Understanding KPIs: Average Order Value
Part of the new Understanding KPIs series
What’s the one thing every business needs more than anything? Customers, customers are the one thing that gives a business a reason to exist and keep it running. Which is why it’s so important to learn as much as you can about them.
Previously in this series, we looked at the KPI Customer Lifetime Value which helped us to understand how much customers are worth to our business. Part of calculating that KPI was to know your Average Order Value.
It’s a pretty common KPI, particularly for ecommerce business, but an extremely valuable one, as we’ll soon see.
Throughout this post, I’ll go over exactly what Average Order Value is, how to calculate it, how it can help you to read customer spending habits and how you can use that to your advantage to boost your revenue.
I know what some of you are thinking, and don’t worry, I’ll also go over exactly how the Average Order Value can help you to assess customer habits.
Defining Average Order Value
The Average Order Value is essentially the amount that a customer will spend on average on each order from your website or store. It can be measured over any period of time, but is usually measured on a month on month basis.
So what makes it an important KPI?
Knowing and increasing your Average Order Value helps towards increasing your business’ profits, if your AOV goes up, chances are so too does your revenue.
Looking at your Average Order Value you can also see how much the average customer is happy to spend, and segment your customers into differing profiles. With these profiles you can then adjust your sales and marketing strategies to more closely target each profile.
How to measure the Average Order Value
Measuring Average Order Value is quite straightforward, it can be easily measured simply by dividing your Total Revenue by the Number of Orders you had.
Here’s an example:
In September for our business here’s our stats:
Revenue = $90,000
Sales = 1,300
Which means that our AOV is $69.23.
That’s all there is to it. Pretty simple, right?
How to Improve my Average Order Value
There are a number of ways to optimise and improve your Average Order Value. Most of the time you’ll be able to do this at pretty much any stage during the customer’s journey on your website.
To increase your Average Order Value, you have one goal: make your customer spend more. You’re essentially trying to break that limit of how much they’re unconsciously or consciously willing to spend.
There are a number of ways to do this, such as making sure your products are enticing in the first place, putting forward your best selling products and promoting your trending products on the website. If it sells well with customers, and your customers have common interests it increases the likelihood of them purchasing the product.
Two very popular methods of increasing the Average Order Value are cross selling and up-selling.
Have you ever been shopping on Amazon or Ebay and spotted that ‘Customers also bought…’ section? This a well known technique that is used to increase Average Order Value, it’s called cross selling.
This is the process of recommending products to go along with one another. sometimes stores will also show a “Frequently bought together” items, these can be used with products that are easily dismissed, and are actually essential.
This happened to me recently. I was buying a microphone from Amazon, and they recommended me a pop filter, now a pop filter is very important, but it didn’t cross my mind until I saw that product on the pop up asking if I wanted to buy it.
Up-selling is another popular method, used to offer customers higher quality products equivalent to what they have in their cart. Let’s say you were to add an unbranded pair of shoes to your cart, and you get an enticing pop up asking if you’d like some Nikes for only $20 more. As simple as it sounds, it does work.
Customers love when businesses get personal, so recommending items that they might like based on their search history and their shared interests with other customers can increase customer’s perception of you which can also indirectly increase Average Order Value.
Whilst there are a lot of ways to optimise your Average Order Value, there are also a number of different factors that will determine how well each method will work, every business, every website has a different set of customers.
Understanding your customers is the key, knowing how to appeal to them and how to offer better quality products and services to them is one of the most important things to keep in mind. Testing a number of different optimisation methods is essential when looking into increasing your Average Order Value.
There’s a lot of things that we covered in this post, so let’s have a recap:
- Average Order Value is all about how much your customers spend on each order on average
- It helps you understand your customers habits and behaviours
- Allows you to create a better strategy based on those habits
- Improve Average Order Value by appealing to your customers needs
- Be personal, understand habits and action on those habits.