AOV

Average Order Value (AOV): Definition & Importance  

What is average order value and why is it important? Learn how the AOV impacts businesses and how it can be controlled to increase profitability.

In eCommerce, businesses are constantly seeking strategies to enhance their profitability. One metric that plays an essential role in this development is the Average Order Value (AOV).

Also known as average value of all orders, this key indicator describes a company’s financial health, as well as its ability to generate revenue. We explain all about AOV in this article.

What Is an Average Order Value? 

Average Order Value (AOV) is a metric that measures the average amount of money spent by customers on each order placed. It is also known as a Key Performance Indicator (KPI) and can be tracked for any given period, but most of the time companies monitor the moving monthly average.

At ECDB, AOV does not include Value Added Tax (VAT), returns and cancellations.

How Does AOV Work? 

The average value of all orders is calculated by dividing the total turnover by the total amount of orders.

Revenue/ Number of Orders = Average Order of Value

To make it easier to understand, here is an example:

  1. Find your data: For calculation, you will need the total revenue for a specific period and number of orders for the same time. E.g. you want to find out what the AOV looks like for the first month of 2023 for your online shop.
  2. Work out your variables: Using your data, you can now calculate the total number of orders and then the total revenue for each product or service. E.g. once, you have all your data from January 2023, add everything up. In total there were 10 orders and a turnover of US$1,000.
  3. Calculate the AOV: Finally, you divide the total revenue by the number of orders to get the average value of orders. In this case, it means you divide US$1,000 by 10. Altogether, this results to an average order value of US$100.

Why Is AOV Important?  

Average order value can be an important metric for eCommerce businesses because it provides valuable insight into how much revenue they can expect to generate from each customer.

By understanding what drives AOV, businesses can make informed decisions about pricing, marketing, and product development.

A higher average order value typically indicates that customers are spending more money each time they shop, meaning higher revenue and profitability. Depending on the value of the AOV, it is possible to make strategic decisions that will help grow a business and increase profits.

What Affects Average Order Value?  

Average order value is affected by a variety of factors, including:

  • The pricing strategies of the products or services
  • The quality of the products or services
  • The customer segmentation and loyalty
  • The customer's shopping experience
  • The marketing and advertising campaigns being used

One possibility to improve your AOV, which is often used technique by online businesses, is to focus on getting costumers to spend past that threshold. So, if the AOV of a store was US$50 last month, they may now offer free shipping on orders of over US$55 to incentivize higher spending.

Meanwhile, increasing the value of orders in such a way may increase turnover, but may not yield the highest profit margins. Other techniques include:

  • Upselling and cross-selling
  • Bundle offers
  • Minimum purchase for discount
  • Loyalty programs
  • Limited time offers
  • Personalized recommendations
  • Post-purchase upsells

By understanding AOV and the factors that affect it, businesses can make data-driven decisions that will help them increase their profits.

Average Order Value: Key Takeaways 

  • Average order value is a KPI that measures the average amount of money spent by customers on each order. It is calculated by dividing the total revenue by the total number of orders.
  • AOV is calculated by dividing the total revenue by the total number of orders. For example, if your store has a total revenue of $1,000 and 10 orders, your average order value is $100.
  • It is a valuable metric for eCommerce businesses because it helps understand how much money a company can expect to generate from each customer. By increasing AOV, businesses can boost their revenue and profitability.
  • A variety of factors can affect the average order value (AOV), including pricing, product quality, customer segmentation, marketing, and customer experience. Businesses can increase AOV by offering free shipping, upselling and cross-selling, and loyalty programs.

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