What is Average Order Value?

What is Average Order Value?

Definition: Average Order Value (AOV) is an ecommerce metric that measures the average total of every order placed with a merchant over a defined period of time. AOV is one of the most important metrics for online stores to be aware of, driving key business decisions such as advertising spend, store layout, and product pricing.

How to calculate AOV — and why businesses should do it frequently

The formula for calculating AOV is revenue divided by number of orders.

Revenue
___________ = Average Order Value
Number of orders

AOV is determined using sales per order, not sales per customer. Although one customer may come back multiple times to make a purchase, each order would be factored into AOV separately.

Average Order Value does not describe gross profit or profit margins, but offers insight into how those figures come to be. For example: an online clothing retailer selling three shirts priced at $15, $21, and $29 with an AOV of $19. This indicates two trends about consumer behavior on the storefront:

1. Customers are not buying multiple items.
2. The low-end shirts represent the majority of sales.

Assuming the more expensive items have higher margins, there is an important opportunity to improve positioning and marketing efforts for those products. By increasing AOV, online businesses increase their ROI and ROAS for all marketing efforts. The higher your AOV, the more you are getting out of every customer — and as a result, out of every dollar spent to acquire those customers.

AOV should be monitored as closely as any other business metric — preferably daily or weekly. When there are any dips or peaks, every aspect of the business should be closely examined to understand what may have driven the trend. New campaigns, buying seasons, and any cosmetic alterations to a website are possible factors that may affect fluctuations in AOV.

Don't forget these metrics when evaluating AOV

Like any ecommerce metric, its significance is tied to related business performance. Two important metrics to consider in tandem with AOV include:

• Lifetime Revenue Per Visitor: This is the total value of each customer and notes the average amount they'll order over time. If this is too low, customers aren't making multiple purchases, which means a lower return on all investments in advertising.
• Cost Per Conversion: This metric notes how much it costs to get each customer to convert, and should be subtracted from Average Order Value to display the actual profit per order.

How to improve Average Order Value

Understanding the average value of all orders is useful, but not the only way to calculate an average. For example, a store can segment customers into multiple groups based on their purchase history. Many stores split their customer base into thirds (Low, Medium, and High spenders), but it's also possible to segment customers based on frequency of orders, the types of products they're purchasing, or any other method that suits their needs.

Once customers have been broken up, they can be targeted with advertising tailored to their group. High spenders and frequent customers can be entered into a loyalty program that rewards them, while low spenders can be targeted with offers and cross-sells to try and improve their value.

Other methods of raising Average Order Value include:

• Bundling, upselling, and cross-selling additional products and services
• Adding a free shipping threshold (typically not too high above the average order value, but high enough to ensure the company can afford it)
• Applying a set discount on minimum order values (and, if relevant, bulk orders)

Don't try every method of raising the order value at once. Instead, test each option and figure out which is most effective for the store in question, then stick with what works.

1. "AOV definition"