What is Average Order Value (AOV)?
Average order value (AOV) is an e-commerce metric that tracks the average dollar amount spent every time when a customer places an order on a website or application. AOV is considered one of the most important metrics in the e-commerce industry.
Essentially, the average order value may provide some insights regarding customer behavior. For example, a lower AOV usually indicates that the seller’s customers prefer to make small purchases with each order. Additionally, AOV trends influence the company’s crucial business decisions, including product pricing and marketing. Due to such reasons, a company must carefully monitor its AOV. Since e-commerce is a remarkably dynamic and competitive industry, companies should analyze their AOV on a daily or weekly basis.
Every e-commerce company aims to maximize its average order value. The rationale is that a greater AOV leads to revenue growth. Eventually, a company may boost its profits.
How to Calculate the Average Order Value?
The average order value (AOV) is calculated by simply dividing the revenue amount for a period by the total number of orders placed in the period. Mathematically, it is expressed using the following formula:
Note that the average order value is determined as the revenue per order rather than the revenue per customer.
How to Increase Average Order Value?
As mentioned above, the average order value discloses how much money customers spend on each order. Each retailer aims to maximize its AOV.
Fortunately, the following strategies can help an e-commerce business to increase its average order value:
1. Price increases
An online seller can easily increase its average order value by raising the prices on its products. In theory, increasing product prices will lead to higher revenue and higher average order value. On the other hand, higher prices may discourage customers from making purchases, which will eventually result in lower revenues. Therefore, the feasibility of the strategy must be carefully evaluated before its implementation.
Upselling is a practice when a seller attempts to induce the customers to purchase more expensive items or add some upgrades or add-ons to the products. The goal of the upselling strategy is to increase the revenue from each order.
Cross-selling implies that a seller offers the customers to buy some complementary or related products to the one being purchased. Similar to upselling, the strategy intends to increase the seller’s revenue per order.
Sellers can offer discounts with a minimum purchase amount. For example, if a customer places an order for $50 or more, he or she can obtain a 15% discount on the order.
5. Free shipping
Creating a free shipping threshold can be an alternative to discounts. For example, a seller may offer free shipping to those customers who make purchases for more than $50.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: