If you’re an online retailer, you’ve probably heard of average order value. It’s one of the most important ecommerce metrics for evaluating the health of an online store.
Increasing average order value gives you the power to boost revenue without changing the total number of customers or orders you have.
In this article, we’ll take a deep dive into the concept of average order value, including how to calculate it, why it’s important, and how to increase it.
Let’s get right into it!
What is average order value?
Average order value (AOV) is the average amount that customers spend when they place an order in your online store over a period of time.
Some ecommerce businesses have a high average order value with relatively few orders of a higher value. Others will have a lower AOV, which means their total revenue comes from many different orders.
Average order value helps online businesses and retailers understand their customers better.
How to calculate average order value?
It’s pretty easy to calculate average order value using this simple formula:
Average Order Value = Total Sales Revenue / Number of Orders
For example, if you made $3,000 in total revenue one month as a result of 100 orders, your average order value would be $30.
3 lessons you can learn from AOV
Once you know the average dollar amount of the orders placed on your site, you can start to better understand your customer base and your business. This metric can help you create smarter marketing and pricing strategies to bring in even more money with the same amount of qualified traffic.
The higher your average order value is, the more you’re getting out of each customer. Yes, you’ll increase your total revenue, but more importantly you’ll do it without spending extra money on acquiring new customers.
Let’s look at 3 things your average order value can help you do.
1. Evaluate your customer acquisition costs
Paying attention to your average order value is crucial for pursuing responsible revenue growth. If you’re spending the same amount or more than your average order value to acquire a customer, that’s a red flag. This includes how much you’re spending on marketing, leads, and other traffic-generating measures.
2. Understand your customers
You can start to nudge customers towards spending more money once you understand the way they typically purchase your products. To get started, you’ll need to break your customer base into segments of users who share certain characteristics.
Think about the groups of people who shop on your site. Which group’s spending aligns most closely with your AOV? Who’s spending more? Who’s spending less? By looking at spending habits, you can better understand your customers and their needs.
3. Spot seasonal trends
It’s important to stay aware of how seasonality affects your business. Do your customers prefer to shop on Black Friday or closer to Christmas?
Your average order value should increase during your peak times of business. If you’re having difficulty achieving that, you could offer discounts or holiday bundles during the seasonal period to incentivize higher order values.
8+1 effective tips to increase your average order value
As we’ve seen, increasing AOV is one of the best ways to boost your profit margins. Here are 8+1 tips you can use to increase your average order value!
Tip #1: Focus on personalization
Implementing a personalized shopping experience is the most important step you can take toward increasing your average order value and customer lifetime value. When you display personalized recommendations and relevant content to each customer, they’re more likely to add more items to their carts.
Personalization can also lead to shorter customer journeys, higher satisfaction, and more loyal customers.
There are many ways to personalize your website, and several of the tips below actually involve personalization. If you’d like the full rundown, don’t miss this ultimate guide.
Tip #2: Offer threshold discounts
Threshold discounts are a great way of encouraging shoppers to spend more.
For example, you could give them a discount of $20 when they spend over $120, $40 when they spend over $200, and so on. Once they reach the highest tier, you could even surprise them with a free gift.
Tip #3: Upselling
Many online retailers use an upselling strategy to encourage higher-value orders.
Upsells are recommendations for alternative products with higher price points, or upgrades on products that the customer is already interested in.
A great example of upselling would be offering someone a premium product that costs, say, $150 while they’re browsing an option that costs $100.
Tip #4: Cross-selling
Cross-selling is another sales technique that online retailers use to increase average order value.
In this case, you offer complementary products to encourage customers to buy additional items. For example, if someone is buying a toothbrush, you might also offer them toothpaste.
You can cross-sell by offering these complementary products as “items often purchased together,” or as part of different bundles or packages.
Tip #5: Customer loyalty programs
A loyalty program creates a bond between the seller and the buyer, making the customer feel rewarded for their business. They can collect points while shopping to get special discounts, or you can offer them early access to your sales and product launches. If customers feel rewarded after their purchase, they’re likely to spend more.
For example, Starbucks offers a free drink as part of its loyalty program once a customer collects 15 or 20 points. If they receive a free drink, they’ll probably end up buying a more expensive drink later on.
Starbucks and H&M both have excellent loyalty programs.
Tip #6: Bundle products
If you want your customers to buy more items, you need to give them a compelling reason to do so.
Bundles—groups of items sold together for a single price—could be the perfect incentive.
Bundling items in a way that makes sense saves your customers time and effort (which is always appreciated).
If you have multiple groups within your target audience who would likely prefer different bundles, you can use personalization to tailor your offers.
Check out the BlendJet example below, where they offer a sleeve and a pack of smoothies next to the blender.
Tip #7: Offer free shipping
When customers are hit with unexpected charges (like high shipping costs), they often abandon their carts. A free shipping threshold is the ideal way to encourage customers to spend more than a certain amount.
You can offer free shipping when customers meet a minimum order value. Many customers will spend extra to get the feeling that they saved a bit of money on shipping.
Kate Spade offers free shipping on offers over $100.
Tip #8: Have a great return policy
When a company has a return policy that customers can trust, they’ll be willing to spend more because they don’t feel like they’re risking anything. It also shows that a company has confidence in its products.
American Eagle has an excellent return policy, accepting proof of purchase anytime.
Extra tip: Raise prices
This article would be incomplete if we didn’t go over the fact that increasing AOV can be accomplished by simply increasing your prices.
However, there’s always a risk involved in raising your prices, as you might make less total revenue because you may see fewer orders coming in. After all, higher prices can drive customers away.
Average order value is one of the most important metrics for ecommerce businesses. It tells you how much the typical order is worth and gives you crucial information about your customers.
If you’d like to use website personalization to boost your average order value and customer lifetime value, OptiMonk’s website personalization software is a powerful tool. Give it a try today!