For many businesses, average order value (AOV) stands out as a critical indicator of business success. In this article, we will explore the importance of AOV and discuss strategies to enhance it.
Understanding average order value
Average Order Value is more than just a set of numbers; it's a reflection of customer behavior and buying patterns. In its simplest form, AOV is calculated by dividing the total revenue generated by the number of orders received.
This seemingly straightforward figure holds one of the keys to unlocking insights into your customers' spending habits and can suggest ways to improve the overall financial health of your business.
The importance of AOV
Why does AOV matter? The answer lies in its direct impact on revenue. By understanding and strategically influencing AOV, businesses can optimize their pricing strategies, product packages, and customer engagement tactics to increase their topline revenue.
For example, a higher AOV translates to increased revenue per transaction, which in turn might indicate that a business could spend more on customer acquisition while maintaining or even improving profitability. Here are a few other examples of how understanding AOV could impact business success:
1. Setting a minimum order threshold for free shipping
Setting a minimum order threshold for free shipping that slightly surpasses the current AOV can be a shrewd strategy to encourage customers to explore additional products and increase their spending. By strategically positioning the free shipping threshold just above the AOV, businesses entice customers to add one or more items to their carts, nudging them towards a more valuable purchase.
This approach capitalizes on the psychology of value optimization, where customers perceive the added items as contributing to the overall value of their order. Not only does this technique potentially elevate AOV, but it also creates a win-win scenario, providing customers with the incentive of free shipping while simultaneously boosting the business's revenue per transaction.
2. Finding opportunities for segmentation
AOV might also present an opportunity to segment your customers and engage them differently. For example, high AOV customers might appreciate exclusive offerings and premium experiences, while budget-conscious customers who have a low AOV might respond well to a loyalty program where they get to unlock certain discounts after spending a set amount.
Ultimately, this segmentation approach allows a business to create distinct win-win situations for customers that drive business results such as profitability and inventory turnover rate.
3. Optimizing pricing strategies
In a similar vein, a strong understanding of AOV might indicate opportunities for tiered pricing models or volume-based discounts, through which businesses can motivate customers to consider larger orders. By keeping track of how these pricing strategies affect AOV, a harmonious feedback loop is created.
4. Informing product development
Beyond its direct financial impact, AOV can play an important role in influencing product development. Having a good understanding of what the average customer spends for each order might indicate opportunities for value-added complementary products, or a premium version of a product which, when bought alone, may come in under the average spend.
When businesses strive to elevate AOV, they are inherently focused on enhancing the customer experience. After all, if a customer is expected to be spending more each time they patronize a business, they would expect to get more value out of the experience. If done right, these AOV-increasing initiatives should also improve customer satisfaction. That’s why a good understanding of AOV is so important.
Factors influencing AOV, and strategies to improve it
Average order value is a dynamic metric, subject to the influence of various factors. Just by observing the formula used to calculate AOV, you can see there are two key factors: revenue, and number of orders. In turn, they are affected by the following:
1. Product mix
If a business has a product portfolio of items at different price points, the typical proportion of high and low value products purchased would influence the total order value. However, this could be used to increase revenues as well.
For example, if a customer purchasing a coffee machine were offered complementary products such as coffee beans or mugs during the purchase, these lower priced items might seem like a convenient additional purchase, especially if it’s implicitly recommended to complement their purchase.
2. Quantity of items purchased per order
For some businesses, influencing the number of products purchased might be the way to go to increase the average order value. For example, instead of selling a daily-use item to a weekly shopper in packs of five, selling them in sets of seven might mean the difference between daily use and using that same item only five days each week, resulting in increased AOV.
3. Pricing, discounts and promotions
Likewise, strategically using pricing and promotions would encourage larger and higher quantity purchases. This also creates value for customers who get more out of their purchase each time they patronize the business. Examples include things we’ve discussed in the previous section such as free shipping above a certain value, volume discounts, and loyalty programs.
4. Cross-selling and upselling
Additionally, cross-selling and upselling are strategies that play a big part of increasing AOV. By presenting customers with relevant complementary products or enticing upgrades, businesses can lead customers down a path of exploring higher-value options. These strategies capitalize on customers' intent to get the most out of their purchase, organically steering them toward products that elevate the overall value of their order.
5. Targeting high-value customers
Focusing on high-value customers presents a strategic advantage in optimizing AOV and overall revenue. By tailoring marketing efforts towards this segment, businesses can encourage them to explore premium offerings, add complementary products, or take advantage of bundled deals, all of which contribute to higher AOV. Moreover, these high-value customers are more likely to respond positively to upselling and cross-selling strategies, leading to larger orders and increased AOV.
While nurturing relationships with all customers is crucial, channeling resources towards high-value customers can yield a substantial return on investment, creating a ripple effect that lifts AOV and drives sustained business growth.
6. Encouraging customer loyalty through loyalty programs
Loyalty programs have a remarkable influence on AOV by fostering a symbiotic relationship between customer engagement and increased spending. Offering rewards, discounts, or exclusive perks to loyal customers creates a strong incentive for them to explore more products or upgrade to higher-value options. This psychological trigger taps into customers' desire to maximize the benefits of their loyalty, leading them to add items to their carts that they might not have considered otherwise.
As customers strive to attain the rewards associated with higher spending thresholds, businesses witness a natural elevation of AOV. Loyalty programs, in essence, weave a compelling narrative where customers are not only loyal to the brand but also enthusiastic participants in boosting their own AOV, resulting in a mutually beneficial synergy that fuels revenue growth.
The importance of clean customer data to power AOV analysis
Customer data serves as the essential building block for knowing and understanding average order value. This data provides invaluable insights into customer behavior, preferences, and purchasing patterns, which are fundamental for comprehending the nuances that influence AOV.
Having a clean and comprehensive customer data asset allows businesses to identify trends, such as peak purchasing periods or preferred product categories, which directly impact AOV fluctuations. It enables the analysis of purchase histories, helping to discern whether certain customer segments consistently exhibit higher AOVs or if particular products tend to drive larger orders.
If you’re looking for a platform to create the most comprehensive data asset for your AOV analysis, check out Amperity CDP, the easiest way to unify and activate your customer data.