Average Order Value (AOV)
Customers who enrolled in loyalty programs tend to have higher AOV due to incentives like bonus points and exclusive offers.
These are just a few examples. The world of AOV is full of fascinating insights and statistics that help businesses scale growth. So, let’s start with the basics.
What is AOV?
An average order value (AOV) is one of the key metrics you can use to track the average amount spent by your customers per order. It shows how much revenue your business generates from each individual transaction.
When you start monitoring and analyzing your AOV regularly, you can gain valuable insights into your customer’s behavior and optimize your business strategies for increased revenue and profitability as well.
How to calculate AOV (Average Order Value)?
The formula used to calculate the average order value is:
For calculating AOV, you need to gather two pieces of information.
First is the total amount you have earned from the sales that happened within a specific timeframe, i.e., day, week, month, or year.
Second, the total number of orders placed during the same time frame.
Average order value helps to track the average dollar amount each time your customer places an order. You need to keep in mind to use the sales per order rather than sales per customer, as one customer might come back for repeated orders.
A higher AOV would indicate that your customers are spending more per order, on average.
For the last month, your company had generated a total revenue of $10,000 and had received a total of 200 orders. So AOV would be
AOV = (10,000 / 200) = $50.
It means that, on average, a customer spent $50 per order last month.
Tips for calculating AOV
Right time frame
You should decide the timeframe for calculating your AOV based on what makes sense for your business. It is suggested that you keep a consistent time frame throughout for better tracking.
You can calculate your AOV based on different segments of customers, like new, returning, geographical location, etc. This would help you to get more detailed information about your customer’s buying behavior.
Set AOV goals
Once you grab detailed information about your AOV and customers, you can set a monthly or yearly goal for your AOV to improve it over time. This would help you to implement marketing strategies to increase your average order value.
Why should you track AOV (Average Order Value)?
So let’s look at the benefits of consistent AOV monitoring.
Measuring Revenue Efficiency
AOV gives you details about the revenue your business has generated per order. When you get a higher AOV, it means that you are extracting more value from each customer interaction. This allows you to assess the efficiency of your marketing and sales efforts.
Better Pricing and Promotions
AOV helps you understand your pricing strategies. You can analyze how your price change would affect AOV. You can identify price points that would encourage larger cart sizes without deterring your customers. Accordingly, you can design and alter your marketing promotions and incentives.
Identifying Customer Behavior
AOV gives detailed information about your customer’s behavior. When you consistently get a high AOV, that would indicate that you have a loyal customer base. As they value your product, they are most likely to spend more. Conversely, a lower AOV indicates that you might have to tweak your online marketing and sales strategies.
This benefit needs a section of its own. So we have captured it below.
An increase in AOV directly indicates higher profitability. It indicates that the cost of customer acquisition per order reduces and minimizes fixed expenses like order processing and fulfillment.
Benchmarking and Competitiveness
Once you start tracking your AOV, you can benchmark your performance as per your competitors and the industry averages. With this process, you start analyzing your competitive landscape and identify your areas of improvement.
How to Analyse Customer Behavior with AOV?
AOV offers great insights into customer behavior that you can use to strategize and boost your business. Let’s look at a few common ones.
Identifying Spending Patterns
- High AOV suggests customers are comfortable spending more, while low AOV indicates a budget-conscious clientele.
- Compare AOV for different product categories. Customers might splurge on luxury items but be frugal with everyday essentials.
- Track AOV throughout the year to see how it fluctuates during holidays, sales seasons, or special promotions.
Understanding Customer Segments:
- New customers may have lower AOV as they explore your offerings while returning customers might spend more with increased trust and familiarity.
- Analyze AOV based on customer demographics (age, location, income) and browsing/purchase history to identify spending patterns and tailor marketing efforts accordingly.
Evaluating Marketing Effectiveness:
- Compare AOV for different marketing campaigns to gauge their effectiveness in attracting high-value customers.
- Track AOV for different traffic sources (website, social media, email) to see which channels generate higher-spending customers.
- Monitor AOV during promotional periods to see if discounts attract new customers or simply incentivize existing ones to spend more.
Optimizing Your Business:
- Use AOV insights to adjust product pricing and develop attractive bundle deals that cater to different customer segments and spending habits.
- Recommend products based on historical AOV and individual customer behavior to encourage higher basket value.
- Set free shipping thresholds strategically based on your average AOV to incentivize customers to spend just a bit more and qualify for the benefit.
How to improve Average Order Value (AOV)?
There are a bunch of strategies that can increase your AOV. It is about getting your customers to grab more than planned. The strategies can differ based on your niche.
Here are a few strategies that you can implement in your marketing strategies.
Upselling & cross-selling
You should train your sales teams to identify opportunities to recommend additional products or higher versions based on the customers’ needs and purchase history.
You can provide personalized recommendations as well.
You can offer subscription plans to your customers for recurring orders for your product or services. With this strategy, you can predict your revenue and encourage long-term customer commitment.
You can provide discounted rates for bigger plans like for premium or enterprise plans. This plan would help attract bigger companies and agencies.
Targeted promotions and campaigns
You can design targeted campaigns for different customer segments. The campaign can be personalized based on their specific needs and desires. You can use cold email software for running automated email sequences.
Content marketing and thought leadership
You can try to establish yourself as an industry expert by creating informative content, webinars, or case studies that showcase your product’s capabilities and address your customer’s pain points.
Personalization and recommendations
With this strategy, you can utilize customer data to personalize product recommendations to your visitors.
You can also showcase personalized messages on your website through chatbots. This would increase the relevance of your product and encourage larger purchases.
A/B testing and data analysis
You should continuously test different strategies and keep a check on which one performs the best and how it is impacting your AOV. Adjust your strategy accordingly.
Customer Support and Relationship Building
Excellent customer support and regular engagements help to build trust, encouraging your customers to invest more in your product and service.
Free Shipping Thresholds
You could try setting a minimum purchase amount to qualify for free shipping. This might encourage your customers to add more items to their carts so that they meet this threshold. This always works.
Cart Value Promotions
You could try promotions or offers designed to increase your cart value. Like Extra 10% on orders above $500. Such offers push customers from buying stuff they need to buy stuff they want.
Remember, your average order value is just one piece of the puzzle. Its needs to be combined with other key data points like customer demographics, purchase history, LTV and website behavior to gain a detailed understanding of your customers and their behavior.
By regularly analyzing and interpreting AOV, you can refine your sales and marketing strategies, and ultimately boost your top and bottom line.
So, keep your eye on that AOV, and watch your revenue scale