Why Average Order Value (AOV) Matters & How to Calculate It
Average order value is a critical metric for all data-driven businesses to keep track of if they want to scale their profits and revenue growth.
Knowing the average dollar spend of each order placed across your business channels can help you plan pricing and marketing strategies to then increase that value — which can significantly impact your bottom line.
Here’s a quick look at what average order value (AOV) is, how to calculate your AOV, and several ways for digital retailers to improve it.
Increasing average order value is one of the most important metrics to track for any retailer. It’s how you can offset customer acquisition costs to reduce your payback period and increase ROI, which means you can accelerate your path to profitability or put more money into advertising and product development.
-Casey Armstrong, CMO at ShipBob
What Is Average Order Value (AOV)?
Average order value (AOV) is the average dollar spend when a customer places an order on a website or in-store.
Knowing the average order value helps inform businesses on their marketing and pricing strategies.
By increasing their average order value, businesses can directly impact their revenue growth.
How To Calculate Average Order Value
You can easily calculate your average order value by dividing total revenue by the number of orders during a given period.
For example:
- Your total revenue for October was $90,000.
- The total number of orders on your ecommerce channels for October was 1437.
- 90,000 / 1437 = 62.63
- Based on this data, your average order value (AOV) during October was $62.63.
Why Average Order Value Matters
Knowing the average order value offers a window into shopper behaviors and how much they are spending on your products.
By learning how much your customers are spending on each order, you can then plan pricing and marketing strategies to improve it.
When you improve your average order value, you directly scale your profits and revenue growth upward.
“As customer acquisition costs continue to rise and competition becomes more fierce, you need the higher AOV for your unit economics to continue making sense,” says Armstrong.
Average Order Value, Conversion Rate, and Revenue Per Visit
Average order value is often used with conversion rate (CR) and revenue per visit (RPP) to evaluate performance and act as levers for driving overall revenue growth.
The standard formula for calculating gross revenue is revenue = traffic X conversion rate X average order value.
Conversion rate (CR)
Your conversion rate is the total number of visitors divided by the number of conversions made on your website or store.
The higher your conversion rate, the higher the multiplier of your average order value will be for overall revenue.
Revenue per visit (RPV)
Whereas AOV relates to the value of each order, revenue per visitor refers to the value of each visitor to your website or store.
You can calculate your revenue per visits by totaling your revenue and dividing by the total number of visits to your website.
A higher RPV indicates that you are receiving more qualified traffic to your store or website.
5 Strategies to Improve Average Order Value
There are a few simple “hacks” that you can employ to increase your AOV: pricing, cross-selling, upselling, offering discounts, social proofing, and more.
These same strategies can also boost your conversion rates and customer lifetime values.
1. Pricing
Pricing control is a surefire method to increase AOV, but you need to do so in such a way that you don’t lose valuable customers.
This requires testing to evaluate the price sensitivity of your customers to gauge the optimal price your customers are willing to pay for your products.
“One of the fastest methods to increase AOV is to increase the price, but this is something you need to track and test carefully,” explains Armstrong.
“If you do this, you should also monitor return rates and the entire customer journey.”
2. Cross-sell & Upsell
Cross-selling and upselling are tried and true behavioral marketing methods that can improve average order value.
You can immediately impact your AOV by offering customers products that go well together.
You see this often on Amazon with a carousel of related products or products that go well together once you’ve added items to cart.
Consider adding a similar feature or widget to your ecommerce website and other digital channels for on-site suggestions like “Other users also bought this…” or “Goes great with …” to prompt customers to increase their order values.
Volume discounts
Discounts on order volume such as “save $5 when you buy 3 or more,” are another excellent way to get customers to increase their order value.
“As you sell your products for more money, you could reach a customer that is less price sensitive and therefore less likely to return your products.
3. Offer Discounts
Another simple way to boost your average order value is to offer customers an incentive such as discounts or promotions when they add products to their cart.
For example, “take 20% off of your next order” or “sign up for 20% off” are both effective ways to get customers back into your store and adding products to their basket.
4. Offer Free Shipping & Returns
You’ve seen this one all the time — “orders over $50 qualify for free shipping!”
No one wants to pay for shipping — and sometimes customers will avoid it at all costs — even if it means adding more items to their order.
That’s why free shipping and free returns (for a minimum order value) can be an excellent way to encourage customers to increase their order value.
5. Build Social Proof to Raise Average Order Value
Social proof is a great way for marketers to build credibility and also create a sense of FOMO for customers.
Actions and opinions of other shoppers, such as customer reviews and user-generated content, can significantly support your AOV initiatives.
Social proof becomes all the more important when you consider that 84% of consumers believe recommendations from friends and family to be the most influential, according to a study by Nielsen.
How Alp-n-Rock Increased Orders By 29% Through Cross-selling and Upselling on Facebook
One of our clients, Alp-n-Rock, found success by increasing orders through a sophisticated Facebook Dynamic Ads strategy that promoted cross-sell and upsell opportunities.
For example, if a customer purchased a pair of yoga pants, we targeted that same buyer with a Facebook Dynamic Ad featuring a complimentary yoga tank.
Or if someone purchased Spring gear four months ago (and is in the Past Buyers 120 Days audience), when Alp-n-Rock launched their new Fall line, we targeted the customer with an ad to bring them back for a repeat purchase.
Facebook Dynamic Ad upsells can increase sales because they advertise a similar but more expensive product.
This strategy proved to be a successful approach for Alp-n-Rock and led to an overall 14% growth in Facebook Dynamic Ad revenue.
You can view the full case study for Alp-n-Rock here.
As you look into improving your AOV, don’t forget about other actionable strategies that drive business growth:
Why Customer Retention Matters & 4 Strategies To Improve It
How Retail Brands Can Predict Customer Lifetime Value
How To Foster Demand & Convert Shoppers in Q4 | CPC Strategy’s Guide
The E-Commerce Business Owner’s Guide to Conversion Rate Optimization
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