Average Order Value (AOV) is one of the few important metrics for businesses to analyse and track to gain an understanding of their current revenue and how they may increase it. It gives an insight into customer behaviour and is often used in collaboration with conversion rate (CR) and revenue per visit (RPV) to drive up overall revenue. In this article, we consider closely what AOV is and how to use it to increase your bottom line.
Calculating Average Order Value
The AOV is quite simply the average value of each order you receive. It is easily calculated:
Total monthly revenue ÷ Total number of monthly orders
What information does the AOV provide?
The AOV denotes how much is roughly spent on each order you receive through your website. This gives an indication of how much each customer is willing, able or needing to spend on your products. In order to increase your overall revenue by increasing your AOV, you should aim to either increase the number of products your customers purchase in a single transaction or increase the value of the products your customers purchase in a single transaction. How is this done? Read on to find out.
5 powerful tools to increase AOV
One way to increase your AOV is to inflate your current pricing or to stock higher-priced items. This may well work, however you can be walking a tentative line, as any slight pricing increase could be seen negatively by your existing customers, and result in a loss of sales. This is where testing price sensitivity, where you can ascertain the optimal price your customers would be willing to pay for your products, is important. This is not the only weapon in your arsenal however, which is where the beauty of marketing emerges.
Cross-selling and upselling are valuable marketing strategies that can quickly drive up your AOV and increase your overall revenue. This type of selling occurs consistently on major shopping platforms such as Amazon where data from customers’ searches can be used to portray complementary or more valuable versions of the items they have looked at or placed in their cart.
Discounting is a general term given to any sort of benefit you can provide your customer to encourage a feeling of obtaining a better deal. This could be through bundle deals such as ‘buy 2, get 1 free’ or through loyalty discounts such as ‘sign up to a club and receive 20% off’. The effect of both of these is an increase in sales either through buying more products or through encouraging return visits.
Facilitating ease and accessibility through free shipping and a smooth returns process is a great way to encourage a purchasing decision in those customers who are faltering. Sometimes offering something such as free shipping is all the comfort they need to commit to a purchase.
Social media or influencer endorsement can be exceedingly powerful in this day and age to entice interest and possible sales from a larger clientele. It is human nature to seek to relate and draw similarities between oneself and someone else or to wish to be like someone who inspires us, which leads to a greater level of comfort and trust. This is a significant part of how social media endorsement works, and companies can benefit from this, particularly if a higher value product is being sold and you need to portray the need for this value to your customers. They may not believe you, but they could believe someone they already trust.
Of course, increasing your AOV may not lead to a greater revenue if the number of people you convert from a visitor to a buying customer (your conversion rate) is dwindling. Part of the AOV calculation is pricing or sales volume, however, the other is the number of transactions which is a derivative of the conversion of visitor to buyer.
Tying it all together
Tying conversion rate and Average Order Value together is the revenue per visit (RPV) metric which aims to quantify how much each visit to your website earns the company. Although marketing, discounts and pricing can all influence these other factors, they must be adjusted depending on which metric is the current focus. For example, if your conversion rate is falling, then the marketing may need to be adjusted to target a first-time customer who does not know a lot about the company or products. Perhaps even a bonus gift for first-time customers may work. However, if the conversion rate is phenomenal but the RPV is falling, then perhaps marketing or pricing must target the customers’ perception of value and how they should require a higher value item in their life.
If these metrics and strategies are complex and a little daunting, it can be helpful to engage with eCommerce or POS software and inventory management software to gain an understanding of where you currently sit as a company and how your position can be improved.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.