AOV is a useful metric for looking at your customers’ buying habits. It can help you identify trends, find ways to improve your sales and gauge the success of your efforts.
If you’re an entrepreneur and want to refine your business plan, this guide will tell you everything you need to know to get the most out of this metric. That includes how to calculate your AOV, how to improve it, and some ways to avoid common pitfalls.
What is AOV?
AOV stands for Average Order Value. It’s a business metric that measures how much your customers typically spend per order.
How to calculate AOV
Calculating your AOV is simple. All you need to do is choose a time period and then divide your total revenue by the number of orders. The answer is your AOV.
For example, if last month you made $10,000 in revenue, and had 200 orders, your AOV is $50.
10,000 / 200 = 50
Typically, businesses will calculate their AOV for each month so they can monitor changes, but you can use it to look at any time period.
Why is AOV important?
Knowing your business’s Average Order Value can be useful in many ways. Firstly, it can give you a way to learn about your customers’ buying habits. This can help when you want to gauge the success of your business in many areas, including:
When you’re making changes to these aspects of your business, AOV gives you a simple way to see how they can affect your customers’ purchases.
Secondly, when you use AOV in combination with several other business metrics, it can help you get a more complete picture of the profitability of your business and ways to improve.
How to improve your average order value
If you’ve calculated your Average Order Value and aren’t satisfied with the results, there are a number of ways you can increase it. They include various promotions and marketing strategies that will encourage customers to spend more on every order.
Bundles
One way to encourage customers to place larger orders is to offer them a discounted price when buying multiple items. One example of this is how telecom companies like Bell encourage customers to sign up for phone, internet, and TV packages at the same time.
Businesses that offer subscription-based services can benefit greatly from this, as bundle purchases result in higher recurring fees (as opposed to a one-time purchase). However, it can be a good strategy for practically any business.
So look at your offering for products that you can bundle together. You should look for closely-related products or optional accessories. Customers are often happy to take advantage of the discounts, even as the total price for their order increases.
Threshold-based discounts
Another way to increase your AOV is to offer customers free shipping (or another form of discount) once their order reaches a certain threshold. You’re probably familiar with this if you’ve ever shopped online because it’s very common and used by all types of businesses.
One reason it’s so popular is that it’s effective. When customers see they only need to spend a few dollars more to avoid shipping costs, they’re more likely to spend more time shopping before placing their order.
The right threshold amount will depend on your business, your current AOV, and the cost of shipping your products. If you set it too low, most customers could qualify for free shipping without needing to add to their order.
That means you would have to absorb the shipping costs without getting the benefits of increasing your AOV. But if you set the threshold too high, customers may be less likely to take advantage of the offer.
And if your products are large or heavy and it results in high shipping costs, you should take that into account when choosing your threshold. For some examples of how wide these thresholds can range, Amazon currently has a free shipping threshold of $35, while Hudson’s Bay has a threshold of $99.
Product recommendations
Showing your customers products that are related to their purchase is another method of increasing your AOV. Sites like Amazon and eBay are good examples, as they have links to related products that show at the bottom of the page as customers shop. Many sites also use pop-ups just before customers check out, that show related products that are often purchased at the same time.
This method is effective because it’s like a form of targeted marketing. When a customer is looking at a certain product or already has it in their cart, it gives you information about what that customer is interested in.
By designing your online store to show related products, you get to show off those items to the customers who will be most interested in them. It’s also beneficial for customers because it makes it easier for them to find what they’re looking for and discover new products that they’ll want.
Customer loyalty programs
Many leading companies offer customer loyalty programs, and it’s something you should consider for your business. It can offer several benefits, including increasing your AOV.
By offering your customers points or other bonuses based on the amount they spend, it gives them an incentive to place larger orders. The popularity of the loyalty programs offered by companies like Canadian Tire, Shoppers Drug Mart, and Petro Canada shows that it’s something customers can often get excited about.
But loyalty programs also help by encouraging your customers to keep coming back. And some data suggests that on average per year, those loyal customers spend more than double the amount that new customers do.
This method of increasing your AOV is particularly useful for businesses with consumable products or services that customers need to repurchase frequently.
Business metrics related to AOV
Here are some related e-commerce metrics that it’s a good idea to familiarize yourself with. Using these metrics, along with AOV, can give you more useful data.
Average basket value
This metric (also known as average basket size) measures the average amount of items sold per order. To calculate it, you take the total number of units sold and divide it by the number of orders. When combined with AOV, average basket value can offer a more complete picture of sales trends.
Purchase frequency
Purchase frequency is a metric that shows you the average number of orders placed by each of your customers. It can be calculated by choosing a particular timeframe and then dividing the number of orders by the number of unique customers.
For example, if you had 100 orders and 50 unique customers last month, the purchase frequency is two.
Customer value
Customer value is a measure of how much revenue a customer brings to your business during a specific timeframe. You can calculate customer value by multiplying your AOV by your purchase frequency.
For example, if last month you had an AOV of $50 and a purchase frequency of two, your customer value is $100. Improving your customer value is a key way to boost your overall revenue.
Cost per conversion
Cost Per Conversion (CPC) is a metric that can identify how much it costs you to acquire each customer that makes a purchase.
It is typically used in online advertising and can help when you want to evaluate an ad campaign or marketing strategy. The term “conversion” refers to a visitor who gets attracted to your website and then follows through by placing an order.
To calculate CPC, you take the cost of attracting customers to your website (such as the cost for an ad campaign) and divide it by the number of conversions.
It’s useful to look at your CPC and AOV together. For example, if you subtract your CPC from your AOV, it can help you determine your average profit per order.
Customer lifetime value
Customer Lifetime Value (CLV) is a metric that measures the total profit your business makes from any given customer over the entire course of your relationship. It’s useful to know because it gives insight into how valuable your customers are and how much you should be willing to spend to acquire them.
To calculate your CLV, take your customer value and multiply it by your average customer lifespan (which is the amount of time before customers typically stop making purchases). If you have a new business, you may not have enough data to figure out your average customer lifespan. To get a rough estimate, you can use a lifespan of three years.
The drawbacks of AOV
While AOV is a useful metric for analyzing and improving your business strategies, it also has its drawbacks. Like many business metrics, it can provide an incomplete picture if you fail to take other aspects of your business into account. So here are some of the common mistakes that can happen when using the AOV business metric and how to avoid those issues.
AOV doesn’t account for your costs
Since AOV is based on the number of orders and revenue, it doesn’t take into account your COGS (cost of goods sold). This means it also doesn’t account for the different profit margins of the products you sell. And you can get misleading signs from your AOV as a result.
For example, let’s say you sell two products: a $20 item that costs you $10 and a $50 item that costs you $45. Your profits are higher for every $10 item you sell, and increasing those sales would be beneficial, but your AOV would decline.
So to better understand these metrics, keep an eye on your profits when looking at your AOV. Because you may find that when accounting for your COGS, a declining AOV can be beneficial to your bottom line.
A wide price range can skew your AOV
Another way your AOV can be misleading is if you have products that cover a wide price range. For example, let’s imagine you sell products that range from $1 to $100, and you currently have an AOV of $70.
If just a few customers buy your most inexpensive products, it could cause a steep drop in your AOV. That’s because the wide price range means there can be outliers that significantly change the average.
If you rely on your AOV alone, this drop might look like a drastic change in your customers’ buying habits, when it’s possible that all you’ve done is attract a few new customers.
So if you’re using AOV and have a wide price range, you should keep an eye on your most frequently purchased items and look at the range between your highest and lowest orders. This will help ensure you get a more accurate view of buying trends.
Put your AOV to work
Now you know how to calculate your Average Order Value and some ways you can use it to improve your business. Knowing your AOV can help you analyze your sales, marketing strategies and more. But remember to use AOV in combination with other business metrics to get the most accurate picture.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.