Varos Glossary

# Average Order Value

## What is "Average Order Value"?

Average Order Value (or AOV) is a significant ecommerce metric, averaging \$122.82 across industries in 2023 according to Oberlo. Based on the data from the 4500+ companies on Varos, the median AOV for 2023 is \$80.71. It looks at the average amount of money that customers spend each time they buy something from your online store during a specific time period. Essentially, AOV shows you how much cash you're bringing in with each order placed. Knowing this average helps businesses maximize revenue from every transaction.

In the bigger picture, AOV matters because it directly represents sales revenue. But it also provides insights into how customers shop and why they're willing to spend.

### How It's Calculated

Think of AOV as dividing the total revenue by the number of orders placed. The math goes as follows:

AOV = Total Revenue / Number of Orders

You'll want to use revenue and order data from the same timeframe to keep things accurate - like a month, quarter, or year. Let's walk through a couple of real-life examples to help explain.

#### Example 1

Say you own an online clothing shop that ships products worldwide. In January, your total revenue is \$15,000 from 300 orders. So your AOV would be:

Total Revenue / Number of Orders

\$15,000 / 300 orders = \$50

This tells us that, on average, your customers spent \$50 each time they placed an order in January.

#### Example 2

Now, imagine in February, your shop had \$20,000 in total revenue, and you got 400 orders. If we calculate AOV, we get:

Total Revenue / Number of Orders

\$20,000 / 400 orders = \$50

Surprisingly, the AOV stayed the same at \$50, even with more revenue and orders. Maybe January had bigger markdowns on expensive items, while February had more full-price sales. You can use insights like this to shape future promos and  campaigns.

## Benefits of Tracking AOV

### See customer spending habits

AOV shows how much shoppers are willing to spend whenever they buy something. You can tailor products, services, and promotions based on their spending patterns.

### Measure campaign performance

Compare AOV before and after marketing campaigns launch. Higher AOV means your campaigns are working to increase customer spend. Successful campaigns should drive both more customers and higher spending per order.

### Forecast revenue

Multiplying your average monthly orders by your AOV lets you estimate future revenue. Naturally, increasing AOV boosts these projections. We'll cover some tactics for that in a bit!

### Set pricing and inventory

Use AOV data to plan inventory needs and spot opportunities to tweak pricing. Low AOV could signal you're underpricing. But if AOV rises after a price bump, you may be able to optimize pricing further.

### Identify upsell opportunities

Low AOV suggests chances to upsell customers to higher-priced items or bundles. This can help lift AOV.

### Flag process issues

An unexpected AOV drop could indicate problems with your checkout, delivery times, product quality, or other operational factors.

### Limitations of AOV

The benefits of tracking AOV are crystal clear. Yet, it's also essential to understand its limitations, so let's go through these right now.

• No profitability data: AOV doesn't factor in product costs and expenses. High AOV might just mean you have low margins. It’s always possible that low-value orders contain your most profitable items.
• Skewed by outliers: A handful of big orders can quickly inflate your average, dramatically influencing the KPI. Unfortunately, this can distort your understanding of typical spending. Median order value can help balance this out.
• Needs context: Average order value alone doesn't tell the whole story—you'll need additional insight from supporting metrics to get a good overall picture of your sales.
• No qualitative insights: The stats are also purely quantitative, meaning they don't explain the customer experience behind purchases. This makes it challenging to rectify any problematic touchpoints.

## Complementary Metrics to Track with AOV

As mentioned above, a singular view of any metric can be misleading. Hence, it is best to gauge other metrics concurrently. Here are some useful KPIs to keep an eye on:

• Customer Lifetime Value: This shows projected total spending per customer. A low AOV could be acceptable if the lifetime value is high enough. In fact, many companies base their business model on low-cost recurring purchases with high LTV.
• Customer Acquisition Cost: How much do you spend to get each new customer? Combined with AOV, CAC helps decide if acquisition costs are justified. If your AOV is high but your CPA is even higher, it might be time to re-evaluate your marketing channels.
• Average Units Per Order: Reveals how many items are purchased per order on average. More units are likely to increase AOV but may signal minor issues like high shipping costs.
• Cost Per Conversion: When calculating profit per order, exclude the CPC from the Average Order Value to reflect the true profitability.

## Ways to Increase Your AOV

Increasing your average order value means that customers spend more at your store for every transaction. For many ecommerce businesses, lifting AOV is quicker and easier than acquiring all new customers. Here are some proven strategies:

### Upsells and cross-sells

Offering add-ons and complementary products during checkout and in post-purchase emails gives shoppers opportunities to spend more per order.

### Free shipping minimum

Free shipping on orders above a certain threshold motivates customers to add more to their carts to qualify. According to Shopify, 78% of consumers are willing to buy more products just to qualify for free shipping. Of course, you will incur additional charges. But you can offset those costs through the higher order values.

### Bulk order discounts

Strategic discounts on bigger orders incentivize shoppers to spend more. Graduated tiers like "10% off orders over \$200" work well. In some cases, volume order discounts may also extend to coupon offerings. Reward buyers with coupons or loyalty points, and they may just place bigger orders.

Good-better-best product selections entice customers to pay more for versions with better features or components, naturally boosting AOV.

Note that these strategies make great starting points, but they are just that. Testing different approaches with your customers and monitoring the impact over time is critical to finding what works best.

## Summary

The Average Order Value is a crucial metric in ecommerce, stretching beyond simply counting revenue. Use it to gain insights into customer spending habits and strategy effectiveness.

Several methods can boost your AOV, directly contributing to revenue growth and profitability. The best way to identify and track these opportunities is through Varos. With our benchmarking platform, you can acquire contextual data comparisons against competitors and assess your business health with ease.

Grab this competitive edge today and put your company ahead of the curve.