What is Average Order Value?
Average order value is a key performance indicator, or metric, that helps you understand your Shopify customers’ purchasing habits by tracking the average amount they spend each time they place an order with your e-commerce store.
You can measure and track AOV over whatever period of time you’d like – the more often the better, though it’s most often done monthly.
Why it’s Important to Measure Your AOV
You spend a lot of time, effort, and resources – both financial and people – on your online marketing and pricing strategies for your Shopify store, so it only makes sense that you need a sound method to evaluate the impact it all has on your business. This is where AOV comes in.
It’s a tool that benchmarks your individual customer’s behavior and measures their value in the long term. Rather than assuming you need to, say, increase visitor traffic to your store’s website (which comes at a price), truly knowing and finding ways to increase your AOV (which is free) may actually be more profitable and beneficial to your Shopify business over time.
Boosting the average value of your orders is a great strategy that makes sense to work on. The reason is it maximizes your direct revenue and profit from existing customers who are already making a purchase since you avoid the cost that comes with each additional individual order.
Basically, the higher your AOV, the more revenue you’re earning from each customer along with your investment made to acquire each customer.
How to Calculate Your Average Order Value
It’s easy to calculate your Shopify store’s average order value – just take your total revenue and divide it by your total number of orders. And remember, you’re looking at sales per order, not sales per customer. So, if one customer returned four times to make a single purchase, you would add four, not one, to your “number of orders” denominator.
Revenue ÷ Number of Orders = Average Order Value
As an example, let’s say that in May your Shopify store’s sales were $42,000 and a total of 1,000 orders were placed. $42,000 divided by 1,000 = $42, so your May monthly AOV was $42.
Although AOV doesn’t give you exact profit margin or gross profit figures, it does shed light on them, which is very helpful. For instance, if you sell hats at three different prices – $15, $20, and $30, and your AOV is $18, you know two things: your customers are buying single items, and your lowest-priced hat is selling the most.
As of June this year, the average value of orders in e-commerce came in at just over $110, nearly a 20% increase from 2020 – a positive trend that’s great news for your Shopify business.
To understand where you stand relative to this, it’s a good idea to monitor your store’s AOV as closely as possible – ideally daily or weekly, but at the very least, monthly. When you see peaks and valleys, you need to examine every area of your business very closely to learn how you got to that point.
This way, you’ll know what you need to repeat (for more peaks) or avoid (for fewer valleys) in the future. Shopping seasons, sales campaigns, and website changes can all contribute to AOV fluctuations.
Tips for Increasing Your AOV
You can increase your AOV in numerous ways. You’re essentially trying to (tastefully!) convince your Shopify customers to spend more, either through choosing additional or frequently bought together items or more expensive items than they had planned to purchase. There are a variety of ways to achieve this:
Cross-sell and upsell
A great strategy to increase your AOV is through something called cross-selling and upselling.
Cross-selling is when you entice customers to buy complementary or related items, while upselling is the suggestion of an alternative, higher-end (and more expensive) item to what they’re already considering. Continuing with the earlier hat example, a cross-sell would be suggesting a t-shirt to go with it, while an upsell would be encouraging the customer to choose a more expensive hat.
Offer direct incentives
Direct incentives like these can go a long way:
- Percentage discounts. People love sales, so you could offer them a percentage discount for a certain period of time, like 15% off hats for one week.
- Volume discounts. Try a volume discount of, say, 25% off a minimum $40 purchase.
- Coupons. A great way to encourage Shopify customers to come back another time is to throw in a coupon with their purchase. For instance, this could be for $10 off their next purchase of $50 or more.
- Freebies. People also love freebies, so you could throw in a free pair of socks with a minimum purchase of $30, for example. Or, cover the shipping on their first order (a great way to entice new customers to buy from you) or on a minimum $50 spend.
Other ways to increase your AOV
Aside from cross-selling and upselling and offering direct incentives, here are some other outside-the-box ways to boost your AOV:
- Put an appealing array of items in front of your customers. Do the research to learn what your Shopify customers want and how to best set up your website design so they’re merchandised and displayed in a way that resonates and connects with them.
- Make donations on your customers’ behalf. If there’s a cause that makes sense for your store to stand behind and contribute to, ideally something related to what you sell and who you sell to, many of your customers will appreciate that and hold you in high regard. For example, if you’re selling sports hats and apparel, maybe you can contribute 5% of each sale to a sports program for underprivileged kids.
- Offer a liberal return policy. Especially when people buy online and can’t see, feel, or try on a product, they often hesitate to purchase. But, if they have the comfort of knowing there’s a fair amount of time to return an item, say 30 or 60 days, they’ll feel more confident and inclined to buy it. And, going the extra mile of covering the return shipping cost will be even more appealing to shoppers.
If you’re not quite sure when, how often, and for which customers you should implement these strategies, simply segment your Shopify customer base into different groups based on their transaction history and patterns. They can be categorized into groups like small vs. big spenders or low frequency vs. high-frequency shoppers. Then, choose the offers you think they’d best respond to and target them with those offers.
For example, the small spenders might love a freebie or volume discount, while the high-frequency shoppers could respond well to a loyalty program.
What is average order value (AOV)?
Average order value (AOV) is a metric that indicates your customers’ purchasing habits by tracking the average amount they spend each time they place an order with your Shopify store.
How can I improve my store’s AOV?
Cross-selling and upselling is a fantastic way to increase your Shopify store’s AOV. This is a targeted, meaningful method to encourage customers to buy complementary or related items, or suggest alternative, higher-end (and more expensive) items to what they’re already looking at.
Now that you’ve been introduced to AOV, why it’s so important, and how to calculate it, go ahead and give these tips and tricks a try so you can improve your Shopify store’s AOV and, ultimately, succeed. Cross-selling and upselling is a fantastic place to start since these offers are targeted and meaningful to each individual customer and their needs.