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Have you ever heard the term average order value? If you\u2019re running a fulfillment center or DTC business, it should be top of mind.<\/p>\n
If your business is selling many items, but the value of those items is low, naturally you want to bring the value up. That means you\u2019re trying to increase your customers\u2019 order value, or the amount a customer spends per order. Increasing the average amount every customer spends is one of the most critical metrics for DTC operators. This concept is known as average order value.<\/p>\n
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Average Order Value (which is also sometimes referred to as AOV) is an important KPI that tracks the average amount of money that a customer typically spends when they come to your website or mobile shop.<\/p>\n
To look at this another way, if you have 100 products on your site that are $5 and one product on your site that is $500, your average order value is likely to be closer to $5 than it will be to $500. This is because more of your customers are likely to spend money on the $5 items (rather than the $500 one), and it\u2019s highly unlikely that they will buy $500 worth of $5 items.<\/p>\n
This may happen, of course, but the likelihood is low.<\/p>\n
Average order value is more than just a KPI that helps you track profit. It can help you understand the habits of your customers when it comes to purchasing from your site.<\/p>\n
Once you know your company\u2019s AOV, you will be able to evaluate how effective your marketing efforts and item price points are. Once you have the AOV, you\u2019ll have the metrics that are required to determine if you have repeat customers or if people are only buying from you once.<\/p>\n
From this, you\u2019ll be able to see if any changes need to be made to your product line to influence consumer behavior. You\u2019ll also be able to set goals to help you pivot your business into a more profitable direction.<\/p>\n
When it comes to calculating your AOV, there\u2019s a specific formula that you can use. To determine your AOV, divide the total revenue you\u2019ve earned by the number of orders that customers have placed during a specific period.<\/p>\n
Let\u2019s pretend that you\u2019re looking at June as your sample period, and let\u2019s say you made $30,000 across 500 orders. You\u2019ll take $30,000 and divide it by 500, meaning that your average order value is $60.<\/p>\n
Now, once you have that information, you have to determine what it\u2019s telling you about your business. If you\u2019re trying to either (a) make more money or (b) drive more sales, you\u2019ll have to look at your business model.<\/p>\n
Ask yourself: are your prices too high? Too low? Do you need to fine-tune your marketing to get more people to interact with your business? Are there specific items that people are gravitating towards? Utilizing the average order formula will assist you with these considerations and making these decisions.<\/p>\n
Seeking out the answers to all of these questions can go a long way toward helping you determine if your current business model is working for you or if you need to change things in the future.<\/p>\n
Once you have an idea of how to adjust your business, consider it a trial period. For example, let\u2019s say that you\u2019re hoping to make a higher profit, and you\u2019re finding that your AOV is extremely low despite you getting a lot of traffic to the site.<\/p>\n
This might mean that people are seeing what you\u2019re selling and they\u2019re engaging with it, but they aren\u2019t spending much money. At this point, you could try a tactic such as implementing a minimum order quantity (MOQ)<\/a> on your website. A minimum order quantity will raise how many items each customer is buying per order. For inexpensive bulk items, imposing a minimum order value is a common practice in ecommerce.<\/p>\n