What is Average Order Value?
Imagine running a business and you notice each customer spending differently. Average order value (AOV) basically tells us about the average amount a customer spends when they're likely to make a purchase with you. To calculate it, one must divide the total revenue with the total number of orders.
Let’s Imagine: In a month's time, a business makes a profit of about $50,000 from 10,000 orders. It simply means, on average, customers are spending $50 for every single order. It often helps businesses keep a track record of their sales and profit.
Average order value serves as a performance indicator in the business world, especially on the e-commerce and retail side. It helps businesses in knowing how much the customers actually spend. Businesses get to polish their strategies and create a good shopping experience for their customers. This helps in generating revenue, too.
Why is Average Order Value Important?
Learning and understanding average order value (AOV) helps businesses grow in smarter ways. Let's highlight its importance:
1. Revenue Growth
When AOV increases, a business is likely to make more from each sale. There's no need to spend extra money to attract a new customer base. So this creates more revenue by making current customers spend a little extra.
2. Informed Marketing Decisions
AOV actually helps businesses keep a record of their marketing strategies. Let's say if their campaign is to target only high-value customers that create more sales, they start putting more effort into similar strategies. This helps their revenue grow a lot.
3. Customer Insights
AOV does record performance, but it also tells businesses about their customers’ behavior. For instance, the products and services that attract the customers more. In this way, they spend more time and effort in promoting the right products.
4. Operational Efficiency
When customers spend more money on their purchases, the business is likely to earn a good profit. Then this extra cost is what helps in running the business smoothly. So, AOV improves smoother operations.
5. Sales Target Planning
With average order value, businesses get to set realistic sale criteria and they can even predict their revenue. Let's say if they know how much a customer spends, then they get to know the number of transactions needed to meet a good revenue standard.
Challenges in Managing Average Order Value
Managing and using AOV isn't just about numbers, it's also about the choices people make. Here's a few challenges businesses face.
1. Data Accuracy
Accuracy is key, especially when dealing with statistical data. Make sure it's correct and factual. When errors appear in recording revenue or even order counts, businesses end up with faulty strategic decisions.
2. Customer Behavior Variability
Think of AOV like a tide that rises and falls with how customers make purchases. Similarly, customers may spend more during the holiday seasons but may step back during inflation periods. So, understand the purchasing behavior of customers first.
3. Market Competition
When your rivals offer the same services but a lot cheaper, your customers may purchase from them. This hurts AOV, and it sadly reduces the customer spending per transaction. Offer fair prices and use exclusive offers to engage customers.
4. Overemphasis on AOV
Don’t focus too much only on AOV, it can hurt your business. Budget-conscious customers are pushed away. Keep their long-term loyalty by not focusing on quick sales and big profits.
Best Practices to Improve Average Order Value
Use these best tried and tested practices to increase AOV effectively:
1. Upselling and Cross-Selling
Let’s say a customer buys a laptop from you. Now gently suggest different ways they can upgrade it and provide an extended warranty or a carrying case with accessories like a mouse. Help them gain more from a simple purchase.
2. Product Bundling
Tempt your customers by offering fair bundle deals. Let's say a skincare brand offers a “care package" which includes a cleanser, a face cream and scrub. This will encourage customers to buy the deal rather than buying each item separately.
3. Free Shipping Thresholds
Try offering a free shipping strategy over a certain amount. For instance, offering free shipping on orders above $50 will likely encourage customers add more items to their cart.
4. Volume Discounts
Offer bulk discounts that make customers feel like they're getting a bonus out of the deals. Let's say a store might offer a “buy one, get 1 free" deal to make customers feel like they're buying smartly.
5. Personalized Recommendations
Check the browsing data and see what customers love to buy. See which items they're purchasing more. Customize items just for them and recommend them to increase sales. Amazon does this well, it shows mainly those items that the customers have previously bought.
6. Limited-Time Offers
Offer time-sensitive deals that expire after a limited time. This creates urgency and makes customers act fast.
7. Loyalty Programs
Release dopamine in their brains by offering them special loyalty benefits and exclusive rewards. Let's say you offer double points if they make purchases above a specific value. They might just make bigger transactions.
How to Analyze and Optimize AOV
Check the pulse of your business regularly. See how it's performing. Use these easy steps to know how you can optimize AOV:
1. Track AOV Regularly
See when sales are increasing and slowing down. Track AOV at different time periods, whether monthly, daily or quarterly. Check which seasons are impacting AOV directly.
2. Segment AOV by Customer Group
Divide your customer data into different groups, like age, demographics, location, and even their buying habits. See which groups are helping businesses produce the most revenue.
3. Leverage Customer Feedback
Ask your customers what they like and what makes them go towards big purchases. Their feedback helps businesses know how to improve their products and how to create better deals to make customers come back.
4. Test and Iterate
Lastly, have fun with it. Experiment with different strategies of providing bundles, limited offers and promotions. Use A/B testing, an excellent tool that tells you what works and what doesn't. This helps you improve your products to give your customers exactly what they need.
Examples of Average Order Value Strategies
- Amazon: Amazon makes the shopping experience truly easy. It helps customers by showing them options like “frequently bought together" or “you might also like" based on products previously bought.
- McDonald's: McDonald's offers simple meal upgrades by lightly suggesting that you add a drink or fries with it. It helps businesses gain more revenue while adding more value to the meal.
- Apple: Apple uses product bundling techniques. It offers attractive discounts. For every iPhone purchased with accessories like airpods or chargers, Apple offers discounts. It increases the value of the purchased items while also helping it gain more profit.
- Sephora: Lastly, Sephora makes its customers feel valued by giving loyalty rewards. They also offer free shipping over a certain amount. So when the customers feel special, they are likely to purchase more. This helps Sephora earn a good revenue.
