Owners of small businesses don’t always see the need to track and record every piece of information when the business is just starting out. While this may be the case while the business is reasonably new and you are still building your customer base, as the business begins to grow these things will become more of a necessity. Arguably, even small family businesses — whose end goal might not necessarily be exponential growth — could benefit from proactive tracking of sales and accurate record keeping. In this article, we’ll explore one particular metric used to measure sales and profitability — the Average Revenue per order, or the Average Order Value (AOV).
What is Average Order Value?
The AOV is the average amount of money your customers spend on each purchase when they make a purchase online or in-store. Business managers will often use the AOV metric to identify successful and unsuccessful sales patterns and trends over a certain time period in order to make adjustments in future.
You can calculate your businesses AOV by dividing the total revenue by the total number of purchases in any given time frame — a week, for instance. In this example, let’s say your total revenue for the past week was $4,000. The total number of purchases made in that same week was 160. By dividing 4,000 by 160, you get 25 — that means your AOV was $25 over the past week.
Why is it important to track your AOV?
Tracking your AOV regularly is an effective way to ensure your business is on track in terms of productivity and profitability. By regularly checking your AOV, you can track whether the average value of purchases is increasing over time, decreasing or staying the same.
This process can help you identify areas for improvement. For example, in a 2-month period, you may notice that the AOV dropped sharply during a particular week. You can then go and investigate what factors may have caused the drop — was it a slow time in general? Was there a lack of marketing in place at that time? Could there be a problem with your inventory?
Being able to investigate these questions when issues arise with your AOV can be extremely useful for ensuring your stock and supply chain are adequately maintained. Moreover, doing so can help increase your AOV — which can then increase your profitability overall. As Armando Roggio, Director of Marketing and eCommerce at D&B Supply, says: “An increase in the average order value for an online retailer has a strong correlation to an increase in profit. When an eCommerce retailer can sell more on each order, that retailer tends to make more profit overall. Thus, online retailers that are able to increase average order value — AOV — should also become more profitable.”
While there are clear benefits to tracking AOV, it is important to note that it isn’t necessarily a foolproof metric. In fact, business managers should be cautious when using the AOV to measure profitability — if the company in question sells a huge range of products with a relatedly large variety in price points, the AOV can be misleading when there are a few extremely high or significantly low-value orders.
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.