As you progress in your ecommerce selling finished products to your markets, you’ll encounter the concept of Average Order Value or AOV. What is AOV and how is the AOV formula calculated?
Average Order Value, as an important metric for figuring revenue as well as profits, is defined as the result obtained when total revenue is divided by the number of customer orders over a period of time.
The Average Order Value formula therefore, can be broken down as AOV = Revenue Orders.
While AOV is determined by using sales per orders – not sales per customers - The average order per customer formula, or rather, number of orders ,can be calculated for whichever period of time desired: a month\or better yet, daily. This flexible formula is useful for determining the buying habits of specific customers:
Average Order Value calculation, then, is a flexible metric used in determining both revenue and profit. It’s not just about the number of customers to your store or website, but whether these numbers translate into actual sales.
Because the AOV metric is one of the metrics used to track and understand revenue and profit growth for your business, knowing your actual AOV is one of the first steps necessary to improve your revenues and ultimately, your profits.
AOV is how you can offset the customer acquisition costs to reduce the payback period, increasing ROI. Using those formulas, you can then accelerate the path to becoming more profitable or choose to put more money into advertising and product development.
Using the Average Order Value calculator is in context with the following terminology:
- Mean: average value of all orders, or commonly termed “Average Order Value”
- Median: the middle value of all orders
- Mode: the most frequently-occurring order value
Ordoro’s inventory management software can help you take the guesswork out of calculating AOV by generating the data and analytics to help you manage revenues and, especially, profits.
The usual AOV meaning is one which measures the average dollar amount that is spent each time a customer places an order on your website, using the formula described above. AOV is one sure way to determine whether your bottom line is growing or whether sales are stagnant and visitors to your store or site are simply browsing, as it tracks your customers’ spending habits on your online store. Remember, if higher revenue isn’t increasing your bottom-line profits, it hasn’t created lasting improvement for your ecommerce business.
From an AOV meaning marketing viewpoint, increasing the AOV (instead of simply trying to woo new customers to your website through paid advertising traffic) is a better way to boost sales revenues. Remember, too, that there are transaction costs associated with each customer order, so increasing AOV is a great way to drive direct revenue and increase profits when customers are already buying from you.
So, Order Value meaning is the tracking of the average dollar amount spent each time a customer orders from your website and is part of one of the most critical factors in determining whether your ecommerce business is profitable or not. It’s by no means the only important metric involved in determining profits and boosting revenues, but it’s probably the most important.
Your AOV ecommerce can be improved with tactics such as cross-selling (“Why not add some socks to the athletic shoes you ordered”), upselling (“How would you like this pair of shoes for only $10 more than the ones in your cart?”), free shipping (for higher minimum purchase), volume discounts (“this towel is only $9 but if you buy 3 or more you’ll save 25%”), coupons (“Get $10 off your next purchase when you spend $50!”), Return policy (“Returns accepted if not completely satisfied.”) More tips and strategies for increasing revenue and AOV are discussed further below.
Why is Average Order Value important? It’s a very important metric as it gives a window into your customers’ purchasing behavior, which can in turn be used to improve your pricing and marketing strategies. When you improve your AOV on your website you make a positive impact on your sales margins and profits, as well as giving you the insights critical to understanding the behaviors and buying habits, and patterns of your customer base.
Here’s an example using the above formula:
You sell 10 “thingamabobs” to Mr. Valued Customer during the month of October. If four of those thingamabobs were a different price from the other six, say, $20 and 2 were $30, your AOV would be $26.
It would also tell you that Mr. Valued Customer 1) Likes having to buy choices and, 2) Those choices are weighed to favor lower prices. This useful information can help you tailor future advertising and targeted offers to Mr. Valued Customer’s preferences, increasing the likelihood of future sales. So, knowing the AOV for your customers is critical in reducing advertising costs by getting more “bang for your buck” in advertising dollars, while increasing revenues from more effective marketing, instead of just trying to entice new customers (of course, there’s nothing wrong finding new customers!)
Dividing your customers into segments based on spending habits, such as Low, Medium, and High can be taken a step further with AOV. Knowing the AOV helps you target advertising to the right market segment, so you get the most out of your advertising dollars.
Did you know that having ecommerce software from Ordcoro can actually help boost your sales as well as your AOV? Having access to inventory, fulfillment, and analytics features can help you stay on top of your customers’ spending habits by identifying browsers from buying customers.
It goes without saying that the better your AOV numbers, the more profitable your business will be.
Here are several proven suggestions about how to increase Average Order Value:
- Increase the average order size, either through savvy marketing strategies or direct incentives, such as “buy one, get one free” offers.
- Cross-sell complimentary products or services every possible chance. Consider offering bundled items that are related.
- Track your conversion rate, which in ecommerce terms, means customers going through the checkout. Conversion rate equals the number of checkouts of unique visitors. Optimizing your conversion rate means converting more visitors into paying repeat customers.
If you want to learn how to increase the number of orders, start with segmenting customers into multiple groups based on buying histories. Most businesses divide customers into three groups: High, Medium, and Low spenders. Once broken up into respective groups, the business can tailor advertising to complement their buying habits: frequent buyers, as well as high spenders, could be placed into a loyalty program that rewards each subsequent purchase. Low-spending customers can be enticed into spending more with cross-sells (see above) as well as special offers.
One factor in order to increase is your brand’s recognition, and the best way to do this is to communicate with your customers. Whether through blogs, newsletters, emails or other means, you will need to dig into their buying habits and what influences buying decisions by asking customers the following questions:
- What are they looking for?
- How can your product or service meet those needs/ wants?
Finally, consider adding upselling, cross-selling, and bundling additional items to raise AOV.
If you’re worried by the idea of additional demands on your inventory management, Ordoro can help with inventory management of bundled and kitted items, through initial purchase order down to the final customer order fulfillment. Using Ordoro’s ecommerce management software has you covered for all functions from inventory through final delivery, with interfacing with multi-carriers and multichannel selling in between.
Here’s another Average Order Value example: your online store’s sales for October were $31,000 with 1,000 total orders. $31,000 divided by 1000 = $31, giving you an October AOV of 31.
Any discussion of AOV business considerations should include the importance of the conversion rate in Average Order Value ecommerce. A successful conversion rate usually carries a price tag, however, along with the rest of the AOV factors. Cost per conversion is a metric denoting the cost of getting a customer to convert, and which needs to be subtracted from the Average Order Value to show the actual profit.
Finally, there’s the lifetime revenue per visitor – another important metric, the total value of each customer, noting the average amount ordered over time. If the figures are too low, that customer isn’t making repeat purchases, which also means you’re getting a reduced return on all advertising investments.
Think about what else is affecting your AOV and sales. What’s your competition doing differently to win the minds and hearts (and dollars) of customers? What seems to work for them and what doesn’t?
An excellent way to step up your AOV game is with ecommerce management software from a leader in ecommerce management software: Ordoro.
Ordoro’s ecommerce software allows you to create packages and bundles, as we take care of the back-end functions: helping manage inventory, order processing, fulfillment, shipping, and other tasks. In fact, Ordoro is one of the best platforms you can use for any type of online store.
From the initial startup through scaling, as your business grows, our versatile software and apps allow you to access not just inventory management but multichannel integration, multi-carrier shipping, dropshipping, kitting, picking/packing, and other fulfillment tasks, automation, as well as analytics and reports. Did we mention FREE 30-day onboarding and lifetime support? So what are you waiting for? Schedule your demonstration today and get your ecommerce business on the road to success.