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The Incredible Scaling Power of Average Order Value
February 20, 2023
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There's nothing like a trick question to start a blog.
But what the heck?
Play along, and I'll make it worth your while.
Janet is on a monthly subscription to receive the same four products from your eCommerce store.
Denise is also on a monthly subscription to receive four different products.
Which of these customers is more valuable to your business?
"Wait a minute," I hear you say. "What kind of nonsense is this?"
What? You can't answer that?
Well, why not?
Is it because you might need to know the cost of each item?
Of course, it is.
In other words, you need to know the Average Order Value (AOV) of each of these clients.
Because there's no scaling a business without it.
That's why the AOV is considered one of the most important metrics for online stores.
But before we get too thick in the weeds, let's get a working definition of Average Order Value.
Average order value (AOV) is an e-commerce metric that tracks the average dollar amount spent whenever a customer orders on a website or application.
To calculate AOV, you'll need to divide the total revenue (gross sales) by the number of (valid) orders.
For example, let's say your October sales generate $37,000.
Let's also say you got a total of 1,000 orders.
$37,000 divided by 1,000 = $37 Average Order Value.
It's a key performance indicator that reflects...
How to adjust your Ad spend. If you are experiencing a decrease in the AOV, it may be because the items are underpriced. You won't be able to stay in the red for long this way.
Conversion costs. You're bleeding money if you have a high conversion cost with a low AOV. Or, at best, breaking even. Shoot for a minimum of 2X AOV (higher is better) than your customer acquisition or conversion cost.
Purchasing patterns, such as seasonal buying habits. For example, does your prospect respond to your marketing more during Black Friday, Christmas, Mother's Day, or Valentine's Day?
Pricing strategy. AOV tells you how well your products are priced. If you're a media buyer, don't hesitate to suggest price increases. If you're an offer owner, reconsider your pricing strategy to better reflect the AOV you need.
The good news is, there are a lot of ways to increase your AOV, like...
... analyze AOV by segment (recency, frequency, monetary value), and...
... selecting the right marketing channel.
Let's unpack it a little bit.
Price increases: A product sells for $29 with a negative or break-even AOV. Increasing the product cost to $37 or $47 can change the game's dynamics for you.
Bundling: Offer volume discounts in the form of a pre-packaged set of goods used as a cross-sell, upsell, or a combination of the two.
Cross-selling: "Would you like a matching blouse to go with the pants you've just ordered?"
Upselling: "Would you like this pair of shorts to go with your new outfit for only $10 more?"
Bulk Buying Options: Offer larger versions of your products. Example: Offer a 5-lb bag of protein over a 1-lb bag.
Free Shipping Threshold: Reach a specific price point, and offer free shipping as a reward.
Product Recommendations: Recommend products for someone else in your customer's life. Example: Amazon's recommender engine.
Loyalty Programs: 75% of customers prefer companies that offer loyalty rewards and spend 39% more on average.
Coupons: Offer customers a coupon code or discount for signing up for your email list after they've made an order.
Multiple Payment Options: Buy now, pay later payment plans are a great way to increase AOV––up to 45% more.
Recency, Frequency, Monetary Value: How recent was the customer's last purchase? How often did this customer purchase in a given period? How much money did the customer spend in a given period?
Selecting The Right Marketing Channel: Have you noticed one marketing channel leads to higher AOV?
As I said, you have a dozen or more ways you can potentially increase your Average Order Value.
Admittedly, there's a lot more we could unpack here.
And let's be honest with each other.
There's no scaling a business without excellent AOVs.
So, if you need help with your Average Order Value and scaling your business...
