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Ecommerce metrics

Average Order Value (AOV) — Ecommerce metric refresher

Vallabh Daga
October 19, 2020
5
mins read

Key Performance Indicators (KPIs) are the metrics used to measure the performance of a business. Similarly, ecommerce metrics are the KPIs that can help online businesses evaluate their performance, set benchmarks, and take corrective measures to steer the business in the right direction.

In this ecommerce metric refresher, you will learn what is average order value (AOV), how to calculate average order value (AOV), why should businesses calculate average order value (AOV), benefits of increasing average order value (AOV), and the strategies to increase average order value (AOV).

What is average order value (AOV)?

Average order value (AOV) is an ecommerce metric which measures the average amount of money spent each time a customer places an order on your website or on any online channel.

The following illustration shows the average order value (AOV) formula:

AOV formula
Average order value (AOV) formula

Let's see how to calculate average order value (AOV) with an example,

  1. Your total revenue for the month of November was INR 100,000
  2. Your total number of orders in the month of November was 1,000
  3. Based on this data, your average order value (AOV) for the month of November = 100,000/1,000 = INR 100

Note: Average order value (AOV) is calculated based on sales per order, not sales per customer. This means that if a customer comes back to make repetitive purchases, each one would be factored individually.

Why should businesses calculate average order value?

Knowing the average order value allows businesses to analyse consumer behaviour and find out how much money they are willing to shell out to purchase your merchandise.

By learning how much your customers are spending on each order, you can then plan pricing and marketing strategies to improve it.

There are many reasons for businesses to calculate average order value, such as:

  • Understanding purchase patterns and trends of online shoppers
  • Analysing conversion costs and advertising costs
  • Pricing products appropriately
  • Quantifying revenues and profits

Benefits of increasing average order value

  1. Increase revenue and profit: Average order value is directly proportional to revenue and profit; therefore, an increment in average order value (AOV) means an increase in earnings. Typically, you want your average order value (AOV) to be as high as possible. Also, due to various transaction fees in ecommerce, you can make more profits from a single large order as compared to multiple small orders that sum up to the same price.
  2. Better marketing returns: With an increase in average order value, money spent on marketing becomes more viable. For instance, let's assume you spent INR 1,000 on marketing and your average order value (AOV) is INR 2500, you aren't earning much after deducting your production costs, taxes, and overheads. However, as you see a positive change in average order value, money spent on marketing becomes more profitable.

Increasing average order value is one of the most important metrics to track for any retailer. It’s how you can offset customer acquisition costs to reduce your payback period and increase ROI, which means you can accelerate your path to profitability or put more money into advertising and product development.

- Casey Armstrong, CMO at ShipBob

How to increase average order value?

There are various strategies to help improve your average order value, but it is essentially done in one of the two ways:

  • Encouraging your customer to buy more items
  • Convincing your customers to buy expensive items

Strategies to increase average order value

1. Provide product recommendations

There are times when customers land on your website or marketplace with the sole focus of purchasing a specific product. These customers neglect the tendency to browse through your catalog and purchase more products. This leads to smaller cart sizes and lower average order value (AOV).

You can address this by providing recommendations on your product detail page and your checkout page. By analysing in-demand products and grouping products that have been bought together, you can minimise friction before checkout and also improve your average order value (AOV).

Frequently bought together Amazon
Standard example of grouping products which are generally purchased together in the 'Frequently bought together' section on Amazon

Product recommendations on Myntra, an Indian fashion retailer.

2. Set minimum order incentives

You can offer various incentives to customers who are ready to spend a defined minimum amount. These incentives could be free shipping, coupons, samples, or even direct discounts.

For instance, GAP offers free shipping on orders above $50.

Gap shipping incentives
GAP minimum order incentives

3. Build customer loyalty programs

If you're selling merchandise which needs to be repurchased frequently—consider building a loyalty or rewards program.

Loyalty programs are proven and effective customer retention strategies, helping you foster personalised relationships with your customers and caressing their tendency to repurchase.

Loyalty programs can also help increase average order value by granting special privileges to customers willing to spend more. For example, Moda Operandi offers a point-based rewards program giving loyal customers access to special perks and discounts.

Moda operandi rewards

4. Create product kits and bundles

You can use merchandising techniques to create various product kits which would cost lesser than the purchasing every item in the kit individually.

By kitting multiple items together, you can increase the perceived value of a purchase. Frequently used strategies include offering all-in-one solutions for different customer problems.

For instance, Plum has created this 'Round-The-Clock" bundle for customers struggling with treatment of dry skin.

Plum Round the clock kit

Additionally, you can empower your customers to create custom kits along with add-ons or features they wish to have.

For instance, Toesmith has designed a platform where customers can create custom footwear

toesmith custom footwear

Bottom line

Increasing your average order value (AOV) could be the key to long term business health and success. Since average order value is directly related with your revenue and profits, a high average order value (AOV) allows you to generate more income which can then be reinvested into high priority business objectives such as customer acquisition, product development, brand outreach, customer retention, and more.

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