What is AOV and how to increase your average order value (part 1)

In the realm of eCommerce we can look at every customer as a treasure trove full of value. We can also assume that the role of eCommerce entrepreneurs is to find the key to unlock it.

Every person entering your store is bringing numerous opportunities for growth, some of them can be harvested immediately, and some are postponed in the long term. 

In a separate series of articles, we will help you learn how to increase the long-term value of a customer, but right now, let’s focus on how you can increase the value of every customer at the exact moment at which he has made the decision to make a purchase.

To help you increase your average order value for your store, we will examine one of the most popular metrics in the kingdom of online sales. Please, welcome the Average Order Value (AOV).

What you should know about AOV?

AOV is one of the metrics used for measuring the value a customer brings to the store. Also, this is one of the metrics unveiling if the strategies developed by the merchants are able to turn each transaction into an opportunity for more profit.

Before we further dissect the mechanisms allowing you to improve your AOV and generate more revenue for your store, first let’s understand why you should be tracking it. 

Well, imagine this: 

Your online store is overflowing with traffic, and your conversion rates are soaring, but something is not working quite the way it should —  the average dollar amount per order seems to be slipping through your fingers and the store’s growth is slow.

From this example it becomes obvious, that tracking AOV is important, but what exactly AOV is?

Average order value definition:

Average order value (AOV) is a metric that measures the average amount of money customers spend per order on a website or mobile app. To determine your company's average order value, you can easily calculate it by dividing the total revenue generated by the number of orders received.

After we know what exactly AOV is and why it is important to track it, now…

Let’s reveal the mysteries of AOV.

Curious about your own AOV? You're not alone! 

Now, let us uncover how optimizing your marketing and traffic channels might be the answer to achieving higher AOVs.

Also, now is the best time to warn you. Although the plan to increase AOV may seem very simple, there are actually several important factors to consider. It is not enough to divide your turnover by the total number of orders and use this value as a foundation for your future strategy.

Using AOV alone as a guide for your future strategy can hide unsuspected challenges.

New merchants are under the impression that if they focus on increasing the AOV metric, it will automatically generate serious profits, but in real terms, the situation is a bit more complicated.

Instead of focusing solely on increasing average order value, it's good to keep in mind the so-called triad of measures of central tendency: average value, median, and mode.

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Let’s see how the triad of measures of central tendency applies to your AOV analyses.

When it comes to measuring and tracking Average Order Value (AOV), the concept of measures of central tendency becomes very relevant. 

AOV represents the average amount of money customers spend per order, and it serves as a crucial metric for e-commerce businesses. But the average value is only one of the three metrics of Central Tendency.

The Average Value (Mean)

To calculate your AOV value (same as the mean value), you divide the total revenue generated by the number of orders. This calculation gives you the arithmetic mean. This value shows you the average value of your oders and helps you understand the typical spending pattern of your customers.

However, relying solely on the mean value may not provide a complete picture. By considering other measures of central tendency - such as the MEDIAN and MODE - you gain additional insights into the distribution and patterns of order values made by your clients.

Median - the average number of all values

The MEDIAN represents the average of the range of order values. It helps determine the central amount for the entire price range of the orders. It is important to note that this value most often does not directly contribute to the optimization of store turnover.

Mode- the most frequently ordered value

The MODE value represents the most frequently occurring order value (not the average of all orders, not the middle of the price range as a whole, but the value most often ordered by your customers). Identifying the MODE can highlight common purchase behaviors and give you the right ideas on how to build your upselling or bundling product strategy.

IMPORTANT:

It is possible for the Mode to be quite different from the average value (when talking about orders - AOV). In simple language, sometimes the largest number of customers place their orders, in a price range very different from the average (the average value is easily distorted). And in many situations, it's important to optimize exactly for the Mode value range (the most customers shop in it, the best results from the optimization, respectively).

Example with values:

In the very simplified example below, you can see a visualization of the mean and the mode values. 

In this example, the store is selling products only in the $100 range. Also, the most common order value (basically the mode) is gravitating around $35, but occasionally the store has a few orders in the upper range - of $90-100. 

Thus, the average value (AOV equivalent) is inflated (almost $55), but most orders are placed in a lower price range.

If you use only the average order value metric, then the final result can be skewed in the direction of higher AOV (which for this example is inflated by only a few high-priced orders). 

Seeing the AOV (mean) might trick you to focus your attention on a value that is not so relevant to your strategy. Let’s say that this value is $55 or even $60.

If you assume that most of your customers leave 55 dollars in your store and consequently start building a strategy to increase this value to $70-80 or more, then you might be setting yourself up for failure.

Why is this?

Because in reality, the bulk of your clients are finalizing their orders in the 30-35 dollar range. Therefore, prompting them to double or even triple the value of their baskets (by using the strategies that are coming later in the article) might not be effective.

On the other hand, if you consider the mode value, then you will find that most of your clients are making orders ranging around $30-35. With a well-executed strategy, you can easily inspire them to increase their orders to, let’s say $45 or even $50. But if you try to make them leave double or triple the initial sum that they intended to spend, then the strategy might not work as well as it should.

NOTE: ‍

Of course, neither approach is wrong. If you can motivate your high-paying clients to leave more money in your store - go for it. But if you have to prioritize, then carefully consider which user segment you should try to optimize for first.

With everything said above, should you ditch the AOV metric? Absolutely not! Just keep in mind that you should also look at the median and mode values and fine-tune your strategy accordingly.

Setting the right goals at the beginning will enable you to pinpoint strategies to increase your AOV and to optimize your messages and offers for the specific target groups. Also, you will be able to optimize your pricing, or offering incentives that align with the spending preferences of the right clients.

Sales Distribution 

Everything described so far seems confusing, we admit. But so that they can make the best decisions for their businesses, we have created CloudCart Analytics for CloudCart merchants. Of course, we also have a ready-made report visualized directly in the sales report dashboard in your store.

Here is a detailed article explaining how to access and use the “Sales Distribution” report.

Now, let’s uncover the most effective ways to increase your AOV in the next part of this article.