similar offer comes along again. But again, diminishing returns can be an issue if you overuse this tactic – consumers can grow cynical – so use it sparingly.
- Loyalty programs
Loyalty programs are proven to foster long-term loyalties between customers and retailers. This is crucial: if you can keep regular customers coming back to you time and time again, this is a good sign that your online business is on the right track. It also helps, of course, to boost your average order value.
Customer loyalty programmes have a long pedigree – they go back as far as the late 18th century – but they’ve really come into their own in recent years. In a highly competitive online marketplace, they’ve become particularly important, helping to reduce customer churn and build a solid, long-term customer base while enticing customers to buy more products.
Online marketers have made use of discounts to help them both win and retain customers. Keeping average order value in mind, you have to be discerning in how you use discounting – too much of it can reduce AOV, even if customers buy more items per transaction – but judicious discounts can help to push AOV higher.
Discounting should indeed always be used carefully. It’s possible to have too much of a good thing; excessive volume discounts can raise customer expectations to unrealistic levels, and potentially trigger damaging price wars with competitors. But careful discounting can give consumers the encouragement they need to increase their overall order value.
- Personalised product recommendations
Ecommerce personalisation is increasingly important. Of course, very few online retail businesses are Amazon, but it is worth looking at what the industry’s behemoth has done in this regard. Amazon has made very effective use of personalised product recommendations, raising the bar for the ecommerce marketplace as a whole.
Consumers have increasingly come to expect that when they order a particular item online, they’ll be presented with related recommendations for other items they might be interested in. These recommendations on product pages are proven to work as an incentive for additional purchases, thus boosting AOV.
- Live chat support
Online customer support is another effective way of encouraging customers to make more and bigger transactions. But the key question is how to provide real-time assistance virtually. This is a challenge for online retailers; customers still value the in-store experience, where they can get help and advice from specialist human staff.
To emulate this as closely as possible, a lot of online retailers have introduced a live chat function to their websites. This allows customers to ask virtual assistants about the products they’re looking for, which can be particularly useful for high-ticket products. It also allows retailers to give customers who might be vacillating the extra confidence they need to buy.
Understand your customers
In this guide, we’ve looked at what average order value is and why it matters so much to online retailers. We’ve also looked at some of the strategies you could use to boost AOV, encouraging customers to either buy more products per transaction or more expensive products. These strategies are already delivering the goods for online retailers worldwide.
The most important point to remember with regard to AOV is that there’s no substitute for a thorough understanding of your customer base. You have to be intimately familiar with what makes your customers tick, and what they’re likely to respond favourably to. What works for one segment of your customer base might not always work for another.
If you’re going to encourage customers to increase the value of their orders, you need to be aware of which incentives are likely to work for them. Segmentation can be a particularly useful tool in this regard. Break your customer base down into different groups according to their purchase history, and try targeting these groups with different incentives.
So, as a general rule, we can assume that regular buyers are more likely to respond positively to loyalty programmes, increasing their AOV in this manner. More infrequent customers, on the other hand, may prefer bundling, upselling and cross-selling. There may be some trial and error involved, so don’t be afraid to tweak things until you hit upon the right solutions.
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Hopefully, this guide has already covered most of the questions you may have had as far as average order value is concerned. Just in case it hasn’t, here are some of the most frequently asked questions about AOV, along with PureClarity’s answers to them.
What is ‘average order value’ in ecommerce?
Average order value is the average amount spent by customers in each transaction (i.e. the mean value of all orders). Businesses which succeed in increasing average order value are likely to enjoy healthier revenue growth, in turn.
Why is average order value important?
Average order value is important to retailers because it offers important insights into customer behaviour and overall business performance. When used in conjunction with other KPIs, such as revenue per visit and conversion rate, businesses can use AOV to inform their marketing and pricing strategies, adjusting them where appropriate.
How do you calculate average order value?
Average order value can be calculated by dividing the total amount of revenue by the total number of orders received over a certain period.