AOV – an introduction
Average order value (AOV) tells you how much each customer transaction is worth. The trends are important to understand customer behaviour and appropriate spend to acquire or reactivate each customer.
Driving increased spend per customer is often more cost effective than finding new customers, but you need to know the baseline before attempting to change average order value.
What is AOV?
Average order value (AOV) is the average amount (£/$/€) spent each time a customer places an order.
You can use AOV to measure how effective your merchandising is over a specific period. Most e-commerce applications have a way to monitor AOV, making it easy for businesses to monitor this.
An important distinction is that AOV is determined using revenue per order, not per customer. Although one customer may come back multiple times to make a purchase, each order is treated separately for AOV. This is typically because each order has order-related costs such as transaction and shipping costs, among others.
Why is AOV important?
Average order value (AOV) is one of the most important metrics to track for any e-commerce business. However, it's not the most straightforward to interpret as there are lots of factors that influence AOV and affect its effectiveness in contribution.
For example, driving a customer's bundled order above a free-shipping threshold can increase AOV but can adversely affect profitability from free shipping. Equally, a certain cohort may have a higher AOV but the customer acquisition cost (CAC) may also be higher, so while AOV may trend in the right direction, overall contribution or even LTV:CAC may not be as favourable.
There is a balance of each of these drivers in AOV which needs to be finely managed.
AOV is one of the more simple metrics to track in an e-commerce business and a leading indicator in growth. Generally, increasing AOV is seen as a good thing, unless it's at a threshold that's affecting overall contribution margin and unit economics.
What does average order value (AOV) look like?
How do you calculate AOV?
The formula to calculate AOV is:
Average order value (AOV) = Total revenue / Number of shipped orders
AOV worked example
If a company has total revenue of £100,000 and ships 1,000 orders in the same month its AOV would be would be £100, calculated like this:
Average order value (AOV) = £100,000 / 1,000 orders= £100
How can you improve AOV?
Segmenting orders by certain demographics, such as geography, can help to better understand customer behaviour. You're likely to find that different cohorts have different average order values. You can learn from the better performing cohorts and apply them to cohorts with lower AOV, or even spend a greater proportion of your marketing budget on the higher performing AOV.
However, AOV should be used in conjunction with other metrics as customer acquisition cost (CAC) as there is often a correlation between CAC and AOV so increasing AOV in isolation should not be a primary goal.
Other ways to increase average order value (AOV) include:
- bundling, upselling, and cross-selling additional products and services
- adding a free shipping threshold (setting this slightly higher than the average order value can be a great way of increasing average spend), and
- applying a set discount on minimum order values (and, if relevant, bulk orders).
If a business understands, tracks and segments its average order value, it can make strategic decisions that will influence customers buying patterns and increase the value of each order.
While there are other factors to take into account, generally, the higher the company’s AOV, the more the company is getting out of each customer, and the more the company is getting out of acquiring each customer.