How to calculate average order value?
Ever wonder how much your average order value is? Wondering what you can do to increase it? Well, we have the answer for you! In this post, we'll go over how to calculate your average order value and a few tips on how you can improve it.
Before we get into the nitty-gritty of how to increase your average order value, let’s take a quick look at what it actually is.
What is AOV?
The average amount customers spend on your e-commerce store per purchase is measured by this e-commerce marketing statistic known as Average Order Value.
Many store owners forget that there is a metric called the average order value. This number tells you how much your customers typically spend per order, which can help you know where to center your marketing operations and what products to stock.
It's the difference between your product or service's value and cost. It is a transparent indication of how much consumers are prepared to pay for your products on your Shopify store.
How to Calculate AOV?
Now that we've discussed the definition of AOV, it's time to discuss how you can calculate your own.
Before digging into the calculation and other details of AOV, let’s get started with simple definitions of related terms.
In order to calculate AOV, you may want to calculate your Total Revenue, aka, Gross Revenue first. Total Revenue is simply the quantity sold multiplied by the price. You can follow this easy formula to calculate your e-commerce store’s TR.
Imagine a Shopify store owner, selling clothes. She sells Christmas Sweaters for $20 per pair. She sold 10 pairs of these sweaters this month, so her total revenue is $200 ( 20x10).
The average order value can be calculated by taking the total revenue and dividing it by the number of orders as shown in the picture below.
For example, your Shopify store has monthly revenue of $5,200 for September, derived from 200 different purchases. This indicates that your AOV is $26;
Why you should care about AOV?
This one is a no-brainer. The Average Order Value (AOV) metric tells e-commerce owners how much money they're making off each customer and it's considered by many to be an important determinant in the industry itself - after all, there are more than two billion searches for products daily on Google alone!
Aside from the obvious purpose of increasing each customer's expenditure with you, why should you care about raising the average order value? Customer loyalty plays the lead role here.
- The more a customer spends, the more likely they are to keep coming back and spending even more
- When you make your customers happy and get them to spend more with you, there's a chance that they will bring their friends along too.
In other words, raising your AOV is directly related to the long-term aim of increasing customer lifetime value (CLV).
- The amount that people are spending on each order is a direct reflection of how much they think your products are worth and how highly they value them.
Customers often behave in ways that say "I'm willing to pay this much for your product because I love it so much" or "This isn't really worth what you're charging me."
- Another reason AOV matters is that it can be a huge indicator of where you should focus your efforts when growing an e-commerce store.
If an increase in sales volume leads to increased competition for top-selling items, then you need to look at new opportunities elsewhere in order to grow your business. However, if you see that your AOV is growing (meaning customers are spending more money on each order), this could be a sign that it's time to start thinking about ways to increase the average sale price of the products you're selling.
Find out ways to increase AOV:
- Promote up-sells and cross-sells at checkout that matches your customers' needs and provides additional value;
- Cross-selling is a marketing technique in which potential clients are encouraged to purchase related additional products. For example, if a customer buys a tablet, recommend they also purchase a carrying case or charger.
Let’s take a look at Apple’s strategy here, when a customer adds “airpods” to the shopping cart, Apple offers related products as recommendations before check-out.
Image Source: Apple
Cross-selling is an effective way to increase AOV by putting the option in front of customers at checkout. It's important to note here that cross-selling can be largely dependent on the type of product you sell. For example, if you're selling clothes this may be as simple as recommending a sweater to go with that winter jacket, but for electronics, it may require more detailed knowledge of the products being sold.
On the other hand, up-selling is also a marketing technique in which the brand offers better or more expensive versions of chosen products. For example, an up-sell could be a customer being offered a more expensive, deluxe camera lens to go with the camera they just purchased.
Again here, Apple offers upgraded and newer versions of the AirPods, when you are looking into the details of an older AirPod.
Image Source: Apple
Up-selling is a great way to increase AOV as it encourages customers to spend more on higher-end products. Like cross-selling, up-selling can be largely dependent on the type of product you sell.
- Increase the perceived value of your products by offering more options, such as multiple colors or sizes. By doing this, you’ll be giving customers a chance for customization.
- Increase your average order value by creating product bundles or packages of products that can be purchased together at a discounted price.
- Use targeted content and marketing campaigns to influence how much customers are willing to spend on your site. For example, if you know that your average customer is an avid golfer, you could promote golf-related products at checkout, in-store displays, or via email and social media.
- Offer free shipping and expedited delivery to encourage customers to spend more on your site by helping them get what they need faster. This incentive is always a popular one with customers, and it can go a long way in increasing your AOV.
- Reward frequent buyers with loyalty programs that provide additional value and discounts for spending more with your store.
According to market research, published in Harvard Business Review;
“In order to maximize loyalty and profitability, a company must give its best value to its best customers.That is, customers who generate superior profits for a company should enjoy the benefits of that value creation. As a result, they will then become even more loyal and profitable”.
Louise O’Brien & Charles Jones
From this perspective, for your Shopify store, you can also use loyalty programs by providing desirable rewards to loyal customers who spend more than others.
- Give live chat assistance for any questions that must be answered quickly.
When you increase your store’s average order value, you can help your e-commerce business grow and reach new heights. Utilize the tips above to get started!