Average Order Value (AOV) | Definition, Formula & Calculator
Mar 02, 2023 | 9 min read | Leave a comment
As an e-commerce shop owner, you know that attracting web traffic is the first step to success. More and more businesses are investing in boosting website traffic to their storefront, intending to translate that traffic into more sales.
Understanding average order value (AOV) can help you understand customers’ spending habits and determine whether your efforts in attracting traffic are paying off.
Unfortunately, not many people are familiar with AOV. And calculating AOV isn’t always straightforward.
If you want a deeper understanding of AOV and how to calculate it, read on!
What is average order value (AOV)?
Average order value (AOV) is an important metric for any business that sells products online. It measures the average amount of money each customer spends per purchase and gives valuable insight into how well your pricing strategy works.
A good AOV indicates strong customer loyalty. As customers are likely to buy more or higher-priced items when they’re satisfied with the value they receive from your business.
If the AOV number increases over time, it’s a sign that customers find more value in their purchases and spend more money with your store. On the other hand, a decrease in AOV could indicate dissatisfaction with the products or prices offered by your business.
To illustrate this concept more clearly, let’s look at below examples:
- Imagine you’re an online clothing retailer that sells shirts for $10 each. If a customer buys three shirts with one order, then the AOV of the customer for your store would be $30 (3 x 10 = 30).
On the other hand, if they bought four shirts at once, their AOV would be $40 (4 x 10 = 40). As you can see, it pays off to upsell and encourage customers to buy more items with every transaction!
Why is average order value important to your business?
For any business, the Average Order Value (AOV) is a key metric. AOV measures the average amount customers spend when they purchase from your business. It’s an important measure of your business success and helps you understand more about your customers behaviors.
A higher AOV can indicate that customers are making bigger purchases or that they’re buying multiple items in one go. It can tell you a lot about customer loyalty and the effectiveness of your upselling strategies.
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More specifically, a high AOV can let you know that your existing buyers are returning. This is an important piece of information since existing buyers are very important for a business.
According to research by Invesp:
- The likelihood of selling to an existing customer is 60 – 70%, while selling a new product to a new customer is between 5 and 20%.
- existing customers are 50% more likely to try out new products and will spend 31% more on these new products.
An effective up-selling & cross-selling strategy can significantly boost your bottom line. Let’s look at the example below to understand this concept:
- Imagine your online clothing store has 100 customers with an average order value of $50, that means the store will generate $5,000 in revenue from those customers.
If you increase your average order value to even just $60, it will result in a 20% increase in total sales for that month – giving you an extra $1,000! This demonstrates just how powerful increasing AOV can be for any business.
Average order value is also valuable when tracking your marketing campaigns’ effectiveness and measuring changes over time.
- For example, if you’re running discounts or promotions, it can be helpful to compare increases in sales with increases in AOV.
A 20% increase in sales with no change in AOV suggests customers are taking advantage of the offer but not spending more overall. But If there was also a 10% increase in AOV, then this could suggest they were indeed spending more money on each purchase.
Another way that understanding the average order value can benefit your business is by allowing you to identify customer purchasing patterns and trends.
- For instance, as an e-commerce store, you might find out that customers who buy product X also tend to purchase product Y at the same time. This information could then be used in creating upselling campaigns or bundle deals, resulting in higher average order values and increased profits.
How to calculate average order value?
Calculating AOV is simple: simply divide the total revenue across a given period by the total number of orders during that same timeframe. For example, if your store earned $3,000 from 100 orders in one month, then your AOV would be $30 ($3,000/100).
Here are some ways you can use to start calculating your average order value:
For those who are comfortable with spreadsheets, you can use Excel or Google Sheets to determine your store’s average order value.
All you need is a list of all the orders placed over a certain period and their respective values. Once that information has been gathered, start by setting up a spreadsheet with columns dedicated to customer information such as name, contact info, date of purchase, and total purchase amount.
Then use basic math functions like SUM and AVERAGE to pull the necessary data from the table and display it in easy-to-read formats.
However, with the complex nature of e-commerce today, many sellers need help using Excel or Google Sheets to calculate AOV. This is because the data is large and changes every time. You may have calculated your AOV in your sheet today, but the next day, that data still needs to be updated. You’ll have to recalculate again!
Use an automatic tracking app
Fortunately, there are various tools available that can help you efficiently track your AOV. Profit analytics solutions like TrueProfit can help you calculate AOV in a simple, straightforward, and real-time way.
TrueProfit is a real-time profit analytics solution designed specifically for Shopify merchants, making it easy to calculate AOV. With TrueProfit’s cutting-edge analytics platform and intuitive dashboard interface, calculating average order value has never been simpler.
This tool helps you track the total amount an individual customer spends over multiple orders. This ensures that your AOV is accurate and up-to-date with all the necessary data points, such as customer lifetime value, sales trends, etc., providing valuable insights into your business’s performance.
With these metrics in hand, you can make more informed decisions about pricing strategy and marketing campaigns.
How to increase your average order value?
So now you know that increasing your average order value is one of the most important factors in improving your bottom line. But how can you go about doing this? Here are five effective strategies to help boost your average order value and maximize revenue:
Upsell during checkout
Upselling is a great way to increase your average order value without scaring off customers with high prices. Offer related products at the checkout page that complement their purchase and appear as if they’re getting a good deal.
For example, if someone buys a pair of headphones, you should upsell by offering them a carrying case at checkout for just $5 extra dollars.
Bundle products together
Bundling multiple items into one package creates convenience for customers and saves them money compared to buying each item separately!
For example, if you sell apparel and accessories, offer customers the opportunity to purchase multiple items as part of one package deal. You could even offer exclusive bundles specifically tailored for different customer segments or occasions– ideal for any online store looking for an edge in their AOV game.
Offer discounts and incentives
Everyone loves discounts and special offers, so use them to incentivize customers to buy more items at once. Consider offering free shipping or discounted bundles when customers purchase multiple products from your store.
For example, consider offering customers a discount when they purchase two items or more, or even a free gift with their purchase as an extra bonus! This encourages customers to add extra items to their cart and take advantage of the incentives while also potentially increasing brand loyalty in the long run.
Announce a limited-time offer
These offers can come in many forms, such as discounts on orders over a certain amount or free shipping for purchases within a specific timeframe.
For example, if you’ve got an online store selling clothes, then announcing a 50% discount in 1 day when customers spend more than $100 could be what they need to hit that higher limit and increase their purchase amount.
Don’t forget to use the power of Fear Of Missing Out (FOMO) by creating a sense of urgency with messages like “Last chance: Offer ends tonight at midnight”.
Run a loyalty program
Create a loyalty program for customers who purchase from your store frequently. This could include exclusive discounts or bonus gifts for loyal customers after they reach certain spending levels. This can encourage customers to return for more and purchase more items at once in exchange for rewards.
For example, offering points for every purchase encourages customers to continue buying from you instead of going elsewhere. Once enough points have been earned, they can be exchanged for discounts or products in your store.
This method gives customers an incentive that encourages repeat spending and increases AOV.
Average Order Value (AOV) is an important metric for e-commerce sellers to track and understand. It lets you better understand your customers’ spending habits and make informed decisions to maximize profits. With the right formula, you can easily calculate your AOV and evaluate how successful your store is in terms of profitability.
To ensure you get the most accurate data, we highly recommend using the TrueProfit analytics tool. Our tool will help you quickly measure your Average Order Value for your Shopify shops. And assist in making wise decisions for your business.
Don’t delay any longer – start unlocking the power of AOV today and take your business to the next level!
See what proper profit-tracking looks like at trueprofit.io