AOV, or average order value, is an essential metric that can give you valuable insights into your customers' purchasing behavior. AOV is the average amount of money a customer spends per transaction.
Understanding your AOV can help you make informed decisions about pricing, promotions, and product offerings to increase revenue. It also helps you identify opportunities to upsell or cross-sell products to customers. With AOV, you'll have a deeper understanding of your customer's purchase patterns, which can help you make strategic decisions to boost profitability.
How do you calculate the average order value?
The formula for calculating AOV is straightforward:
AOV = total revenue ÷ number of orders
This AOV formula emphasizes sales per order rather than sales per customer. Even if a customer makes multiple purchases, each order contributes individually to the AOV.
For instance, imagine an online retailer that offers three styles of shirts at $15, $21, and $29. Their AOV is $19, which reveals that their customers prefer the two lower-priced items. This insight gives the retailer an opportunity to refine their marketing and/or pricing strategy. Maybe they won’t offer that higher-end shirt anymore, or they’ll advertise it differently.
Using an AOV calculator is crucial to your ecommerce growth strategy, and frequent evaluations (preferably daily or weekly) help identify trends. Various factors can account for fluctuations, including new campaigns, buying seasons, or website changes – understanding those trends is vital for making informed decisions that can impact the overall success of the business.
What is a good AOV?
A good AOV isn’t a one-size-fits-all marketplace metric. It varies by industry and business model. You should determine what you consider to be a good AOV based on industry-specific benchmarks, such as individual product values and seasonal highs. The average order value for a car dealership, for example, will be much higher than that of an electronics store.
However, there is a basic rule that all businesses can follow: a good AOV is one that’s better than the last one you calculated, whether that was a year ago or last week.
6 ways to improve average order value
Boosting AOV involves strategic efforts aimed at encouraging customers to spend more in each transaction. Unlike focusing solely on increasing website traffic, improving AOV directly impacts revenue and profits without incurring additional transaction costs. Various methods have proven effective, including:
1. Cross-selling and upselling
Products rarely exist in a vacuum – a customer buying a new phone might also want a case and screen protector. Encouraging customers to add related products to their order during the checkout process is called cross-selling.
You can also try upselling to customers on your product pages, a technique that entices customers to upgrade their purchase to a more expensive option. This is most effective when the price difference is only fractionally higher.
2. Volume discounts
Volume discounts give customers a great reason to spend more money at your store: if they buy enough products, every item in their order is cheaper than they would be individually. Displaying the minimum volume required for the discount while a customer browses your store is a good way to entice them to buy more than they initially planned, increasing your average order value.
3. Free shipping thresholds
When you set a minimum order amount to qualify for free shipping, customers are motivated to add more items to their cart or upgrade their purchase. Be sure to include reminders of this threshold at checkout, especially after providing the calculation of shipping costs.
4. Coupons and temporary discounts
Coupons and temporary discounts on higher-ticket items can create a sense of urgency for customers. For example, you might offer 15% off orders over $400 for the next 12 hours, while advertising popular purchases in that price range with the discount visibly applied. Customers who may have been on the fence about buying a bigger ticket item might jump on the opportunity given the lower price.
5. Payment plans
Payment plans allow customers to make a series of smaller, manageable payments for expensive items over time instead of making a big purchase up front. Phone plans are a common example, where customers pay $10-$15 a month for several years instead of buying a new phone outright. This encourages customers to consider more expensive items than they would normally, removing a major cost barrier.
Increasingly so, ecommerce stores are allowing customers to pay in installments. Apps like Klarna make it simple to manage and track.
6. Launch your own marketplace
According to a recent study Nautical Commerce commissioned with Forrester Consulting, companies that launched marketplaces experienced an average AOV growth of 36% year-over-year. A marketplace allows you to increase your product assortment through third-party sellers, without taking on the inventory risk.