Average Order Value and its importance to online Ecommerce business

According to Statista data, the average order value of online shopping in the U.S. increased from \$73.8 in the year 2012 to \$82 by the end of 2017. Despite the increase in smartphone usage, the average order value (or AOV) of online purchases made from the traditional desktop computer is 20% higher than on mobile apps (according to a 2016 Ecommerce benchmark report).

So, what does average order value or AOV mean and why is it so important for Ecommerce enterprises? Let us evaluate this in detail.

What is Average Order Value and how is it calculated?

Average Order Value is the average amount spent by customers on each online purchase made on either the website or on a smartphone app. AOV is calculated by dividing the total revenue generated by the Ecommerce retailer in a specified period (month or year) by the total number of customer orders. For example, if an Ecommerce retailer generated a revenue of \$50,000 in August 2018 with a total number of 1,000 purchase orders, the AOV for August 2018 would be \$50.

Why does Average Order Value or AOV matter?

The Average Order Value is among the important KPIs for Ecommerce decision makers as it presents an insight into the customer’s buying patterns, online advertising spending, and even product pricing. To understand this, let us consider a simple use case of an online clothing retailer who offers customers the choice of buying 4 shirts each priced at \$12, \$15, \$19, and \$25. Based on the overall sales revenue and number of orders, the AOV works out to be \$17, which presents the following customer insights for you, as an Ecommerce retailer:

· Sale of your lesser-priced shirts represents the major share of your revenues.

· Most of your customers are not buying more than 1 shirt in a single order.

Assuming that the more expensive items offer higher profit margins, you can focus your digital marketing efforts on improving your AOV by encouraging your shoppers to buy the higher-priced items on your shelf. Additionally, an increase in AOV means that your business is extracting a higher revenue for the same amount of dollars spent on acquiring the customer.

Similarly, just like any other important Ecommerce KPI, AOV must be tracked on a daily or weekly basis to observe any major dips or peaks. This can help you, as an online retailer, to understand the impact that any marketing campaign, new product launch, or festive season sales can have on your AOV.

As an Ecommerce business, you can improve your AOV by either encouraging your customers to purchasing more items in a single transaction, or by increasing the price of the most-frequently purchased items. Listed below are some of the common techniques you can use to improve AOV:

Upselling:

Upselling involves the use of visual cues to encourage shoppers to purchase a more expensive item (than the one in their shopping cart) by paying an additional but very nominal amount.

Cross-selling:

Cross-selling is a method used to encourage shoppers to add products that are complementary with the original purchased item. For example, adding a pair of socks to match with the shoes that the shopper has just purchased.

Product combos:

Product packs or combos are a great way of increasing the value of the purchase. Rather than selling products separately, create a pack comprising of 3–4 items that can offer volume discount to the customer (example, “Save 30% by purchasing 3 or more hand towels”).

Ecommerce industry statistics for AOV

According to Statista, online purchases made from traditional desktop computers continue to dominate other devices in the first quarter of 2018.

Among the best social media platforms that are generating the maximum AOV, Facebook continues to dominate with an average of 85% orders (according to Shopify data).

Summary

Regular monitoring and measuring AOV is crucial for any Ecommerce retailer. Along with improving sales revenue, AOV can drive your business and marketing decision-making and offer a higher return on every dollar that you spend on your digital ads and social marketing.

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