To succeed in business, you must not only perform well, you have to be able to measure that performance.
Measuring your performance is crucial to understanding the position of the overall organization which will help you bring your business to the next plateau of success. Analyzing an organization’s AOV is the perfect place to start.
AOV is an acronym for Average Order Value. AOV is an essential key performance indicator (KPI) for eCommerce websites. It is used to measure merchandising results over a specific period of time. AOV can be found and monitored as a KPI in most common eCommerce web analytics dashboards, making it easy for businesses to monitor merchandise performance related to customer orders.
How to Calculate AOV – and Why Businesses Should Care
AOV is calculated by dividing sales revenue by number of orders. One important detail to note is that the AOV value is determined using sales per order rather than sales per customer. Although one customer may make several purchases at different times, each order is divided into AOV separately.
Although AOV does not factor into gross profit or profit margins, it’s still an important decision-making metric. For example, AOV offers decision makers insight into customer buyer patterns and trends, advertising spend habits, store layout and even product pricing. As a result, AOV is one of the most important KPIs for online and offline sales for a business.
Let’s look at an example. Let’s say an online clothing retailer sells a number of clothing options and accessories. The retailer sells three shirts priced at $15, $20, and $30. After some number-crunching, the retailer has determined that the organization’s AOV is approximately $21. This means that not only are customers buying multiple items but that the cheaper items make up the majority of sales.
Furthermore, by monitoring a company’s AOV, online retailers and other eCommerce businesses can increase their marketing ROI. The higher the company’s AOV, the more the company is getting out of each customer – and the more the company is getting out of acquiring each customer.
Taking AOV One Step Further…
Like any key indicator or metric, the outcome and numeric results and data are tied to business performance. It’s important to understand two other key metrics when analyzing and monitoring AOV:
- Lifetime Revenue Per Customer: This is the total value of each customer, which indicates the average amount a customer will order over time. If this number is low, then this means that customers aren’t coming back to make more purchases, which also means a lower return on marketing investment.
- Cost Per Conversion: This metric indicates the amount it costs the company to acquire customers. By customers we mean paying customers, not leads. This number should be subtracted from AOV in order to determine the actual profit per order.
How to Improve AOV
If your AOV is low, including Lifetime Revenue Per Customer and CPC, then it may be time to look into some strategies on how to improve AOV so that you improve overall performance.
One strategy used to improve AOV is by customer segmenting. For example, many businesses segment their customer base based on purchase history or even purchase frequency, and divide customers into groups, such as Low, Medium, and High spenders.
Once customers have been segmented accordingly, the company can then fine-tune its marketing strategies and craft the perfect message for each customer group. For example, high spenders can be targeted to enter loyalty and/ or rewards programs whereas low spenders can be targeted with coupons, sales and offers.
Test several different segmentation methods, and test several messages. Don’t test too much at once so you don’t muddle your data. Find your strongest campaign, and iterate off it.
Monitoring and analyzing AOV is crucial for your business. It not only improves performance and increase sales, it can also aid businesses in making important marketing and sales decisions, which will improve your customers experience while improving your bottom line.