What is Average Order Value (AOV) and How to Calculate it?

If you’re serious about growing your online store, you’re probably spending the lion’s share of your time and budget on customer acquisition. And there’s absolutely nothing wrong with that. However, what most small and medium business owners are missing is a significant opportunity to drive revenue without having to spend a cent on more marketing. It’s called increasing Average Order Value (AOV).

According to Inbeat agency insights on the best e-commerce customer acquisition strategies, increasing AOV is, by most accounts, the quickest and most profitable way to grow your bottom line when CAC is increasing.

What is Average Order Value (AOV)?

Average Order Value is a metric that measures the average amount of money a customer spends every time they place an order. In other words, Average Order Value refers to the amount of money that customers spend on average per order.

The formula for Average Order Value is:

Total Revenue ÷ Number of Orders = Average Order Value

For example:

$50,000 revenue ÷ 1,000 orders = $50 AOV.

Note that AOV is a measure of value per order, as opposed to per customer. A customer who places three orders worth $40 each will contribute $40 to your AOV calculation, not $120. For that reason, it’s different from CLV, or Customer Lifetime Value, which measures revenue from a single customer across all their orders.

Beyond the bottom line, Average Order Value also tells you something very important about the way your customers behave. Do they buy your low-end products or premium items? Do they add complementary products to their basket? This is critical information that you need to know which products are actually selling and where to focus your marketing efforts.

Why Does AOV Matter?

For most merchants, the entire conversion conversation is so focused on conversion rate and customer acquisition that other important KPIs and metrics are often left by the wayside. Most business owners only consider these core conversion questions:

• How many people can I get to my site?

• How many will buy?

• How much will each customer spend per order?

While all of these points are certainly valid their scope remains incomplete. As soon as a customer is already on your site and ready to buy, you’ve already sunk the acquisition cost. If it costs next to nothing to get them to buy $75 instead of $50, and transaction costs and fulfillment costs are essentially the same, then your profit margin per order just increased by 50 percent.

Customer acquisition costs are increasing across nearly every industry. And at the same time, there’s a transaction cost (or overhead) associated with each sale you make. That means that an effective way to drive increased revenue is to increase your AOV, and drive direct additional revenue and profit from customers who are already in your funnel, and who have already demonstrated purchase intent. The reality is that most e-commerce stores are leaving a lot of money on the table by neglecting Average Order Value.

How to Calculate AOV for Different Customer Segments

AOV segmentation is where things start to get interesting. Different types of customers have different shopping habits and, therefore, different AOVs. And once you understand those differences, you can target your strategies and tactics much more effectively.

Here are some of the most important segmentation types to consider:

By Customer Type (New vs. Returning)

New Customer AOV = Total Revenue from New Customers ÷ Number of New Customers

Returning Customer AOV = Total Revenue from Returning Customers ÷ Number of Returning Customers

Example: New customers made 300 orders worth $12,000, and returning customers made 250 orders worth $25,000. AOV = $40 for new customers, and $100 for returning customers

By Traffic Source

• Organic AOV = Revenue from Organic Traffic ÷ Orders from Organic Traffic
• Paid AOV = Revenue from Paid Ads ÷ Orders from Paid Ads
• Direct AOV = Revenue from Direct Traffic ÷ Orders from Direct Traffic
• Social AOV = Revenue from Social Media ÷ Orders from Social Traffic

By Device Type

• Desktop AOV = Desktop Revenue ÷ Desktop Orders
• Mobile AOV = Mobile Revenue ÷ Mobile Orders
• Tablet AOV = Tablet Revenue ÷ Tablet Orders

By Time Period

• Seasonal AOV = Revenue in Specific Season ÷ Orders in That Season
• Holiday AOV = Revenue During Holiday ÷ Orders During Holiday
• Off-Season AOV = Revenue in Off-Season ÷ Orders in Off-Season

The Difference Between AOV and Profit

Average Order Value is a very useful metric, but there is one caveat to be aware of: AOV doesn’t equal profit. AOV is a measure of revenue per order, not profit per order. Boosting AOV by heavily discounting products or adding low-margin items to bundles can significantly damage your actual profitability.

That’s why the most sophisticated merchants track AOV along with other metrics, such as conversion rate and revenue per visitor (RPV). It is indeed possible to increase Average Order Value while reducing conversion rate and ultimately bringing in less total revenue. This is why testing and measurement are so critical.

Getting Started With AOV

AOV increases when customers spend more than the average amount on a single order. That’s why the key tactics are:

• Cross-sell complementary products related to the original purchase
• Upsell premium or higher-priced versions of the product the customer is interested in
• Product bundling. Sell related items at an attractive price point as a “value” bundle.
• Raise your free shipping threshold slightly above your current AOV to incentivize customers to add more items to the order.
• Personalize product recommendations based on past behavior, browsing history, and purchase patterns.
• Volume discounts that incentivize larger orders.
• Checkout optimization to remove friction and abandoned carts.

The key to AOV is ensuring that these strategies and tactics don’t come off as pushy or forced and are a natural extension of the customer journey, that provide genuine value. The other part is simply testing what works and what doesn’t for your particular audience.