AOV (Average Order Value) is the average value a customer creates on an order. To calculate AOV, you need basic information about your business, such as total sales and the total number of orders. Measuring and understanding your AOV KPI can be beneficial for improving your business and tracking its development. It is good to know that your business has a large number of orders, huge revenues, and a large number of customers. Depending on what you sell, it can still be a bit unpleasant to discover that your sales could have grown from 5% to 30% in the last year. But they didn't.
This indicates that AOV is primarily a preventive metric.
In this blog, we will go through all the important things to understand the AOV and how to calculate it. Then we will write about the factors that affect the AOV, including those we can control and those we can not. There will also be real-life stories and examples, as well as everyday challenges you may face in increasing AOV.
What is AOV and how do you calculate it?
The AOV is the average value of an order that a customer spends when they place an order. As mentioned earlier, to calculate AOV, all you need to know is your total revenue and the total number of customers. AOV is calculated by a simple mathematical operation of dividing the revenue by the total number of orders. AOV is an important metric that provides us with sound insights into our customers' behavior and how we can increase the size of their shopping cart with each purchase.
However, AOV is not completely independent, so it would be best to track it along with other metrics, such as:
- Conversion rate: The conversion rate is calculated as the number of conversions divided by the total number of visitors. Therefore, businesses must strike a balance between striving for a higher AOV and the need to maintain a healthy conversion rate. With this approach, companies can optimize both metrics and achieve sustainable growth.
- Revenue per Visitor: Revenue per visitor (RPV) is a valuable metric that indicates how much revenue each customer generates during a website visit. This measurement is critical for assessing the effectiveness of a company's online strategy and can provide insight into areas where optimization is needed. Therefore, monitoring and improving RPV is critical for companies seeking sustainable revenue growth.
Why is AOV an important metric?
Knowing your AOV in your business is important for several reasons related to the profitability of your marketing campaigns, average customer value, and overall direction of your business development.
The real value of AOV lies in its ability to significantly determine the direction of your business.
For example, if you have a stable business and need to determine its future, adding more traffic may not be critical if your traffic is satisfactory. Instead, if you understand your AOV, you can focus on adding value to that traffic.
The biggest strength of AOV is that it is based on people who already want to spend money. They have the money in their pockets, and we can bet that if we do a good job with them, they'll be willing to spend even more.
Industry differences at AOV
AOV is directly related to the type of business and the price range of the products or services we sell.
Therefore, measuring AOV for a large e-commerce shop that sells cheaper products is not the same as measuring AOV for a smaller shop that sells high-tech goods. Similarly, a shop that deals in consumer goods and has an extremely consumer-oriented policy and a shop that sells prefabricated houses.
Factors affecting AOV
The factors that can affect AOV can first be divided into two groups: those that we can influence and thus increase sales, and those that we unfortunately cannot influence.
For the second group, we may need a bit of luck.
Factors that can be changed to increase AOV.
Some of the factors that can be adjusted to increase AOV are:
Product bundling: If you want the customer to spend more and increase the value of their cart, you should focus on the item they were interested in and add something related to that item.
Example: If your shop specializes in selling camping tents, the latest stove would be a great package to go with that tent. The goal is to create an all-in-one solution. If you're technically capable, you can also offer the ability to build packages from customers.
Upselling and cross-selling: People often don't know the difference between these two terms, and the main thing is that upselling means giving them a better, but more expensive offer. Cross-selling is a technique used to suggest additional purchases in the form of a similar or additional item that is closely related to the main item.
Example: Let's say you sell cars. Upselling would be offering a newer, more powerful engine instead of a base engine. Cross-selling would be the additional purchase of ski racks, bicycles, or roof racks.
Discounts and promotions: A very simple method to increase AOV. They're easy to implement and get good results. It can also be a volume discount.
Example: per $100 you get a 10% discount, or if you buy three of these products you save 30%.
Free shipping: The advantage of free shipping can be used in several ways. It's a strong psychological factor and often crucial for confirming a purchase.
Example: Free shipping can be offered as a reward for exceeding the minimum value in the shopping cart.
Gifts: A good way to increase AOV is also gifts. They are tangible, and their value is often perceived as more valuable than telling the customer that they have saved a few euros.
Example: simply motivate them with the message that they will receive a gift if they spend an additional $15. The icing on the cake would be the ability to choose from multiple types or variations of gifts.
Loyalty Programs: Loyalty programs are one of the most direct tactics to increase AOV because they relate directly to your repeat customers. Try to create short-term (gifts, discounts...) and long-term (annual raffles, access to special offers) loyalty programs.
Example: Make sure that your customers can collect points, and for 100 points they will receive $5. We are sure that this will be beneficial for them.
Personalization: Personalization is the most neglected method of AOV customization. This is the process of tracking the specific needs and behaviors of your customers. It is a tedious job to analyze a huge amount of data. Excellent personalization is the best tactic to increase AOV. The advantage of personalization guarantees the most sustainable results.
Referral programs: Referral programs combine two directions of action in increasing AOV. Let us say you allow any user of your brand to give someone a $50 code, and they receive the same coupon. We are sure there will be no shortage of customers willing to participate.
Factors related to AOV that are beyond our control
Factors related to AOV that are out of our control usually result in a decrease in AOV. However, the good news is that we can anticipate most of these factors and somehow offset the decline in AOV.
Consumer behavior: Consumer behavior can be influenced by external factors such as economic conditions, cultural norms, and social trends, which can affect willingness to spend more per order.
Seasonality: Seasonal changes in demand and consumer behavior can lead to fluctuations in AOV, such as higher AOV during vacation shopping periods.
Competition: Price and promotion competition can affect AOV, as customers may buy from competitors with lower prices or better offers.
Market saturation: Market saturation or high levels of competition within a particular industry can make it difficult to increase AOV, as customers may have many options to choose from.
Price sensitivity: Some customers may be more price-sensitive than others and less willing to spend more per order.
Real-world examples of companies that have increased their AOV include
Casper, an online mattress store, is a good example of how a guarantee can be used to our advantage.
When it comes to warranties, it's important to use them in a way that turns them to our advantage.
Let's take a look at how Casper has done this.
First, they point out that the body needs 30 days to get used to a new mattress. As a company that makes and sells mattresses, it's credible to claim this. Then they give you 100 nights to try the mattress for free. If it turns out not to meet your expectations, you get your money back and the mattress is donated to those in need. They even announced that they'd pick up the mattress. You don't have to worry about putting the mattress back in the box.
This is a great example of a guarantee that greatly improves the AOV.
You don't have to worry about anything and the only decision is whether you're satisfied or not. The value of the guarantee increases the decision that the returned mattresses will be donated. This sentence helps people understand that the seller doesn't necessarily lose anything by offering a guarantee. It also puts more pressure on you because you don't want to be rude to someone so generous.
An example of Salesforce shows us one of the most successful SaaS examples of proper upselling, with its price list and "most popular" tactics.
First of all, we noticed that there is no difference between the box selling the $25 monthly plan and the $300 plan. This is a psychological tactic to reduce the difference between cheaper and more expensive programs.
The second interesting item in the price list is the "MOST POPULAR" label they cleverly placed on the Enterprise plan, which has a $150 monthly subscription.
As I was looking for an example for this blog, I too eventually forgot why I was there and began to understand why this model was the most popular. The differences are listed right below the prices.
Another psychological trick Salesforce uses is labeling the second most expensive program as "Most Popular". The difference between the Enterprise and Unlimited programs is there, and combined with the "Most Popular" label, it gives the Enterprise model a sense of credibility and marketability.
In later research, I found that many SaaS companies use similar models, but the ease with which Salesforce did it is phenomenal.
Common challenges in increasing AOV and how to overcome them
While increasing AOV is a great way to increase your revenue, it doesn't mean that everything will go smoothly and that challenges won't arise. Challenges can come from industry-specific factors or your customers' preferences. They can also be caused by the emergence of new trends.
Challenges in increasing AOV are the main reason why this metric is measured continuously and at shorter intervals.
We have identified the most common challenges and briefly explained how to overcome them.
Customer resistance to upselling:
Increasing average order value can be challenging due to customer resistance to upselling. This resistance can come from aggressive tactics that pressure or annoy the customer and lead to a negative experience. To overcome this challenge, companies must focus on delivering value and offering upsells that truly enhance the customer experience. By suggesting complementary products that are useful or enjoyable to the customer, companies can increase the effectiveness of their upsell strategies and promote a positive customer experience.
Choosing the right products for bundling:
Selecting the ideal products for bundling is a challenge when trying to increase average order value. While bundling can indeed increase AOV, companies need to ensure that the products included complement each other and provide real value to the customer. One potential solution to this challenge is to use data from customers' purchase histories to identify frequently paired products and use these insights to design product bundles that resonate with the target audience. Using this approach, companies can make tailored product recommendations that increase AOV while improving customer satisfaction.
Establishing effective discount thresholds:
One hurdle for companies looking to increase average order value is setting appropriate discount thresholds. Although offering discounts can entice customers to spend more money, companies need to ensure that discounts are structured in a financially viable manner. To overcome this challenge, data analytics can be used to determine the ideal discount thresholds that will most effectively increase AOV without impacting profitability.
With this approach, companies can develop targeted discount strategies that motivate customers to spend more while protecting profits.
Free shipping without sacrificing profitability:
While free shipping can be an effective tactic to increase average order value, it is challenging for companies to do so without impacting profitability. To overcome this challenge, companies can employ a variety of strategies, such as setting a minimum order value for free shipping or integrating free shipping into a customer loyalty program. In addition, streamlining shipping and fulfillment processes can reduce shipping costs and improve profitability. By employing these tactics, companies can take advantage of free shipping while maintaining financial stability.
Key findings related to AOV
AOV is an important metric for your company to strive to increase. It simply shows whether you're maximizing your opportunities.
Calculating AOV doesn't require much. Just divide the total revenue by the number of orders. It's very simple.
Determine the optimal AOV for your business. Classify your customers and determine the advantages you could take over the competition.
When creating a plan to increase AOV, look at your competition to make sure you haven't forgotten anything.
Remember to change one thing at a time over some time so you can track what specifically impacts and increases AOV.
And finally, you can enjoy seeing how the average value of your orders increases.
Average Order Value FAQ
What is the KPI for average order value?
Average order value (AOV) is an important KPI that measures the average amount of money customers spend per order within a given period. This metric is calculated by dividing total sales by the total number of orders and analyzing it can provide valuable insights into customer spending habits. By focusing on increasing AOV, companies can improve revenue and allocate resources more effectively. Therefore, AOV KPI is an important tool for companies looking to optimize their sales strategies and achieve long-term growth.
How to measure AOV?
To measure average order value (AOV), you need to divide total revenue by the total number of orders in a given period. Here's an example:
Suppose a company generates a total revenue of $10,000 from 200 orders in a month. To calculate the AOV, you need to divide the total revenue by the total number of orders:
$10,000 ÷ 200 = $50
The AOV for this company for this month is $50, which means that each order from a customer brings the company an average of $50 in revenue.
Example of AOV?
Here is an example of how to calculate average order value (AOV):
Suppose an online clothing store generates $30,000 in revenue from 500 orders in a month. To calculate AOV, you would divide the total sales by the total number of orders:
$30,000 ÷ 500 = $60
The AOV for this online store this month is $60. This means that each order placed by a customer brought the store an average of $60 in revenue.
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