What is the average order value?
The average order value (AOV), an eCommerce metric, tracks the average dollar amount customers spend when they place an order on a website. The AOV is one of the most important metrics within the eCommerce industry.
It can provide insight into customer behavior. An example is a lower average order value, indicating that customers are more likely to place small orders.
AOV trends also influence critical business decisions such as product pricing and marketing. Companies must monitor this metric carefully. Companies should examine their AOV every day or weekly, as e-commerce can be a highly competitive and dynamic industry.
Every e-commerce business strives to increase its average order value. It is believed that an increase in AOV will lead to increased revenue growth. A company can eventually increase its profits.
How do you calculate the average order value?
Simply divide the revenue amount of a period by the total orders placed during that period to calculate the average order value (AOV). It is calculated mathematically using the following formula:
Average order value = revenue / number of orders
The average order value is calculated as the revenue per order and not the revenue per customer.
What is AOV in marketing and pricing strategies?
Understanding the average value trend and its meaning can help online businesses understand their customers and predict how they will shop. This can help businesses decide on pricing, product mix, and promotions. This metric can help businesses raise prices or reduce shipping costs to increase orders.
Low average order values could indicate that customers only buy one product per order. Lower prices could increase sales to make customers feel more comfortable and encourage them to order more. Customers might only purchase certain items at a low price. This is why you would want to sell higher-priced products.
Metrics for AOV
When evaluating this value, there are other metrics that you need to consider. These metrics are the conversion rates and revenue per visitor. We’ll go into more detail in the next section. These metrics are often used together with AOV to assess the performance of retail businesses and inform strategies to increase AOV.
You might also want to look at the average order value, which is the mean order price. However, you may also be interested in the median (the middle order value after considering all orders) and the mode (i.e., The most common order value. This will give you a better understanding of customer behavior.
These three factors together will help you increase your profit margins. It is important to remember that the average or mean order value is not the only measure worth considering. You and your company can reap the benefits of a more holistic approach.
What is the difference between AOV and conversion rate or revenue per visit?
We have already discussed conversion rate and revenue per visitor. Let’s dive deeper into their meanings and significance. These two metrics are essential and can be used as valuable, insightful complements for the average order value.
The conversion rate is the percentage of users who visit your site and complete a goal. Out of all the users who visit your website, how many complete a transaction? Online retailers need to optimize their conversion rate. This refers to the many techniques used in increasing the conversion rate.
Divide the total number of visitors to your site by the number of conversions. transactions) completed. You might notice an increase in your average order value but a decrease in your conversion rate. This could indicate a severe problem.
Revenue per visit
You may be curious about the difference between revenue per visit and average order value. They seem almost identical. Well, not quite. Revenue per visitor (RPV) refers to the value of each visitor who visits your online store. Your website will receive more qualified traffic if you have a higher revenue per visitor.
The RPV can be calculated by multiplying your total revenue by your site’s visits. This calculation is slightly different from AOV, which is calculated when overall revenue is divided by total orders.
Nine ways to increase your average order value in eCommerce
While it’s excellent to calculate average order value, and other key metrics, as a businessperson, you need to know how to improve it. Online retail businesses are concerned about increasing their AOV. There are many ways to achieve this goal.
This section will discuss the best ways to increase this metric. It also includes other essential yardsticks, such as customer acquisition costs, customer retention, lifetime values, purchase history, and gross profit.
Offer free shipping
Consumers are often frustrated by shipping costs. Amazon and other online retailers have made free shipping a key selling point. This has increased consumer expectations. Many consumers will move their business to another online retailer if they don’t receive free shipping if one retailer doesn’t offer it.
A free shipping threshold can help increase AOV and encourage shoppers to spend more on each transaction. Customers will be more inclined to buy more if there is a minimum purchase threshold. Amazon offers free shipping for orders over Prime members, for instance.
Pricing strategy control
Offering great prices is another effective way to increase average order value. A great deal is what consumers love, so they are always looking for ways to save. This will incentivize consumers to spend more when you offer lower prices than your competitors.
Even if your prices are lower than those of your competitors for specific items, customers will be more likely to purchase them in one go. This can increase your average order value.
Cross-selling and upselling
Cross-selling and upselling are two effective ways to increase AOV. Cross-selling and upselling are subtle ways to encourage customers to purchase more expensive products, add-ons, or other complementary products. Cross-selling and upselling are similar to bundling.
However, be careful. These tactics may not deliver the desired results. Customers might become more dependent on them.
Bundling additional products in a deal can help customers buy more, increasing their order value. If customers buy a product and receive complimentary products at a lower price or even free, they will be more likely to add it to their shopping cart.
It is crucial to make sure that the bundled products complement each other. It is unlikely that a customer will buy headphones from you if you offer a discount camping stove. Customers could also be able to design their bundles by choosing the features and add-ons they want.
We have discussed the fact that customers are always looking for great deals and that limited-time offers can be an excellent way to get them to make a purchase. Customers who feel they have to order quickly to get a special offer, such as a discount or a product bundle, are more likely to do so.
Time-limited offers can make consumers feel more urgent. After all, they don’t know how long it will take before another offer like this is offered. However, consumers can become cynical when they use this tactic too often. Diminishing returns can also be a problem.
Loyalty programs have been proven to build long-lasting relationships between customers and retailers. This is vital: If you have regular customers who keep coming back time and again to you, it is a sign that your online company is on the right path. This will help you increase your average order value.
Although customer loyalty programs have a long history, they are still trendy today. They date back to the late 18th century. They are essential in today’s highly competitive online market. They help to reduce customer churn, build solid customer bases and entice customers to purchase more products.
Discounts have been used by online marketers to win and keep customers. Keep in mind the average long term value and be selective in your discount. Too much can lower AOV even though customers purchase more products per transaction. However, prudent discounts can increase this metric.
It is essential to be careful when discounting. You can have too many good things. Excessive volume discounts can lead to unreasonable customer expectations and possibly cause price wars between competitors. However, careful discounting can encourage consumers to increase their total value.
Personalized product suggestions
It is becoming more important to personalize your eCommerce average order experience. Although very few online retailers are Amazon, it is worthwhile to look at the achievements of this industry giant. Amazon has raised the bar for eCommerce by effectively using personalized product recommendations.
Customers have come to expect that when they place an order for a product online, they will be offered related recommendations for similar items. The effectiveness of these recommendations on product pages is proven to increase AOV and encourage additional purchases.
Live chat support
Another effective way to encourage customers to make more significant transactions is through online customer support. The critical question is, how can you provide instant assistance online? Online retailers face this challenge; customers still value the in-store experience, where they get advice and help from specialists and human staff.
Many online retailers offer live chat to replicate this experience. Customers can ask virtual assistants questions about the products they are looking for. This is especially useful for expensive products. This allows retailers to offer customers with doubts the confidence they need to purchase.
In a matter of minutes, you can almost guarantee an increase in your AOV by implementing any or all of these strategies. Your customers are the most critical aspect of this metric, but customer retention is not just about perks and rewards.
Your business should have strong relationships with customers online. You must ensure that your website is accessible to all visitors, potential leads, and paying customers.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.