Average order value (AOV) is an e-commerce metric that tracks the average dollar amount spent whenever 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 daily or weekly.
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 of 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, resulting in lower revenues. Therefore, the feasibility of the strategy must be carefully evaluated before its implementation.
2. Upselling
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.
3. Cross-selling
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.
4. Discounts
Sellers can offer discounts with a minimum purchase amount. For example, if a customer places an order for $50 or more, they 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.
More Resources
Thank you for reading CFI’s guide to Average Order Value (AOV). To keep advancing your career, the additional CFI resources below will be useful:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
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