As an eCommerce business owner, you’re likely paying attention to your conversion rate. If you have a good eCommerce conversion rate, it’s common to assume you’re attracting a lot of traffic to your eCommerce site. However, another metric that you should consider is the AOV or average order value.
High traffic and conversion rates mean that you have a low AOV which may be problematic for your business. AOV is an important eCommerce metric that provides you, you as an eCommerce business owner, insights into your customer base.
This blog post covers the AOV meaning and answers the question, “What is AOV?” With this information, you can understand the importance of AOV and how it can help your eCommerce business.
AOV Meaning and What Is AOV?
AOV stands for average order value, and it estimates the standard amount customers spend on each order placed on an eCommerce website or mobile app. Average order value is a performance indicator that online businesses use because it provides insight into customer purchasing habits.
It’s possible to track AOV over time in order to measure change and growth. Most businesses will track their AOV monthly, so they have up-to-date information to help them make changes as needed. You can do this by using the AOV formula.
AOV trends commonly influence important business decisions such as eCommerce marketing and product pricing. This is similar to how other trends, such as food trends, DTC trends, eCommerce trends, and restaurant technology trends, influence business decisions.
eCommerce businesses are dynamic and in a competitive industry which is why it’s ideal to analyze AOV metrics daily or weekly. Most of these companies will look into maximizing their AOV as it tends to lead to revenue growth and an increase in profit.
Key Takeaway: eCommerce businesses should pay attention to AOV because it’s a metric that provides crucial insights that will allow you to make strategic marketing and pricing decisions.
What Is AOV Used For?
AOV is used by businesses to provide them with crucial insights that may affect their future marketing and pricing strategies. It is an ideal metric that helps evaluate change.
This metric is best used by calculating and comparing the AOV on a weekly or monthly basis. Like many other eCommerce metrics, a company’s average order value may fluctuate daily or seasonally. These fluctuations may be due to sales, promotions, shopping holidays, or seasonal needs.
It’s common for these fluctuations to also affect customer behavior. In fact, customers may be more inclined to spend more or make multiple purchases at certain times during the year than others. Measuring average order value monthly will allow you to make these conclusions and future business decisions.
Keep in mind that a good AOV will vary depending on the industry that you’re in, your sales channel, and the price range of your products. To best determine if you have a good AOV, you may consider measuring it against your past metrics. This way, you can see if it has increased, decreased, or remained the same.
The Importance of AOV
Calculating your business’ AOV will allow you to evaluate how well your pricing strategy and marketing efforts are working. AOV is necessary for measuring the long-term value of each individual customer. It also provides essential information regarding customer outreach efforts including customer acquisition and customer retention.
With AOV metrics, businesses can set clear strategies and goals. It’s also possible to use this metric to determine how well existing strategies are working.
Keep in mind that many businesses focus on increasing their website traffic instead of increasing their AOV. Paying more attention to increasing the business’ AOV may be more useful for the business and increase profits.
Increasing the average order value can be a quick and direct process compared to the timely and costly process of paying for ads to increase site traffic. Increasing AOV is an ideal way to increase overall profits and push direct revenue since transaction costs are linked with each order.
AOV is a key metric and performance indicator that provides insight to help with:
- Understanding customer behavior
- Analyzing advertising spending
- Evaluating marketing strategies
- Changing site layouts
- Examining product pricing
A high AOV indicates that you’re maximizing your revenue on each purchase. A low AOV, on the other hand, indicates that your transaction revenue is low. In this case, you may consider adjusting your strategy to offer additional options to your paying customers.
AOV vs Conversion Rate vs Revenue Per Visit
As a business owner, you may confuse the AOV with conversion rate or revenue per visit. However, the metrics are different. The conversion rate and revenue per visit metrics are also useful and insightful which is why it’s important to understand the difference between the two.
The conversion rate measures the percentage of visitors on a website that complete a specific goal - such as completing a transaction - out of the total number of website visitors. Calculating a business’s conversion rate requires you to divide the total number of website visitors by the number of conversions (goals) completed.
You may discover that your AOV is increasing while your conversion rate is falling. This may indicate a business problem.
Revenue Per Visit
Another metric to pay attention to is revenue per visit (RPV). Revenue per visit is the value of every website visitor. The higher RPV, the more qualified visitors you’re getting on your website. RPV is calculated by dividing the total revenue by the total number of website visits.
Frequently Asked Questions About the AOV Meaning
It’s possible for businesses to increase their AOV by identifying and segmenting their top customers and offering them personalized sales and marketing strategies. To better understand the AOV meaning and “What is AOV?”, read the following commonly asked questions.
Why Is Average Order Value Used?
Average order value is used to determine the average amount each customer spends when completing a transaction on your website. It’s common for businesses to evaluate AOV because it provides insights that may help your pricing and marketing strategies.
What Is a High AOV?
A high AOV will depend on the industry that you’re in; however, it may be a good sign for your business’s spending. High average order values mean that your transaction revenue is lower than the ideal amount. With a high AOV, you may consider adjusting your strategy to offer more options to the customers that are making purchases.
To raise your AOV, you may consider:
- Upselling, cross selling, or bundling additional products and services.
- Applying discounts on minimum order values or bulk orders, including bulk shipping.
- Adding a free shipping threshold, such as 3PL shipping options - calculate shipping costs to ensure that your company can afford this option.
What Is the Difference Between AOV and LTV?
The difference between AOV and LTV is that AOV is your business’s total revenue divided by the total number of orders whereas LTV or Lifetime Value is the monthly revenue per customer divided by the customer’s lifetime duration. Both of these metrics will help you make future marketing and pricing decisions.