One of the most critical metrics for a business is average order value or AOV. This article will serve as a beginner’s guide to this metric and how it can be used to measure the success of your store. It includes definitions of AOV and what it means, as well as tips on how you can increase your own AOV so that you see more revenue from your store.
What is Average Order Value (AOV)
The average order value (AOV) is the total revenue generated from a single transaction. It’s also known as customer lifetime value, which measures how much profit you get from an individual customer over time. The higher your AOV, the more profit you’ll make.
AOV is a metric used to measure how much money your customers spend on each transaction. It is displayed as a numerical value of the average amount of money a person consumes per order.
What Does AOV Signify?
A high AOV signifies that you have many loyal and frequent buyers, which in turn means that it is likely that your customers are satisfied with your product and service. If this is the case, then it is expected that they will be back to purchase again in the future.
Conversely, a low AOV signifies that many of your customers are buying a single item from you at a time, which often means that these people are likely not loyal customers who return often.
What Factors Influence AOV?
Many different factors influence AOV. Some of the more important ones include:
- The value of the items you sell
- The price you charge for each item
- How competitive your pricing is compared to your competitors
How to Calculate Average Order Value (AOV)
Average Order Value (AOV) can be calculated by taking the total amount of money your customers spend on an order and dividing it by the number of orders you received.
So, if a customer buys $100 worth of items with you and is the only purchaser in their order, then the AOV would be $100. But, if they were to purchase more than one item with you, say two for $50 each, then the AOV would be lower at $75 ($150 divided by 2).
If, however, their purchases totaled $200 with one purchase of four items, then your AOV would be higher at $66.67 ($200 divided by 1).
5 Benefits of Increasing Average Order Value (AOV)
Almost every business wants to increase its average order value. It’s a valuable metric calculated by adding the total revenue from each sale and dividing it by the number of sales.
1. Increased Profits
Of course, the main reason to increase your average order value is to make more money. You can earn higher profits by increasing how much a customer spends on each purchase. An AOV increase will allow you to take home a more significant piece of the pie and bring in an enormous profit. For example, if you earn $100 per sale at an AOV of $20, your total revenue would be $500. However, if you instead increased that AOV to $30 and made two sales rather than one, your total income would be $600–an extra $100 for your business.
2. Fewer Refunds Resulting From Mistakes
It is essential to ensure that you handle your returns and refunds correctly to retain customers and keep them coming back. When a customer makes an order and their card is declined, they may get frustrated and request a refund (and you need to provide one.). If the AOV of your products is low, this could result in many refunds–which means more money out of your pocket.
To avoid this issue: If a customer’s payment is declined while purchasing something from you, offer them other options for paying, such as PayPal or Google Wallet, so they don’t feel like they have to leave your store.
3. Better Prices through Lower Costs
When you increase your average order value, it also increases the percentage of each sale that goes towards your profit. This means that by increasing your AOV, you can also offer your products at a lower price point while still earning more money. Moreover, with this method, you can attract new customers looking for better deals and discounts on the products they want.
A great way to do this is through bundles or special offers. For example, you can offer special deals like 3 for $20, 10% off any order over $50, or free shipping if the customer spends over $25. Offering these types of deals will help you increase your AOV even further–and allow you to provide even better prices to keep them coming back.
Many e-commerce retailers increase the AOV of their products by giving out promotional codes or coupon codes to their social media followers and people who subscribe to their newsletters. This can help you grow your following on social media and get more people signed up for your newsletter. As a result, your brand can become more recognizable, which will drive higher profits down the road.
5. Better Reputation among Other Sellers
When other businesses see that you can increase your AOV, they may be inclined to work with you or partner with you to reach similar numbers. If these connections then turn into sales for them, this is also another way that increasing your average order value can benefit your entire e-commerce community. When it seems like everyone is profiting, it can be a great motivator to join in on the success.
Upselling vs. Cross-selling
When was the last time you were at a store, and they asked if you wanted to buy something else? After purchasing some new shoes or getting your car washed, it may have been after purchasing some new shoes. These are both examples of upselling. Upselling is when a company tries to sell their customer an additional product that goes with what they just bought. If the customer agrees, it is considered successful because it creates more profit for the business and satisfies them.
On the other hand, cross-selling is when a company tries to sell its customers an additional product that does not go with what they just bought. For example, A shoe store could offer socks, or a grocery store might offer juice as an add-on item while you shop. These examples show cross-selling because they are trying to sell you an additional product that does not go with what you just bought, and it is optional for the customer to buy.
Cross-selling makes customers feel like a business likes them and wants their repeat business, encouraging people to come back more often and spend money there.
7 Strategies to Increase Average Order Value (AOV)
1. Make Purchasing Easier For Your Customers
One of the easiest and most profitable ways to increase AOV is by making purchasing easier for your customers. For example, if you sell electronic accessories, what can you do to make them convenient for your customers? One way we recommend is by using a drop shipping business model. Dropshipping allows you to eliminate the need to store inventory and offer products from hundreds of different suppliers all at once. This can be especially helpful when selling electronic accessories because there are so many manufacturers and models of each product. By using this method, you will no longer have to worry about having an enormous amount of inventory in your warehouse or dealing with slow and unreliable suppliers.
2. Provide Multiple Payment Options
Including PayPal or Google Wallet as an option for customers during checkout can help customers feel more comfortable buying from you. It reduces the chance of an order being declined and allows for quick processing. If combined with promotional codes or deals (discussed above), this can help increase your AOV even more.
In addition, many companies offer products that are too expensive to pay cash for, and it does not make sense to put them on a credit card. This is where payment options such as consumer financing can help businesses increase AOV.
As discussed above, giving out special promo codes on social media and in newsletters can help your AOV and attract new customers to your brand. When people see that you offer discounts or gifts, they might be inclined to purchase without thinking too hard about it. This will increase not only traffic but also your average order value.
4. Offer Bundled Products
Offering bundles is another way to include multiple items for one price–making your customers feel like they are getting more bang for their buck. You can provide customer-centric bundles to choose the items or make it easy for your customers by offering their preferred products together.
5. Run Holiday Promotions
If you want to increase sales during certain times of the year (when traffic is usually lower), running a special promotion can be a great way to do so. One popular promotion is the “Black Friday sale,” where everything in your store only goes on sale for one day. You don’t have to wait until Black Friday, either–you could run a Thanksgiving sale, Christmas sale, or anything else that would attract new buyers. It’s important to note that people typically participate in these types of deals because they know that they will only be around for a limited time, so it’s also a good idea to make sure that you don’t run deals for too long.
Increasing your average order value can be done in several different ways. Try out some of these ideas and see which ones work best for your brand. In no time, you should notice an increase in your AOV–as well as more profits from each sale.
6. Combine Orders from Repeat Customers Together
Suppose you notice many of your returning customers are purchasing more than one item at a time. In that case, it’s best not to ship their orders separately as this can be inconvenient for them and slow down your shipping process (this will be especially true if some of those items aren’t in stock). Instead, we recommend combining all or some of those orders into one shipment. This will make things much easier for your returning customers, and they’ll probably appreciate getting free shipping as well. Depending on how much each customer spends, you might even be able to provide them with free shipping by doing this.
7. Segment Your Product Line
If you sell various products, it’s best not to put all your eggs in one basket when increasing AOV. Instead, consider segmenting your product line into separate sections (i.e., auto accessories, cell phone accessories, etc.). This can make it easier for customers to find what they are looking for and help them discover related items that might appeal to them. Another strategy you can use is to offer bundles or combinations of your products. For example, if you sell Bluetooth devices and speakers, consider bundling these two items together and offering a discount on the total package price.
So, if your average order value is low, several things can be done to increase it. For example, you can offer discounts or free shipping for purchases that contain more than one item, as well as a loyalty program that rewards your customers for buying from you. By increasing your AOV, you will be able to generate more revenue from each of your transactions and see the overall growth of the business.