Analytics and Intelligence have rendered businesses today the ‘curse of knowledge.’ There are too many metrics that one can track and evaluate. There are too many numbers that could mean a hundred different things. Here is the one metric that is bound to be evaluated when strategizing for growth – Average Order Value.
What is the definition of Average Order Value?
Average Order Value or AOV is the average value of an order for a business. It means that an average customer spends x dollars per order.
How do I calculate my Average Order Value?
Your Average Order Value = Your Total Revenue / Number of Orders
This can also include the multiple purchases made by the customer.
Why should I optimize the Average Order Value?
There can be many metrics that indicate a growth in revenue and sales. However, an increase in the Average Order Value of the business is a key performance indicator (KPI) for its revenue growth.
There are several reasons why Average Order Value must be tracked and increased effectiveness. Here are a few of them:
- Increasing ROI and ROAS: Increasing the Average Order Value directly increases the Return on Investment (ROI) and Return on Ad Spend (ROAS). Increasing AOV lowers the cost per order and, thereby, is more cost-effective for the business.
- Pricing strategy: AOV poses essential questions in regard to one’s pricing and marketing strategies. If your AOV is not increasing, it may be time to rethink what you’re doing.
- LTV and Cost per conversion: LTV or Lifetime value denotes the value of each customer throughout their lifetime. Average Order Value can help us derive the customer’s lifetime value like so:
Customer Lifetime Value = AOV X Average Customer Lifespan X Average Purchase Frequency
How do you calculate the average customer lifetime value?
Average Customer Lifespan is a complex metric to calculate. There can be a lesser scope for precision while calculating the Average Customer Lifespan for your business. It denotes the average time span of the product’s association with the customer, after which the customer might go inactive.
Average Customer Lifespan = 1/Churn Rate
The churn Rate is the rate (percentage) of customer attrition in a business. It should ideally be less than the retention rate for a business to stay afloat. Different industries have a different understanding of what a churned customer is, and the time frame of their inactivity also differs.
If the LTV is low, the customers may not be making repeat purchases, which is cash burning scenario. The cost per conversion must also be less than the AOV.
How can you increase your Average Order Value?
Now that we have discussed how significant increasing the AOV is, let’s dive into how you can increase it.
- Product Recommendations: Product Recommendations can help you upsell and cross-sell. This is the simplest way to increase the Average Order Value. Businesses integrate product recommendations through algorithms that enable the customer to see related products or products that were frequently brought together. Product Recommendations are based on a customer’s past purchases and browsing behavior.
- Increasing Average Basket Value: Average Basket Value is the number of items bought per order (or transaction) multiplied by the average product price. A higher average basket value is associated with a higher average sale price. A higher average sale price is associated with a higher AOV.
- Upselling and cross-selling: Upselling means selling the upgraded version of the product, and cross-selling means selling related products.
- Engaging with customers: Acquiring customers is expensive, and seeing them inactive after their first purchase must raise a fire under your chair. Engaging with customers via omnichannel messaging and social media branding is quite instrumental in driving sales growth. It helps in retaining customers and having them make repeat orders with your platform.
Some other ways of increasing AOV are personalization, omnichannel presence, loyalty programs, package deals, discounts beyond minimum value, and, most importantly, retention marketing.
AOV, or Average Order Value, is a pertinent metric because it goes on to impact many other metrics such as customer loyalty rate, retention rate, customer lifetime value, etc. Over years of growth, it is expected for a business to have an increasing AOV as well. Not only is it statistically significant, but also an important factor in building trust over time. You must make the most of the traffic, your acquired customers, and your platform in making conversion efforts at all points.