In e-commerce, the more transactions the better, right?
Well, not always. Let’s say one brand completes 1,500 orders for the month and the other completes 800. Will the first brand always show the most revenue growth? It largely depends on one thing: the average cost of each transaction.
Let’s break it down: One brand has 1,500 orders with an average value of only $40. A second brand has just 800 purchases but with an average of $80. The second brand may be financially healthier than the first! The difference? Average order value.
In this blog, we’re covering everything e-commerce brands need to know about Average Order Value (AOV): What it is, how to calculate it, why it’s important, and ways to increase it.
Let’s get started!
Average order value (AOV) is a metric that tracks the average dollar amount a customer spends each time they make a purchase at your store. Typically, AOV is tracked over a certain time period, such as month-to-month or quarterly.
Average order value depends on two things:
For example, a luxury athletic apparel brand like Lululemon sells higher-priced products than a more affordable brand like Fabletics.
Now, you may think since Lululemon is more expensive, their AOV must be higher than Fabletics. But, this doesn’t always hold true. It all depends on the number of products that customers are adding to their carts. A Lululemon customer may only feel comfortable purchasing 1 pair of $100 leggings, while a Fabletics customer might spend $150 across a few different articles of clothing.
Plus, this doesn’t take into consideration the promotions and pricing strategy run by each brand that could increase the number of products purchased.
In e-commerce, acquiring customers is expensive! The higher a brand’s average order value, the more likely they are to increase revenue and stay in the green. Once brands begin digging into the data, there will certainly be opportunities to optimize and increase AOV. From setting a free shipping threshold to offering Buy Now Pay Later, brands can begin to incentivize adding more products to shopping carts. In turn, they’ll improve their overall profit margins.
On paper, your AOV may only be a number. But in reality, it’s an invaluable metric – one that can help drive key strategies and business decisions. Not only does AOV point to marketing success (i.e. consumers are purchasing products and proving marketing spend) but it also points to which products are most popular, and which need to be reassessed. Plus, by understanding how much customers are spending on each order, brands can begin to optimize their checkout process and selling strategies to increase it.
Calculating your average order value is relatively simple. All you need to do is choose a specific timeframe and identify the total revenue as well as the total number of orders. Divide these two numbers, and you’ll have your AOV.
AOV = Total Revenue / Total Number of Orders
For example, let’s say that a brand’s total revenue for the month of July was $50,000 and they completed a total of 1,200 orders.
AOV = $50,000/1,200
AOV = $41.66
While the equation stays the same, the timeframe selected will have a large impact on the average order value. Why? Seasonality. A swimwear brand will have a much higher AOV during the summer months than the winter months unless, of course, they’re running a winter promotion.
While AOV is a valuable metric to track, it doesn’t always paint the full picture. Even though AOV may hint that a product isn’t performing well, it doesn’t share the ‘why.’
Similarly, tracking average order value can give brands a good idea of how customers are spending at their store, but it won’t explain why the cost is fluctuating or if the number is higher than acquisition costs.
E-commerce businesses who are looking to understand the full picture of customer behavior and their financial health will need to incorporate additional metrics like:
These are only a few important metrics that will help brands track the profitability of their business. For a comprehensive understanding of how marketing and pricing strategies are performing, try tracking top e-commerce success metrics.
The good news for online businesses interested in increasing average order value? There are plenty of ways to do it! From the time a customer lands on your site to the time they check out, there are a number of strategies that can be implemented to boost AOV. Let’s dive in!
Offering free shipping is a surefire way to improve customer satisfaction and streamline the checkout process. The downside? Somebody has to foot those shipping costs. But – there is a solution!
Setting a free shipping threshold can ensure that your brand can cover shipping fees while increasing the average order value. How? It incentivizes the customer to purchase more.
Picture this: a customer is all ready to check out from their favorite brand when they see a notification that says ‘Spend $10 more for free shipping!’ Chances are they’ll add another product to their cart to meet the minimum purchase, snagging savings.
Let’s say a customer enters a site looking to purchase two skincare products. However, within their shopping journey, they see a bundle that includes both products they are interested in, plus a few more at a cheaper price than if they were to purchase all products separately. There’s a much higher chance that this customer will purchase the bundle rather than separate items. The results? A higher spend than they were originally planning, but savings on a few extra products.
Product bundles are a great way to increase average order value because they change the customer’s perceived value of their purchase – making them more likely to spend a greater average dollar amount because they are saving on products overall.
It’s not rocket science: the more a customer resonates with a product, the more likely they are to purchase. When brands offer personalized product recommendations within their online store, they increase the likelihood that customers will add more products to their cart, therefore increasing AOV.
For example, Amazon pinpoints specific products that a cat-loving consumer might be interested in based on their browsing and purchase history. These recommendations work perfectly for any cat mom or dad out there but won’t have the same effect on a customer without a feline friend.
In addition to boosting customer retention, loyalty programs are incredibly effective when it comes to increasing a brand’s average order value. Why? Loyalty programs typically award those who spend more – these programs give your most engaged customers a reason to continue purchasing.
If a brand has a points system, customers may add more items to buy during their transaction to reach the desired number of points for the purchase. Or, they may accept an offer to purchase another product to secure a certain number of points.
Cross-selling is a perfect way to entice customers to add more products to their carts. The trick? Showcasing complementary products.
For example, if a customer is purchasing a dress, a brand might show them accessories that go well with the outfit: earrings, a bracelet, or even a pair of shoes. Apparel brand Urban Outfitters includes a ‘Shop the look’ section that shows all the pieces their model wears in the image photo:
Similarly, brands can up-sell complementary products depending on what their customers are adding to their carts for purchase. For example, Doc Marten’s upsells their shoe-protecting product whenever a customer adds a pair of shoes to their cart:
Put simply, volume discounts offer lower prices to consumers who purchase more products. Volume discounts can occur as tiered, threshold, or package discounts. Let’s say a t-shirt brand wants to participate in volume discounts. This brand has a few options:
No matter what they go with, the message is clear: the more you spend, the more you save. For e-commerce brands, volume discounts can increase AOV because they incentivize customers to spend more within one transaction.
With the inflation woes of the past year, customers are consistently looking for ways to save money. One of the biggest trends of e-commerce has been the ‘Buy Now, Pay Later’ option for customers who aren’t ready to fully commit to the full purchase. Instead, they can pay a little over a longer period of time.
This method works especially well with high-value items, making the price more attainable for consumers who may have a hard time paying the full price tag all at once. The best part for brands? They’ll still receive the full value of the sale upfront and the third party takes care of cash flow. This means if their customers are more comfortable purchasing higher-value products with BNPL, their average order value will grow as well.
While it may seem like a 3PL doesn’t come into play until after a product has already been purchased, there are quite a few opportunities for logistics partners to increase an e-commerce brand’s average order value.
From fuel surcharges to peak season rates, shipping continues to be one of the largest costs for e-commerce brands. But, there is hope. Partnering with a 3PL can help reduce shipping costs by:
So, why does this matter for AOV? When shipping costs are reduced, it’s easier for brands to offer a free shipping threshold. And with a free shipping threshold, there’s more incentive for customers to buy products that help reach a minimum.
Many 3PLs have extensive experience in providing value-added services for their customers. This can include free samples, promotional packaging, discount inserts, and more. When it comes to increasing average order value, these services can play a huge role.
Think of it this way: if a brand sets order rules that customers purchasing $50 or more worth of product will receive a free sample, it’s likely the customers will try to hit this threshold if they’re a big fan of the brand. Plus, 3PLs can aid in product bundling/kitting, giving existing products a premium feel and fresh value and increasing AOV.
The average order value isn’t the be-all and end-all for e-commerce brands, but it packs quite the punch when it comes to boosting profitability. E-commerce brands that pay attention to AOV, actively optimizing and increasing this metric, will ultimately get ahead of those who don’t.
Why? Because the strategies that help increase average order value also increase customer engagement and satisfaction. And the more customers engaging with and buying from your brand, the more opportunity there is to foster an army of loyal brand advocates – shoppers who return again and again.
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