You’ve probably heard of the term Average Order Value (AOV) and you may even use that as one of your Key Performance Indicators (KPIs).
If you are using AOV, I’m glad, because you are doing the right thing to measure your business performance.
But, are you using it correctly, so that it is relevant and meaningful to your business? Are you using it to build profitable campaigns and promotions that will increase your sales, while minimizing your cost?
In this guide, we’ll cover:
- what Average Order Value (AOV) is.
- how to calculate AOV.
- why AOV is important to your business.
- how to calculate your AOV by segmentation.
- Average Order Value (AOV) vs. Customer Acquisition Cost (CAC).
- what a good AOV is for both retail and eCommerce.
- how to set up and find eCommerce AOV in Google Analytics.
- 7 Ways to increase your AOV.
- areas to optimize on your website to increase your retail and eCommerce AOV.
This is Part 4 of the 7-part Customer Lifetime Value Optimization Process series. If you haven’t yet, check out the previous articles:
Let’s begin by defining what Average Order Value is, and how it affects your business.
What is Average Order Value?
Average Order Value (AOV) is the average of how much your customers spend each time they buy from you on a single order, or how much revenue you bring in, on average, from each order.
It is one of the most common and important metrics in many industries, especially in retail and eCommerce.
The goal of increasing your AOV is ultimately to encourage your customers to buy more and/or purchase products that cost more than what they would buy otherwise, to increase the total value of their order each time.
As a result, your business spends the same amount of Customer Acquisition Cost (CAC) and a lower cost – as a percentage of the total cost of the order – to fulfill that order, yielding a higher revenue and profit.
How to Calculate Average Order Value
To calculate your Average Order Value, all you need to do is divide your total revenue by the total number of orders or transactions.
This formula can be applied to any length of time, such as daily, weekly, or annually; most commonly, companies track this value on a monthly basis to see their month-over-month changes.
A monthly update keeps the interval relatively short, ensuring your data stays relevant to what’s currently happening in your business but is also long enough to see any significant impact in relation to your last calculation.
Let’s use an example to see how AOV is calculated in real life.
An example of Average Order Value
Total revenue last month = $250,000
Total number of orders last month= 1,000
Average Order Value from last month= $250,000/10,000 = $25.00
This example shows that, on average, each order placed last month brought in $25 in revenue.
AOV is a very good-to-know number; it can help you analyze your data and use it strategically to increase your revenue without having to acquire new customers or spend more on paid advertising.
Let’s look further into why AOV is important and how it can be used in your business.
Why is AOV important to your business?
Average Order Value is important because tracking and understanding it can tell you a lot about your marketing strategy and can even signal changes in customer behavior, without requiring much time or resources to calculate and keep up with this metric.
Just as increasing the conversion rate is far more efficient than increasing new traffic, increasing the Average Order Value is an effective way to efficiently and profitably increase your revenue with your current traffic volume.
For example, depending on your particular business situation, a 5% increase in your Average Order Value may be significantly more efficient than a 10% increase in traffic.
Since improving your Average Order Value means you’re getting more revenue from the current traffic volume, this incremental revenue increase adds more profit to your bottom line.
How many different ways does your business or team measure the Average Order Value?
If your answer is one, then this next section may give you a different perspective.
How to Calculate Your AOV by Segmentation
AOV by Marketing Channel
Would it make sense to know your AOV by marketing channel?
Just as your Cost-Per-Acquisition (CPA) will differ between each marketing channel or medium, so will your AOV.
AOV by Product Line or Category
What about different product lines or categories?
As shown above, you may prefer a customer in the jewelry or fashion category over the footwear or accessories category due to a higher AOV.
In this case, would you be willing to spend more in Customer Acquisition Cost to get more jewelry and fashion customers, as opposed to footwear and accessories customers?
AOV by Device
As more consumers depend on a mobile device for information and shopping, the “mobile-first” experience is becoming more important.
However, if you focus on B2B or are in a more traditional niche, that may not necessarily be the case.
For example, if your mobile AOV is significantly lower than desktop AOV from the Google PPC traffic, you may want to bid lower on mobile clicks than desktop clicks.
AOV by Geographic Location
Who says all Americans are alike?
Depending on the nature of the business, AOV may vary significantly by location or region.
Are you considering promotions via direct mail or regional sales promotions?
Instead of spreading your reach across the country to see what works, start with your highest-AOV locations to get a higher ROI.
Average Order Value (AOV) vs. Customer Acquisition Cost (CAC)
As a side note, before we dive into this topic further, I’d like to mention another important metric to keep in mind when looking at your AOV.
Of course, a higher AOV is great — if Customer A has an AOV of $10 and Customer B has an AOV of $50, then I’d prefer Customer B any day.
However, you should also consider your Customer Acquisition Cost (CAC) in such a comparison when using AOV in your strategy.
AOV should NOT be used as the ONLY source of data to make strategic decisions.
If Customer A has a CAC of $3 and Customer B has a CAC of $55, then who would you prefer to acquire more of?
Although I’d want to look further into why it’s costing so much more to acquire Customer B (yielding a negative profit), I would definitely prefer Customer A in this case.
What is a Good Average Order Value for Retail and eCommerce?
Many retail and eCommerce companies try to find the “sweet spot” of the perfect AOV.
You certainly won’t be surprised to hear that there is no one magic number.
Although it seems straight forward to increase your AOV, it becomes more complicated when you think about what your target AOV should be.
The question is, “isn’t higher always better?”
The answer to that question is whether it’s worth your time and resources.
Based on the factors listed below, you can determine whether you currently have a healthy AOV and what your target AOV should be.
- What is your current AOV by segment? What is the AOV of each segment’s top 5-10% of orders?
- What are your top-selling items and their prices? How do they compare to your AOV?
- What percentage of orders with the top-selling items have their frequently sold together items on them? And, what percentage of your orders are single-item orders?
- How many units, on average, are you selling in each order? What is that number for the top 5-10% of your orders?
How to Setup and Find eCommerce AOV in Google Analytics
Are you wondering where you can easily get your eCommerce AOV?
In order to set up eCommerce tracking between your site (such as Shopify) and Google Analytics, you need to enable eCommerce settings in Google Analytics AND add some code to your site to collect and transmit data to Analytics.
How to Enable Ecommerce Setup in Google Analytics:
1.Log in to your Google Analytics account, and click Admin in the left-side menu.
2. Click Ecommerce Settings under the View column
3. Set Enable Ecommerce to ON.
4. Enable Enhanced Ecommerce Reporting if you would like to get more advanced insights and reports.
5. Click Done to save
*Important Note: Enabling eCommerce setup in Google Analytics will NOT automatically transmit eCommerce data from the site to Analytics. See below for more information.
How to Integrate eCommerce Tracking in Google Analytics:
Your site needs the eCommerce tracking code to enable Enhanced eCommerce reporting and transmit more advanced eCommerce data to Google Analytics.
You will need to be comfortable editing code or contact us for help with this.
Below are instructions from major eCommerce platforms:
Where to find Ecommerce Average Order Value in Google Analytics:
After you log into your Google Analytics account, go to Conversions → Ecommerce → Overview in the left-side menu.
Select the date range you want to review.
You’ll find Avg. Order Value below the graph.
How to find Ecommerce Average Order Value by Traffic Source in Google Analytics
In the left-hand menu, go to Acquisition → All Traffic → Source/Medium.
Select the date range you want to review.
Under Explorer, click Ecommerce.
You’ll see a list of all of your traffic sources and their revenue, transactions, average order value, conversion rate, and more.
How to calculate the AOV in Google Analytics if there is no AOV column:
Only certain views and reporting will have the Average Order Value data available.
In that case, simply divide Revenue by Transactions to calculate your AOV.
For example, if you go to Acquisition → Campaigns → All Campaigns, you get a report that breaks down the performance of each marketing campaign.
While this report doesn’t have the AOV readily available, you can easily take the numbers from the Revenue column and divide that by Transactions to calculate each campaign’s AOV.
Seven Ways to Increase AOV
Once you calculate and analyze your current Average Order Value, the next step is to strategically increase it.
Here are seven ways you can increase your AOV and some best practices for doing so.
1. Bundle products
Some products just make sense purchased together.
Shoes and socks. Printer and ink. Desk and chair. Dog crate with dog mat. Yarn and needle. The list goes on and on.
If it’s likely that your customers will want to buy items together, bundle them as a package so it’s easier for them to buy them together from you.
Here’s a good example from Amazon of a printer and its replacement ink combined in a bundle.
2. Free shipping
Offering free shipping is a great strategy to entice lower-value online buyers to buy more on a single order so they hit the minimum threshold, and thus increase your Average Order Value.
You ideally want to make the free-shipping threshold higher than your current AOV but not too difficult to meet. If you have to add 2-3 more items to hit the threshold, this probably won’t be very effective.
Sometimes other factors, such as competition, will play a role in determining your free shipping policy, but this is a good place to start. Here’s an example of Walmart offering free two-day delivery on orders of $35 or more.
You can see that when I add an item to the cart, it will remind me I should add more to qualify for free shipping.
3. Upselling and cross-selling
Cross-selling is similar to the bundling. With cross-selling, you suggest items that buyers would consider buying with their purchase item anyway.
However, they don’t necessarily need to be complementary products.
Have you ever seen related or suggested products when you shop online? That’s a form of cross-selling.
Upselling, on the other hand, is suggesting a higher-priced item or additional items to go with your product to increase your order value.
Common examples include offering an extended warranty with your TV or appliances or recommending a newer version or model of the item.
Coupons can be used to encourage more products to be purchased at once, or higher-priced items to be purchased to qualify for the minimum.
Take a look at this coupon offered by Target which was designed to get you to spend $100.
Or this offer from Safeway to get you to buy 5 at once.
5. Loyalty programs
Did you know that loyal customers generally spend more?
Smith’s has a loyalty program that offers fuel points that give their members discounts on gas.
You’ll frequently see a promo similar to this:
This encourages its members who are enrolled in their loyalty programs to buy gift cards to get 4x fuel points.
So, what happens when they receive those 4x fuel points?
They’ll have to come back to Smith’s to redeem these points. And while they’re there, they’ll probably get a few grocery items, too.
It always pays to bring customers back to the store!
6. Bulk or quantity discount
Incentivizing your customers to buy more at a time is a great easy way to increase your AOV.
Are you buying a ream of paper at Office Depot? Why not buy a whole case of 10 reams for convenience and savings?
You don’t have to be a distributor or a wholesaler to offer a bulk or quantity discount.
Offering a small discount to buy 2, 5, or 10 will encourage customers to buy more at a time.
7. Make it easy
This last tip to increase your Average Order Value is to make it easy for customers to buy more.
Make your product suggestions and recommendations prominent and easy to find and add to the cart.
Don’t make them have to look or work for it.
Making your options clearly visible and easy to see and accept will encourage more customers to take advantage of these features.
Areas to Optimize on Your Site to Increase Your Retail and eCommerce AOV
You know what type of offers and programs you’re willing to offer to improve your AOV.
But where would you place them on your website or online store?
These are common pages or areas to review and optimize for an online retail and eCommerce store.
The product page is where the magic happens.
Your site visitors will decide whether the product they’re viewing is worth purchasing.
This is also a perfect place to take advantage of their attention while they are in buying mode.
Pay attention to the layout of your product page.
Consider Amazon’s product page layout.
Similar item to consider
This recommendation shows above the fold.
Although it’s subtle, it gives customers a chance to see what may be frequently purchased together with the main product.
Frequently bought together
Compare with similar items
Note the majority is of higher value than the main item. (upsell)
Popular products inspired by this item
If your category page is simply a cluster of products in the same category, you may be missing some valuable sales opportunities.
Are you featuring some of the top-selling and most popular items?
Are they properly grouped to make it easy for customers to buy more than they originally intended?
Keep in mind that customers can buy more than what they initially came to purchase, so show them what they might want or need to be added to their cart.
Shopping Cart Page
You’re so close to getting that conversion you worked hard for, and your visitor has added that product or service to their cart.
You’re not done yet.
Consider Office Depot’s shopping cart below.
When you add a printer ink or toner, it will show that other customers who purchased that item also purchased items like paper.
If you need this with your purchase but forgot to add it, this would be a great reminder.
Even if you don’t need it but it would be convenient to order this together with your toner, you’d add it anyway.
Other examples of how to utilize the shopping cart page include:
- upselling to a newer model or updated service plan
- cross-selling services with your product, i.e. product warranty
- promoting in-store credit card or gift cards
- reminding customers of any promotions, i.e. Buy 1 Get 1, 10% off with 3 or more, free shipping over $50
If you’re spending time and resources on marketing your product, increasing your Average Order Value is one of the most effective ways to maximize your return on investment.
As part of the Customer Lifetime Value Optimization Process, this is a great way to increase your Customer Lifetime Value (CLV) without having to spend more on marketing, acquiring new customers, or adding new product lines.
By now, you understand AOV is more than just a simple metric and that there are a lot more insights around understanding your customers and marketing strategy.
What have you done to increase your AOV? What has or hasn’t worked? Let me know in the comment below.