Average Order Value (AOV): Definition & Meaning
In the world of eCommerce, businesses are constantly seeking strategies to enhance their profitability. One important metric playing an essential role in this development is the Average Order Value (AOV), also knowns as average value of all orders. This key indicator describes a company’s financial health, as well as its ability to generate revenue.
The article below will delve into the significance of AOV, explore how it impacts companies’ businesses and how it can be manipulated.
What Is an Average Order Value?
Average order value (AOV) is a metric that measures the average amount of money spent by customers on each order placed. It is also known as a Key Performance Indicator (KPI) and can be tracked for any time period, but most of the time companies monitor the moving monthly average.
At ECDB, AOV does not include Value Added Tax (VAT), returns and cancellations. It is calculated by dividing the total revenue by the total number of orders.
How Does AOV Work?
As already mentioned, the average value of all orders is calculated by dividing the total turnover by the total amount of orders. To make it easier to understand, here an example of the calculation:
- Find your data: For your calculation you will need the total revenue for a specific time period and number of orders for the same period of time.
- Example: Let’s say, you would like to find out what the AOV looks like for the first month of 2023 of your online shop.
- Work out your variables: Using your data, you can now calculate the total number of orders and then the total revenue for each product or service.
- Example: Now you have all your data from January 2023 together and add everything up. In total there had been 10 orders and a turnover of US$1,000.
- Calculate the AOV: Finally, you divide the total revenue by the number of orders to get the average value of orders. Your calculation should look like this:
Revenue/ Number of Orders = Average Order of Value
Example: In this case it means you divide US$1,000 by 10. Altogether, this results to an average order value of US$100.
Why Is AOV Important?
Average order value can be an important metric for eCommerce businesses because it provides valuable insight into how much revenue they can expect to generate from each customer. By understanding what drives AOV, businesses can make informed decisions about pricing, marketing, and product development.
A higher average order value typically indicates that customers are spending more money each time they shop, meaning higher revenue and profitability. Depending on the value of the AOV, it is possible to make strategic decisions that will help grow a business and increase profits.
What Affects Average Order Value?
Average order value is affected by a variety of factors, including:
- The pricing strategies of the products or services,
- The quality of the products or services,
- The customer segmentation and loyalty,
- The customer's shopping experience,
- The marketing and advertising campaigns being used.
One possibility to improve your average value of all orders and often used technic by online businesses is to focus on getting costumers to spend past that threshold. Therefore, if the AOV of an online retail was US$50 last month, they may offer free shipping on orders of over US$55.
Meanwhile, increasing the value of orders in such a way may increase turnover, but may not yield the highest profit margins. Other technics may be:
- Upselling and cross-selling,
- Bundle offers,
- Minimum purchase for discount,
- Loyalty programs,
- Limited time offers,
- Personalized recommendations,
- Post-purchase upsells.
By understanding AOV and the factors that affect it, businesses can make informed decisions that will help them to increase their profits.
Key Takeaways About Average Order Value
To sum-up, AOV is more than just a numerical metric. It is a powerful tool that can significantly impact your eCommerce business's profitability.
- Average order value is a KPI that measures the average amount of money spent by customers on each order. It is calculated by dividing the total revenue by the total number of orders.
- AOV is calculated by dividing the total revenue by the total number of orders. For example, if your store has a total revenue of $1,000 and 10 orders, your average order value is $100.
- It is a valuable metric for eCommerce businesses because it can help understand how much money a company can expect to generate from each customer. By increasing AOV, businesses can boost their revenue and profitability.
- A variety of factors can affect the average order value (AOV), including pricing, product quality, customer segmentation, marketing, and customer experience. Businesses can increase AOV by offering free shipping, upselling and cross-selling, and loyalty programs.