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In the ever-changing world of marketing, there is one single metric that every DTC marketing team should focus on. And it has nothing to do with CPMs, CPCs, CTRs, or even CACs. In fact, it has nothing to do with platform metrics at all.
We’re talking about Average Order Value (AOV).
AOV is a critical metric in e-commerce that calculates the average total value of each transaction or order placed by a customer during a specific period. It's calculated by dividing the total revenue generated from orders by the total number of orders within the given time frame.
In this article, we delve into the art and science of optimizing AOV.
We’ll explore proven tactics and innovative approaches your team can take to encourage customers to spend more during each visit, thereby elevating their average transaction value and overall lifetime value.
Let’s dive in.
Boosting your average order value should be a permanent objective for DTC marketing teams as it directly impacts the overall revenue, profitability, and sustainability of your e-com business.
Here's a breakdown of why enhancing AOV is so important:
Immediate Revenue Boost:
Encouraging customers to spend more in a single transaction increases the overall revenue generated from each sale, and helps to "cover" the cost of ad spend.
Efficient Marketing Spend & Better ROI:
Acquiring a customer can be expensive, and if your AOV isn't high enough you won't be able to scale your spend and keep acquiring customers. So maximizing the value of each customer by increasing their AOV ensures a better return on the investment from the very first touchpoint.
Economies of Scale:
Selling more products in a single transaction can lead to cost savings in packaging, shipping, and handling, ultimately increasing the profit margins per order.
Long-Term Revenue Generation:
A higher AOV contributes to a higher CLV as it indicates that customers are willing to spend more over their relationship with the brand. This extends to potential repeat purchases and brand loyalty.
Cross-Selling and Upselling Opportunities:
Encouraging customers to spend more initially opens up opportunities for future upselling or cross-selling, further enhancing CLV.
Product Turnover:
Higher AOV can help in faster inventory turnover as more products are sold in each transaction, reducing holding costs and the risk of obsolete stock.
Perceived Value:
Customers often perceive a higher value in a comprehensive purchase. Bundles or higher-priced items can convey a sense of better quality or value for their money.
Savings Perception:
Offering discounts or free shipping for a certain order value encourages customers to spend more, making them feel like they've gained value or saved money.
Segmentation and Personalization:
Understanding customer spending patterns based on AOV allows for more targeted marketing efforts. Different strategies can be employed for high AOV customers compared to low AOV customers.
Promotions and Campaigns:
Tailoring promotions to encourage customers to increase their order value can be more effective than blanket discounts. For example, "Spend $50 and get 10% off" often encourages customers to add more items to their cart to reach the threshold.
Perceived Brand Value:
Brands that effectively utilize AOV-boosting strategies can set themselves apart from competitors. They position themselves as brands that go beyond just making sales, focusing on providing added value and a superior customer experience through bundled offers or discounts.
Investment Attraction:
When potential investors or stakeholders analyze a business, they often look for metrics that demonstrate sound financial strategies.
A high AOV signifies an effective strategy to maximize revenue, which can attract investment interest, funding, or partnerships as it showcases the business's ability to optimize sales and profitability.
One effective strategy to increase AOV is bundling related products or offering discounts on bundled purchases.
This encourages customers to buy more items to avail the discount, resulting in a higher AOV. Clearly communicate the savings customers will receive through bundling to incentivize larger purchases.
Here’s a great example from the Dollar Shave Club:
For just $18, you get:
Talk about a great bundle!
Introduce tiered pricing to reward customers for purchasing more. Offer discounts based on the quantity or value of products in their cart. Display these discounts prominently to encourage customers to increase their order size to maximize savings.
Example: Amazon
Amazon utilizes tiered pricing effectively, especially through their Prime membership.
Customers can subscribe to Amazon Prime and get various benefits like faster shipping, access to Prime Video, and more. The tiered pricing encourages customers to spend more to enjoy the perks associated with higher membership tiers.
Leverage cross-selling and upselling techniques to promote complementary or upgraded products.
During the checkout process or on product pages, suggest related items or premium alternatives that align with the customer's current selection. Provide compelling reasons for the upgrade to entice customers.
Here’s an example from Obvi, an 8-figure health & wellness brand that provides Collagen-based supplements.
When you proceed to checkout on their “Burn Elite” supplement, the cross-sell is the beauty sleep supplement.
Without this cross-sell, the order value would have been $49.99. But with the cross-sell, it becomes $64.98!
Develop a loyalty program that rewards customers for making larger purchases. Offer points, discounts, or exclusive access to products based on the AOV. Make it easy for customers to understand the benefits and how they can unlock rewards by increasing their order size.
For example, Sephora's Beauty Insider loyalty program is a loyalty program that offers a range of benefits to its members, encouraging them to shop at Sephora, engage with the brand, and ultimately foster long-term customer relationships.
Set a minimum order value for free shipping and display it prominently on the website. Customers often add more items to their cart to meet the threshold and avoid shipping fees. This encourages them to spend more, effectively boosting the AOV.
Another powerful tactic is to implement "cash back" rewards. This type of program entices customers to spend more now so they can be rewarded in the future in the form of a free gift, free shipping, or an amount off future purchases. Therefore, it boosts AOV and creates brand loyalty. It’s a win-win tactic.
Another example from Obvi:
This is a prime example of leveraging thresholds.
At $65, you unlock free shipping. At $100, you unlock a 25% cash-back. And at $125, you unlock a 30% cashback.
The "Subscribe and Save" option can enhance Customer Lifetime Value (CLTV).
This approach encourages customers to make recurring purchases by subscribing to receive a product on a regular basis, often at a discounted rate.
By enticing customers to subscribe to regular deliveries, the brand creates a predictable and steady stream of revenue.
This consistent income flow contributes to the overall increase in CLTV as it ensures ongoing purchases from the customer.
Subscriptions create a sense of commitment and loyalty. Customers who subscribe to a product are likely to continue purchasing from the brand, fostering long-term relationships and repeat business. This strengthens customer retention rates, a key factor in boosting CLTV.
Here’s an example from the supplements brand Juvenon:
Create a sense of urgency and exclusivity by introducing limited-time offers tied to a minimum purchase. For example, "Spend $100 and get a free gift." The urgency of the offer can motivate customers to spend more within the specified timeframe.
Here’s an example of a time-limited offer from apparel brand Christopher Cloos. It’s a today-only, 15% OFF + FREE shipping offer.
Utilize customer data and purchase history to provide personalized product recommendations. Tailor recommendations based on their preferences and buying patterns, increasing the likelihood of adding more items to their cart.
For example, if a customer adds a shirt to their cart, suggest matching pants, shoes, and accessories to complete a stylish outfit.
This can entice customers to buy a set of items rather than just one, thereby boosting the AOV.
These personalized recommendations can encourage customers to add more items to their cart, increasing the total order value.
By suggesting tailored content, they entice users to continue their subscription and potentially upgrade to a higher-priced plan for more features.
Streamline the checkout process to make it easy for customers to add more items or explore additional offers before completing their purchase.
Incorporate a quick-view option, recommended products, and a progress indicator to encourage additional shopping.
Create informative content that educates customers on how to use or benefit from products. Showcase the advantages of purchasing additional items to complement their original purchase, highlighting the overall value of a larger order.
Example: Home Depot
Home Depot provides a wealth of educational content on their website, including how-to guides and project tutorials.
By educating customers on DIY projects and suggesting products needed for these projects, they subtly encourage customers to purchase more items, boosting the AOV.
Binet and Field, in their study "Media in Focus," emphasize a holistic approach to marketing that focuses on both short-term sales activation and long-term brand building.
Applying the insights from this study, we can establish that increasing Average Order Value (AOV) is not merely a tactical maneuver but an integral component of a unified marketing strategy that aligns with the broader objectives of sustainable growth, brand strength, and effective allocation of resources.
Binet and Field stress the importance of integrating short-term sales activation with long-term brand building for sustainable growth.
AOV optimization embodies this integration, as it involves short-term tactics (e.g., promotions, upselling) for immediate revenue increase while nurturing long-term customer relationships, brand loyalty, and lifetime value.
Binet and Field highlight the necessity of a balanced advertising budget that allocates resources effectively between short-term sales activation and long-term brand building.
Increasing AOV aligns with this balanced approach by contributing to both immediate transactional revenue (short-term) and enhanced customer loyalty (long-term), making it a vital aspect of optimal budget allocation.
Binet and Field emphasize economic efficiency and maximizing profitability as key objectives.
Increasing AOV directly addresses this by focusing on extracting maximum value from each customer interaction without significantly increasing acquisition costs. It's an economically efficient approach aligned with their principles.
Binet and Field advocate for data-driven decision-making.
Optimizing AOV involves analyzing customer data to tailor offerings and pricing strategies, aligning with the data-centric approach they promote for crafting effective marketing strategies that enhance overall performance and drive growth.
Binet and Field underscore the significance of long-term growth driven by customer value.
AOV optimization directly contributes to this by ensuring that each customer transaction yields a higher value, ultimately increasing customer lifetime value and fostering sustainable growth over time.
At Tier 11, our mission is simple:
We help purpose-driven companies unlock their online business potential through multi-platform, full-funnel digital advertising.
Unlike most agencies who just “run ads,” we have a full-funnel approach that goes beyond the “click” and focuses on improving post-click metrics such as AOV and CLTV.
If you feel like your current agency or in-house team isn’t pushing for a better average order value, we invite you to book a call to speak with us today.