The question every ecommerce store wants to answer is: ‘How can I encourage customers to buy more, more often?’.
Key to this is offering products that are attractive to customers, at exactly the right time, and making it easy for them to find other products they might be interested in. It sounds simple, but it can be a tricky balance to get right. Ecommerce brands need to consider key questions such as:
- Which products are easiest to upsell to customers?
- Which related products are customers most likely to be interested in after adding certain other products to their cart?
- Are customers more likely to be interested in similar items, or different products? (For example, a customer buying soap may be interested in soaps with other scents, but a customer buying a laptop is unlikely to be interested in a second laptop and would be more interested in related products like laptop covers, bags, etc.)
- What’s the best way to get browsing customers to view other comparable products?
- What discounts or offers can you use to encourage sales while maintaining profitability?
Nail it, and you’ll build up key metrics such as customer lifetime value. But get it wrong and you’ll miss out on a lot of potential revenue in every transaction.
In this article, we explore how ecommerce brands can calculate their average order value, along with tips on how to increase it consistently and sustainably.
It’s not enough to focus on traffic and conversions — revenue per transaction is vital
Ecommerce brands often prioritize two metrics: traffic (the number of users that arrive at their store) and conversion rate (the rate of users which convert into a sale).
While having a high volume of traffic and high conversion rate is great, focusing on these metrics means merchants miss two key elements that contribute to sustainable profitability: repeat purchase rates (the number of customers that return) and average order value (the average amount people spend per order).
Increasing the latter, in particular, is an excellent way to boost your store’s profitability and grow your business.
Average order value is important because it increases your profitability per customer
A low AOV means people are spending less per order, while a high AOV means they are spending more.
The more each customer spends per order, the more profitable each customer becomes. In other words, a high AOV means a higher average customer lifetime value (CLV).
We live in an age of rising customer acquisition costs. If you can increase the value of each order, you will increase the return on the investment you already made at the top of the funnel getting each customer through the door.
Knowing your AOV also gives you an insight into your customers’ buying habits. Combined with other ecommerce metrics such as order frequency and repeat purchase rates, you can find ways to tailor the shopping experience to meet customer needs.
Average order value = customer spend / number of orders
To calculate your company’s average order value, simply divide total revenue by the number of orders.
AOV = The total amount spent by customers in a period, divided by the number of orders placed in the period.
Once you know your AOV, you can track it over time to determine how different actions affect customer behavior and which incentives result in the best results.
Free shipping, discounts, loyalty programs: there are many ways to increase average order value
Generally, it’s suggested that ecommerce brands first optimize their store traffic and conversion rate before working on increasing average order value. After all, there’s no point in worrying about order size if nobody is placing orders to begin with.
Once you’ve got a solid customer base and a repeatable marketing strategy, there are a number of ways you can increase average order value. These include tactics such as:
- Offering free shipping over a certain purchase value
- Offering free gifts with a minimum spend
- Offering discounts with a minimum spend
- Implementing a loyalty program to reward customer spend
- Showcasing additional products that are likely to appeal to the customer, based on their basket or browsing habits
- Making it easy for customers to quickly add items to their basket
The average customer spends less than a minute on a website so it is unlikely that they will have a chance to see the majority of your products unless they’re given an incentive to continue browsing.
To keep customers browsing longer—and, crucially, adding to their order value—put promotions and loyalty offers upfront where customers will see them instantly.
Another excellent tactic is to display similar or complementary products to those in their basket, or promotional items that are on sale or newly offered by the business, where the customer will see them, such as alongside their shopping basket or at the bottom of browsing pages.
AOV is one of many important ecommerce metrics
AOV is an important metric — it’s an excellent way to track the profitability of your customers.
But it’s only one piece of the puzzle. You might enjoy a high average order value, but if your customers hardly ever return to buy again, you still might not generate enough revenue per customer. In this case, you’d be struggling with a low “repeat purchase rate”.
Or perhaps they buy from you frequently for a few months and then disappear to a competitor, in which case you’d have a low “customer retention rate”.
So, to get a full picture of your ecommerce performance, you need to track a range of metrics. Consider:
- Repeat Purchase Rate (RPR), which measures the percentage of your customers that return to buy from your store.
- Customer Retention Rate (CRR), which measures the proportion of your customers that are loyal, based on the number of customers who made a purchase in a time period, the number of new customers, and the number of repeat customers.
- Customer Lifetime Value (CLV), which helps you understand your revenue source better, by understanding how much on average customers are worth in terms of revenue for your business.
- Revenue Churn, which refers to the revenue lost from existing customers, through order cancellations or subscription downgrades.
- Time Between Purchases, which represents the average length of time between customer purchases.
You can learn more about these ecommerce metrics in this article on loyalty metrics and how to calculate them.
Loyalty programs are a great way to improve average order value
Loyalty programs are an effective way to improve customer retention and increase average order value. What’s more is that engaging previous customers is much more effective than acquiring new ones, and can create greater lifetime value.
A study by Bain & Company found that having loyal customers pays. Some stats that stand out include:
- A business’s top 10% of customers order 3x more on average per order than the rest
- The top 1% of customers order 5x more than the rest
- After 30 months of loyalty, customers spend 67% more than their first purchase
So, there is a strong connection between customer loyalty and AOV. Now, what can you do with this information?
Build loyalty into your business plan
A classic loyalty program set-up rewards customers with points that can be redeemed for product discounts. As customers spend more, they receive more points which incentivize buying more products and in turn increases their AOV.
A common misconception of a loyalty program is that offering discounts to loyal customers puts the brakes on profit margins. However, rewarding your shoppers with discounts actually helps build customer relationships in the long run—especially if a spend threshold is used.
Merchants such as Neom Organics have seen a 45% increase in average order value after launching their loyalty program with LoyaltyLion, showing the huge impact this strategy has on the metric.
Points-based loyalty programs aren’t the only initiatives that help improve the average order value and lifetime value of brands. The ecommerce space is constantly evolving with new concepts and ideas on how to reward customer loyalty. The key lies in understanding your customers and what they care most about.
Ready to boost your AOV with loyalty marketing?
Loyalty programs are the perfect way to boost your average order value. If your customers know they’ll earn more loyalty points by spending more money, you’ll naturally see the revenue from each order tick upwards.
LoyaltyLion makes running a loyalty program easy. When you’re ready to get started, book a demo.
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