What is Average Order Value (AOV)? Definition, How to Calculate & Essential Tips
November 10, 2021
What is Average Order Value (AOV)?
Average order value indicates the average amount a customer spends every time they place an order. Your company’s AOV is a key performance indicator (KPI) that helps you understand your customers’ purchasing habits. You can track it over any period of time, but many online businesses track the monthly average.
While AOV is an important metric to track, it’s important to remember that your AOV doesn’t always correlate with your sales volume. A high volume of orders during your busiest sales period may bring down your average.
With that said, this article will teach you how to calculate your average order value, other metrics to look at alongside it, and ways eCommerce businesses can optimize its AOV.
How to calculate your AOV
Calculating your AOV is simple.
AOV = Revenue / total number of orders
For example, let’s say your company received 3,000 orders in the last quarter, and those orders brought in $50K in revenue.
AOV = $50,000 revenue / 3,000 total number of orders
AOV = $16.67
Now, let’s look at an entire year’s worth. Let’s say your company received 25K orders over the last year, and those orders brought in $750K in revenue.
In this case: AOV = $750,000 revenue / 25,000 total orders
AOV = $30.00
There could be various reasons for the change from the last quarter to the year—from seasonal changes to your sales and promotions. That’s why it’s also important to consider other key metrics.
Pro-tip: Make sure to align the AOV to the exact time period. If you want to use your revenue from the last quarter, you must also use the number of orders you received over the same time period. Failure to match these will skew your results.
Other key metrics to keep in mind
Since so many things can influence your AOV, such as your sales volume, sales on certain products, seasonal sales, etc., it’s not the best standalone metric.
However, when combined with other metrics, it can help you make business decisions around your marketing efforts, advertising spend, and product pricing. With all of these metrics in mind, you’ll get more context around how your company achieved your AOV. It’ll also guide you in any future marketing plans you take as you seek to improve your AOV.
Lifetime revenue per customer
This refers to the total revenue you can expect to receive from any given customer. It measures the profit you earn from any customer. It’s the most important metric for understanding your consumers. Analyzing customer lifetime revenue provides the following business insight:
- How much you should spend to acquire a customer
- How much you should spend to retain a customer
- How you can price products that bring your business the best value
Cost per conversion
This eCommerce metric refers to the amount of money it costs you in advertising to convert a customer from a web visitor to someone who actually makes a purchase. This is crucial for budgeting advertising costs and determining how cost-effective your past ad campaigns have been. For instance, if you spend $100 on a campaign that nets you ten paying customers, you have a $10 cost per conversion.
This metric refers to the percentage of website visitors who become paying customers. This guides everything from your website design to your offers and your ads. For example, if you have 2 paying customers for every 100 that visit your site, you have a 2% conversion rate.
Revenue per visitor (RPV)
This is a measure of how much money your company earns every time someone visits your website. Divide the total revenue by the total number of visitors to your eCommerce store. Use this to estimate the value of each additional visitor.
Pro-tip: A 2% conversion rate sounds low, but it’s not that bad. It depends on your industry, of course, but the average U.S. eCommerce conversion rate is 2.63%.
Essential eCommerce tips to increase AOV
One of the simplest ways to boost your overall revenue is to increase your average order value. And luckily for you, there are multiple ways to do this. Try using any combination of these and see what it does for your numbers!
- Bundling, upselling, and cross-selling
- Volume discounts
- Free shipping and returns
- Discount codes and coupons
- Offer thresholds
Bundling, upselling, and cross-selling
Data from Shopify suggests that anywhere from 10% to 30% of eCommerce retailer revenue comes from cross-selling and upselling product bundles.
Bundling is a common technique where you suggest a second item to go with the original purchase based on the customer’s order. It’s a highly successful method because it catches them at a time when they’re already in the purchase mindset, and offers additional value at a discount. The value meal at fast-food restaurants is a prime example of bundling. You can buy a side and a drink separately from your entree, but buying the entire combo saves money (and makes the restaurant more money compared to selling you the entree only).
Upselling is based on offering product recommendations for a more expensive version of the same product. Looking for a 55’’ smart TV? You may find recommendations for another TV of the same size, but at a higher price point because it has more features.
Cross-selling is similar to bundling. It bundles related products together (similar to the Amazon example above). For the person buying the adjustable barbells who wants to add to their home gym equipment, it may make sense to also purchase a dumbbell stand and a weight bench.
One way to pull all three of these off successfully is to look at the customer’s purchase history and offer items related to what they’ve already purchased.
Volume discounts, or the “Buy More to Save More,” approach are a great way to encourage people to purchase more products from your business. The more units someone buys, the bigger the discount you offer. You’ll still make a profit, and your customer will get a deal.
One study found that you can increase sales up to 73% by offering a “bonus” or “value” pack. The research also found that customers preferred the larger quantity over the reduced price for a reduced quantity, even though the price was the same between the two.
Free shipping and returns
When shopping online, free shipping influences purchasing decisions. Many customers don’t want to pay for shipping. In fact, nearly ¾ of consumers say that free shipping dramatically influences their decision to buy things online.
But free shipping is only part of the equation. UPS found that 68% of shoppers look at a store’s return policy before purchasing, too.
Yes, returns can be a hassle for your ecommerce business, but offering free shipping and free returns can significantly boost your AOV. Free shipping and free returns reassures consumers. After all, why would someone spend more money with you if they’re stuck with an item they don’t like? People are loss averse, and if the product isn’t what they expect it to be, they want to know they can get their money back.
Pro-tip: Want to make it easier for consumers to get answers to questions about your shipping and returns policies? Include a live chat option on specific pages to give visitors the support they need to make a purchase!
Discount codes and coupons
Want a surefire way to make people happy and promote customer loyalty? Offer discount codes and coupons. In 2020, 88% of U.S. consumers used coupons when shopping. Don’t currently include coupons and discount codes in your pricing strategy? You could be missing out on a higher AOV—or, worse, sending customers straight to the competition.
To bring in new customers, try advertising discount codes on social media. Or, automate your live chat software to offer new website visitors a discount on their first purchase!
If you need customers to spend a specific dollar amount on their order to reach your revenue goals, offer incentives to your customer base in the form of offer thresholds! Offer thresholds or benchmarks require customers to spend a certain amount to essentially “unlock” a reward. Your business might consider offering a free shipping threshold for all orders above $35 (as Amazon does for non-Prime members and Target does for RedCard users), or adding a free gift for orders over a set minimum purchase amount, as shown above.
Let ChatSupport help you increase AOV
Adding live chat to your website can do wonders for your overall customer experience and customer support. When customers find the answers to their questions while shopping, they’re more likely to purchase. That means an increase in your revenue and total order numbers.
It’s the last piece of the AOV puzzle.
Ready to install live chat software on your website? Get started for free today!
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