If you have read our Ultimate Guide to Average Order Value (AOV): Everything You Need to Know, you’re most likely using, or plan on using, AOV as one of your Key Performance Indicators (KPIs).
By now, you understand that Average Order Value is more than just a metric.
It’s a tool to guide you make strategic decisions.
Aside from how much your customers spend each time they buy from you on a single order, there are other insights you can draw from it.
Below are 6 things AOV tell you about your customers.
What can Average Order Value Tell You About Your Customer Behavior?
1. Which customers or prospects you should invest in
If you use AOV as your customer benchmark, you will notice that some group of customers fall short or exceed that level. If you had to focus your resources on customers that are more meaningful, wouldn’t you specifically target them?
Let’s use an example.
You have calculated your AOV and notice that customers coming in from social media campaigns fall well below that. This signals that this group of customers are not buying as much as your average customer.
So you decide to offer a special promo only available on social media to encourage new customers coming from that channel to buy more.
We’ll cover how to increase Average Order Value using promotions in a bit.
2. Impact of your marketing campaigns
You can see that AOV can also be used to measure the success of this example social media promotion campaign.
If you launch this promotion on social media and measure your AOV again next month, you should, hopefully, see a boost in your Average Order Value with customers coming from that social media channel.
If not, it may be that your promo isn’t effective.
3. When to offer free shipping
Free shipping is becoming a must in an eCommerce space. Thanks to Amazon and its competitors.
Although it’s widely offered, how each business determines their free shipping minimum remains their responsibility.
Offering what most of your competitors offer may be the easiest way (or maybe the most common way) but if you don’t have the same type of logistics or profit margin, that can quickly hurt your bottom line.
Utilize your free shipping to encourage customers to buy more and make sure to test your theory!
4. Benchmark in your business decisions
Whenever you need to make a decision, you need to put customers in mind. Not understanding your customers can lead you to make bad business decisions that can turn customers away.
Average Order Value is a reflection of your customers’ behavior.
Choosing a new product line to launch? Is your new price point too far off from your current customer base? If so, it may be difficult to sell them to your current customers or new customers using the same marketing strategy.
Need to scale back on advertising spend due to limited budget? Don’t simply choose a channel that does the least in revenue. Instead, consider each channel’s AOV and make sure you’re not eliminating a channel that brings in more valuable and profitable customers.
5. If your Customer Acquisition Cost makes sense
If your AOV is $25 and your Cost-Per-Acquisition, or CPA, is $25, then you’re certainly losing money. While this is not the best way to determine what your customer acquisition cost should be, it’s definitely a quick way to determine if your current acuiqisition cost is too high.
If your CPA is too high, you have a few options:
- You can decrease your acquisition cost and hope to bring in just as many customers
- You can increase your AOV and hope your new margin is big enough to sustain the business
- Or you can re-evaluate your marketing channel and strategy to make sure you’re choosing what makes sense for your business
6. Customer Lifetime Value
Rather than simply looking at the Average Order Value and what it tells you, you should consider calculating your Customer Lifetime Value, or CLV or LTV. Although AOV isn’t the only thing needed to calculate the Customer Lifetime Value, it is one of the many components needed to evaluate your business as a whole.
By calculating and understanding your Customer Lifetime Value, you can make better predictions and decisions for your business based on many other important numbers and metrics on your customers.
3 Myths about Average Order Value
I’d like to address 3 common myths and misconceptions about AOV. They lead to some common mistakes made by businesses so I hope this can help you avoid them!
AOV Myth 1: AOV is a good metric and is enough to measure my performance
Remember the earlier example with a $25 AOV?
What if your average product price is $25? That means each order sells one product on average.
But what if your average product price is $10? Now you’re selling more than 2 items on each order!
While AOV is a good metric and does a good job measuring your performance, it’s more powerful when combined with other numbers and metrics.
Combine other key metrics, such as Return On Advertising Spend (ROAS) and profit margin, in evaluating your AOV for further insights that’s meaningful to your own situation.
AOV Myth 2: Higher the better!
If you choose to simply discount more or offer other aggressive promotions, then you might be able to instantly increase their AOV. Great, right?
Not really. Now your promotional cost is hurting you.
Whether it’s through coupons, free shipping, or other incentive to increase your AOV, pay attention to what your cost is and whether it’s acceptable.
AOV Myth 3: Expecting AOV to stay the same
Just because you’re offering the same products to the same type of customers, it doesn’t mean your AOV will stay the same.
Customers, competitors, and market trends change to impact your AOV. Don’t make it a one-time or a rare exercise but keep a close eye on it.
Refresh your AOV on a consistent basis and monitor it over time. Don’t let it be a surprise.
We, as marketers and business owners, always try to increase revenue and decrease cost. While it’s nice to increase your revenue, it often comes with increased cost.
Increasing your Average Order Value is a good way to encourage your customers to buy more than they would otherwise. You’ve already acquired them, and now you’re trying to get them to spend more while they’re at it.
While it can be calculated quickly and easily, this value becomes more insightful when it’s combined with your other Key Performance Indicators to help you understand how your customers are interacting with your brand.
But between all sorts of KPIs and other fancy metrics that can be lengthy and difficult to measure, it’s nice to have one metric that is quick, easy, and pretty straightforward to interpret.
How else are you using your Average Order Value metric? Let me know in the comment below.