Data Analytics

What is Average Order Value (AOV) and How to Calculate It

Are you getting a fair return on investment (ROI) on your customer acquisition cost (CAC)? Have you optimized your conversion rate but can’t seem to increase your revenue for your online store?

Increasing your Average Order Value (AOV) might be the solution. AOV is the amount of money a customer spends per order. It’s the value per order, not per customer, and is an important metric because it tells you how efficient your store is at maximizing the value of each transaction.

When your acquisition cost and conversion rates remain the same, AOV can help your store grow without the need for huge ad spend. For example, if your cost of customer acquisition (CAC) is $10, increasing AOV impacts your profit per order which brings in a bigger ROI.

You can help grow your store not by getting more customers, but just by increasing the amount each customer spends per order. Tracking AOV also gives you insights into consumer behavior. If your modal AOV is $25, but your average product price is $20, it means that your customers are willing to buy more.

Optimizing your AOV creates a ripple effect and every subsequent order is affected. Not only that, but it also adds to your brand loyalty in the long run. You increase your ROI and return on ad spend (ROAS) for your existing marketing efforts.

Tracking AOV, and setting benchmarks, when you’re making changes to your store tells you the efficacy of those changes, so you can quickly figure out what’s working and what’s not. For example, an increase in AOV when you add upsells is a sign that they’re working.

Let’s jump into everything you need to know about average order value (AOV) and why it is such a critically important e-commerce metric.

How to Calculate AOV

You can calculate the average order value with a simple AOV formula: divide the total revenue generated over a specific time period by the total number of orders placed in the same time period.

Average Order Value (AOV) = Total revenue / Total number of orders

For example, suppose your store's gross revenue in March 2022 was $5,000 through 200 orders. This means the average customer spent $25 when they ordered from your store.

AOV is not just limited to a straightforward average order value. By taking the two metrics—revenue and number of orders—you can get deeper insights into how your store is performing. For example, you can see how AOV changes for different cohorts, the AOV of returning customers, and the AOV of new customers.

You can skip the manual calculation by using an automation tool like Peel, where you can view any type of AOV over any period of time with a single click.

How to Use Average Order Value (AOV)

Average Order Value goes beyond just highlighting your profit margins. In reality, it gives you deeper insights into the store’s overall efficiency and how you can improve your efforts.

For instance, suppose your AOV is $24 and your products are generally priced in increments like $18, $22, and $30. This forms trends that tell you how customers are either buying products in the lower range or are not purchasing multiple products. Having this understanding will help you create better strategies to increase your AOV.

What’s more, AOV can help you determine how valuable each customer is, and how much you can spend on discounts and promotions. When put in context with other metrics like the average lifetime value of customers (LTV), their returning rate, and cohort AOV, you get a better picture of how much you can give as discounts. You can do this by understanding the ROI on a cohort basis.

You can calculate different types of AOV that give you deeper insights on what’s working and not:

  • Cohort AOV per Month: This tells you how the AOV of your cohorts is increasing or decreasing every month. Based on the monthly AOVs, you can understand how valuable each customer is and when to introduce discounts.
  • AOV: This is the defined AOV where you take the total revenue and divide it by the total orders.
  • Net AOV: Net AOV tells you the average net sales you’re accounting for per order.
  • AOV (new): AOV (new) tells you how much every new customer is spending per order on average. This can help you understand how your discounts for new customers are performing.
  • AOV (returning): This is the average amount your returning customers are spending per order.
  • AOV Gross: As the name suggests, this is the average gross revenue per order.
  • AOV Net New Customer: This is the average net amount a new customer spends per order.
  • AOV Net Returning Customer: The net sales amount spent per order per returning customer is the net AOV of a returning customer.

For more strategies on improving your AOV metrics and more, check out our full Guide to E-commerce Analytics.

How to Improve AOV

Here are 5 simple strategies you can use to start improving your AOV today. Deeper analysis on your customer purchase behavior will help you identify which of these strategies might be right for your business, but these are good starting points for any brand looking to increase AOV.

1. Increase your free shipping threshold

In a survey, 65% of respondents said that they consider the threshold of free shipping before adding items to the cart. 70% of the respondents would choose to purchase online and pick up in-store just to save on shipping costs. This shows how consumers don’t like spending extra dollars on getting the products to them.

Your store can use this customer preference to increase the AOV. You can do this simply by picking a number above the current AOV For example, if your modal AOV is already $45, you can increase the free shipping threshold to $50 to get customers to buy more.

The only point of caution here is, you should calculate the profits carefully before deciding the threshold. Make sure you’re still making a profit after providing free shipping.

2. Create product bundles

You know your customers well. You know what they want and need. Product bundling is just about offering your customer a better option for buying more, by creating an offer that bundles together related items that the customer needs at a discount. So, the customer gets a deal, and the average value of your transactions increases.

For example, the DTC beauty brand Glossier creates irresistible bundles:

Product bundles can improve average order value (AOV)

Notice how the product bundles contain the items that their ideal consumer would’ve bought anyway. It’s all about finding the intersection of the products that make sense together from a customer purchasing standpoint and the average dollar amount that will bring to your store.

3. Offer a discount on the second product

Boots.com runs discounts on their best-selling product line, where they offer 3 products at the price of 2—the cheapest being free. It’s almost impossible to not buy the second product.

Discount Strategy to boost AOV

4. Cross-sell and upsell

Similar to product bundles, upselling or cross-selling is when you offer your customers additional products, based on their needs. Again, Glossier does this really effectively.

Cross-sell & Upsell AOV example

All you need to do is identify related products, or offer a premium version of the existing product.

But make sure that you’re not cross-selling or upselling items that are at a completely different price point. Add-ons should just be high enough to increase your AOV but also a price that your customers are comfortable spending.

5. Offer a free gift

Just like free shipping, a free gift can be an incentive to spend more. This is a great way to show appreciation to your customer base and increase brand loyalty while having an eye on increasing AOV. Select a gift by identifying something that has a low cost for you, but has a higher selling price.

This puts you in a great position to maximize gross profit, by creating a threshold for customers to spend more to get the free gift. This is also a means of increasing your customer lifetime value if you can hook those customers on a free gift item that they may want to replenish or come back to purchase time after time.

So, not only are you increasing AOV to get them to the free gift, but you’re also using it as a gateway to introduce them to other relevant products. You can also determine your free gift offering by digging into your customer behavior data and finding which products are often purchased together.

You can use this to increase the AOV during a slow season of the year, which you can identify if you’ve been tracking your AOV properly.

Automating AOV Calculation with Peel

AOV helps you understand the health of your store. But you need to calculate different AOV types to get the proper picture.

Be it the introduction of a new discount code or analyzing a dip in revenue, AOV can give you deep insights into your growth, which can spark new marketing strategy from acquisition to retention. This is what Peel helps you with by automating your AOV calculation. You can calculate the AOV over any time period, for example, during a new campaign.

As a result, you can focus on just strategizing to increase the AOV, rather than spending hours on an excel sheet.

Integrate Peel with your Shopify store today to automate your analytics.

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