Imagine you’re at your favorite store. Let’s say it’s a pet store. Your beloved dog is out of dog food. So, on your lunch break, you’ve run over to pick up that specialty brand the store carries. You walk in and make a beeline for the dog food aisle. On your way, an elaborately fun display of organic dog treats and special treat-dispensing toys catch your eye. You know your dog would absolutely love to have one of these toys, and it would keep her occupied for hours, which is a bonus for you. You came in for dog food, though. So, you walk on by.
Wait, what did that sign say? Buy two bags of treats and get one toy at 50% off? That’s too good to pass up. You add the treats and toy to your basket, then continue on your way.
That pet store just increased their profits by increasing the number of items that you purchased. In the e-commerce world, you can create a similar effect which can increase your profitability, address customer retention, and may be easier and more cost effective. Yes, we’re talking about increasing your…
Average Order Value
Maybe you haven’t been focused on it. You know it’s part of your overall strategy, but other growth factors, like increasing your conversion rate, have taken the front seat. Perhaps it’s time to take another look at this metric known as Average Order Value (AOV) You know, the average dollar amount spent each time a customer places an order on your website or mobile app.
How to calculate Average Order Value
The AOV formula is simple. Here’s a simple refresher:
Let’s say your online store sells women’s shoes and accessories. In March, your total revenue was $55K from 1,500 individual orders. Your AOV would be: $50,000/1500 = $33.30. On average, a customer spends $33.30 on each purchase.
While you can track your AOV over any time period, it is most common to monitor your monthly average.
Why Average Order Value is a useful metric for e-commerce
AOV can be incredibly beneficial in growing your e-commerce business. It can provide useful data that can be used for both short-term and long-term strategies, such as:
- Insight on customer behavior, like how much they spend on your products or services
- Data needed to measure a customer’s lifetime value (CLV), which can be used to evaluate your pricing strategy over time
- Assistance in evaluating how well your business strategies are working and if you’re achieving your goals
When used in conjunction with other related metrics, like Average Basket Size (ABS) and purchase frequency, you can build a more comprehensive marketing strategy that engages customers and keeps them coming back from more.
Increasing your AOV can provide multiple benefits:
- Your revenue and profits will increase when you make more money on each customer’s order. This may appear obvious but think about it. If each customer who planned on purchasing one product actually purchased two or more products per transaction, your revenue would increase significantly.
- You will see a more cost-effective return on your marketing efforts. The simple AOV formula doesn’t account for your marketing costs. If you spend $15 per customer on marketing, and your AOV is $35, there’s not much profit after you deduct your own production and other costs. But what if your marketing cost remained the same, but your AOV increased to $45? To $65? Now that $15 marketing cost takes less of a bite out of your profits.
To put it simply, increasing your AOV means you will earn more revenue on each transaction without having to increase marketing and sales costs by the same factor.
According to a recent study in Retail Touchpoints, e-commerce executives consider AOV the most essential metric this year, with 47% of those surveyed saying it was a high priority, even over conversion rates.
So how can you improve your Average Order Value?
It may seem like a daunting question to answer. But don’t hyperventilate. There are 4 simple and fun ways to improve your AOV.
1. Product Bundling
This tactic encourages customers to buy more things at once, thereby spending more in a single transaction. Of course, this works best when the products are related. For example, if you sell kitchenware and a customer is buying a set of mixing bowls, you could bundle it with a set of measuring cups and spoons.
2. Free Shipping
This tactic makes use of the fact that people, in general, like free shipping. According to a study by Walker Sands, the number one incentive to shopping online was free shipping. Most businesses employ this tactic with a minimum purchase threshold. And as your customers' carts fill up, remind them when they’re close to reaching that free shipping threshold. This is a perfect time to make sure they know about those product bundles!
3. Customer Loyalty Programs
Rewarding customer loyalty is a great way to retain customers and keep them coming back for more, which will translate into a boosted AOV. Increasing those loyalty perks with each visit and transaction can have the same effect on a customer as getting an extra life or bonus tool has on a gamer when they reach a certain level in a video game. That’s an incentivized shopping experience!
4. Interactive content and product matching experiences
When you engage your customers in an interactive way, the experience becomes much more enjoyable and personal for the customer and therefore potentially more successful for everyone – your business and your customers. Just look at ALEX AND ANI, the Rhode Island-based jewelry retailer. They increased their AOV by 27% when they added an interactive experience by EX.CO to their website, a gift guide which asked the customer a series of questions which would lead them to a personalized gift recommendation. Want to learn more about this EX.CO interactive experience? Read the Alex and Ani Case Study!
Let’s return to the pet store scenario we began with. That fun and flashy display with product bundling and a discount caught your eye. Now, your dog is happier which makes you a happy customer. So happy, in fact, those organic dog treats may just become part of your basket each time you shop there.
It might be time to make increasing AOV a higher priority in your overall marketing strategy. It’s a great way to improve customer satisfaction and customer retention, and it’s a cost-effective way to increase your overall profitability.