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How to calculate Average Order Value (and why it matters)

The e-commerce industry has come a long way since its inception back in 1989, when Compumarket came on the scene as the first-ever internet-based commerce platform. 

Since then, the industry has exploded. In fact, it’s reported there are roughly 12 – 24 million e-commerce retailers globally— and those numbers show no signs of slowing down. 

Given the stiff competition and incredible market saturation within e-commerce today, smaller online retailers have to seize every opportunity possible to stay competitive. To achieve this, a brand needs to understand its customers’ shopping behaviors, taking an “every single customer is valuable” approach. This makes what customers are buying an equally important factor.

This is where Average Order Value (AOV) comes into play. AOV provides the insights needed for an e-commerce business to make informed decisions about its sales strategy. In this post, we’ll show the power of AOV, why it’s important to measure, and how to calculate it.

What is Average Order Value?

is a significant metric that retailers use to assess how much their customers are spending on average on their web or mobile sites. Typically, this metric is tracked on a monthly basis. 

AOV is a good measure of how well your marketing efforts have performed, such as product pricing initiatives, and how well SKUs are categorized to attract impulse purchases.

Average order value is a essential to online businesses, as they rely on it to track consumers’ buying behaviors and directs how they plan future ecommerce marketing and sales initiatives.

Why is Average Order Value Important?

The average order value is incredibly important for an e-commerce business owner who needs to make informed decisions when developing marketing strategies and pricing. It is a quick benchmark tool to observe a healthy profit margin.

If a brand’s average order value has increased, then its profit margin should too! If profit hasn’t increased, some other good metrics to dig into that tie in with AOV are conversion rate and revenue per visitor for a deeper analysis.

Tracking AOV helps the business owner hone in on individual customers buying behaviors, what they’re purchasing and how much they’re purchasing. It enables the brand to identify various consumer segments by spending amounts. This data can then be used to tailor promotions to incentivize customers to add to their purchases at checkout. 

The AOV also provides insights on an aggregate level, in terms of helping retailers gauge what products by category are most popular or not. Plus, it gives specifications on the success of a promotion and whether a price increase has hit its mark or eroded margins over a specific time period.

How to calculate Average Order Value?

The calculation for AOV is straightforward. The total revenue for the month is divided by the number of orders for that same time period. Although any time frame can be used, the most common is by month.

Actual calculation:

For example: If a retailer assessed $5000 of total revenue for the previous month and there were 200 orders, the average order value would be $25.

The merchant can deduce that a customer spends on average $25 for each purchase at that store.

It’s important to note that if a retailer is using this calculation during peak season or when running a promotion, these numbers can be skewed in terms of finding the “true” average. 

Why? Because peak or promotional periods tend to be overinflated due to the higher demand. So, it might be best to run this calculation for those special time periods separately to get a more accurate sense of what the “normal” AOV is.

4 Methods to Improve Average Order Value

There are various ways to increase the average order value. See below for some non-invasive tactics that customers can’t resist:

1. Incorporate a free shipping threshold

By setting a minimum order value to qualify for to meet that free shipping threshold, this tactic is an absolute no-brainer.

2.  Cross-selling

There’s always a corresponding item to offer, often presented as, “you might also like …”

The matching scarf to that hat, filters to go with that vacuum, or even recommending an additional cosmetic item or items that are a part of a larger launch to complete the set.

Bonus tip: That latter option could also be turned into Volume Discounting where a discount is given with a purchase of two or more to get free shipping.  See where we’re going here? (Wink)

3. Upselling

This is a strategy to get the customer to buy a more expensive product option for a few extra dollars. So, it could be $20 more for a newer model or version. It’s all in how you position those words, for just the right item, at just the right moment!

4. Discounts

This is another great tactic to increase AOV and drive repeat purchases at the same time. Discounts can be offered on the next purchase if a customer spends a minimum amount on their current purchase. An example of this would be a customer getting $15 off their next purchase of $75 or more. 

The retailer would need to do an analysis on the best thresholds to set for a minimum purchase amount to ensure they’re protecting profit margins.

So, there you have it! We’ve covered what AOV is, why it’s essential to an e-commerce business, and actionable marketing strategies you can take away to improve current tactics. Like we’ve said before, the year 2023 is all about retaining customers. for success in a competitive market. Consistently checking the average order value is one sure way to help improve profit, and if strategized just right, can also drive repeat purchases.

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