In ecommerce and also in other industries, Average Order Value (AOV) is a key metric that reveals how much customers spend per transaction. In this article, we’ll zero in on what AOV means for businesses and how to calculate it.
What is Average Order Value (AOV)?
How is Average Order Value (AOV) calculated?
To calculate AOV, simply divide total revenue over a given period by the total number of orders during that same time.
Average Order Value Formula
AOV = Total Revenue / Number of Orders
Here’s an example. Say you are an online retailer that sells wellness supplements. If your website brought in $10,000 of revenue in the month of March and received 2,000 orders during that time, you’d solve for AOV like this:
AOV = $10,000 in revenue in March / 2,000 orders in March
AOV = $50
So, the average customer, in March, spent $50 per order.
Why is Average Order Value (AOV) important?
AOV tells you, on average, what customers are spending per transaction. This data is already impactful on its own, but is even more helpful when used to analyze and evaluate marketing and retention strategies.
Here are just a few of the ways businesses use AOV data:
- Measuring ROI: With AOV, businesses can understand what platforms and promotions are leading to increased sales, and they can make more informed decisions about how much to spend acquiring new customers and marketing to existing ones.
- Comparing platforms and customers: Do customers spend more on the app or the website? Do certain incentives or products lead to increased AOV? Is there evidence that, based on segmented AOV data, specific cohorts that’ve been marketed to or acquired in a certain way spend more?
- Understanding customer behavior: Do customers spend big, or shop small? Do incentives like free shipping over a particular order value move the needle? Do customers spend more in certain months?
- Long-term financial health: Is AOV rising over time? If it is, can we pinpoint why? And if it’s falling, what can be done to reverse the trend?
In other words, AOV can help growth-focused companies make better decisions about pricing, marketing, and sales efforts. And, once again, a quick glance at AOV, month-over-month, can offer a snapshot of a scaling business’s revenue in a bite-sized number with built-in context. After all, AOV tells you, in a dollar amount you can actually grasp, what on average your customers are spending whenever they click “checkout”.
Another thing about AOV worth mentioning is how meaningful it can be for businesses that spend a lot of money acquiring and nurturing customers. Even the most expensive acquisition campaigns can be worth it if AOV offsets the costs, and businesses can easily connect the dots between AOV surges and drops and promotions, incentives, and customer communications.
AOV is typically considered alongside other key metrics such as conversion rate, lifetime customer value, customer acquisition cost, and returning customer rate.
How businesses can increase AOV
Virtually every business wants to increase AOV—especially in ecommerce, where customer acquisition costs continue to rise over time. Some ways to incentivize higher AOV include:
- Upselling and cross-selling best-selling and related products at checkout
- Nudging shoppers with free shipping thresholds
- Linking loyalty programs and other incentives to websites and apps
- Discounting products in bundles (which is also an effective way to move items that aren’t selling before they become deadstock)
- Utilizing promo codes, subscription discounts, and other time offers to encourage bigger orders
Softer strategies, such as community building, influencer marketing, and customer nurturing, can also help increase AOV over time.
What are the drawbacks to using AOV?
Like any other metric, AOV cannot do it all… and comparing AOV between industries or without context isn’t recommended. After all, a company that sells electronics will almost always boast a higher AOV than one that sells books. The average ticket price of items sold makes that a foregone conclusion.
It’s also worth mentioning that the more diversified a business’s inventory for sale is, the less reliable a metric AOV could become. It’s hard to compare AOV month over month when some customers buy furniture and others buy board games. This doesn’t mean AOV shouldn’t be used—even enterprise businesses that sell everything want to increase AOV! It simply means that AOV, in these cases, cannot tell the whole story.
About Sortly
Average order value is one of the easiest inventory formulas and ratios to calculate—so long as you have the correct data at your fingertips. While your sales channels will likely track this information for you, good data and analytics start long before your customers check out.
Sortly is an inventory management solution that helps you track, manage, and organize your inventory from any device, in any location. We’re an easy-to-use inventory software that’s perfect for large or small companies. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your projects succeed.
With Sortly, you can track inventory, supplies, parts, tools, assets, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.
Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on your next build. That’s why over 15,000 businesses globally trust us as their inventory management solution.
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