Average order value is intended to represent the dollar amount of your average customer’s payment. At its simplest, AOV is represented as [Total Sales] / [Total Orders]. So if you made $1000 in total sales in a month on 100 orders, your AOV would be $10 for that month.
Why is it useful?
AOV can be useful for a variety of reasons, a few of which are:
- Understanding what your typical customer expects to spend with your
business, which informs:
- Insight into whether your pricing is appropriates
- Understand how customers from different channels differ in their spending habits
- Calculate the profit you make per order, which in turn informs:
- How much you should be willing to pay to acquire an order through marketing
- How much you can offer in discounts without being unprofitable
After getting comfortable with the basics, there is a ton of additional analysis that you can perform on AOV in order to better understand your customers and your business.
- Different components of AOV (product price and quantity, shipping costs, taxes)
- Changes in AOV (effects of seasonality, product mix, pricing, loyalty programs)
- Relationship between AOV and conversion rates (usually caused by pricing, but not exclusivelys)
- Behavioral differences between high-AOV customers and low-AOV customers
- Comparing AOV to Median Order Value, to understand how much AOV is skewed by high (or low) spending customers
AOV is a fairly important metric, especially in early-stage ecommerce businesses. Investors will almost always ask for it given both its applications and implications. When high-level sales or usage metrics change, it’s often a key element in helping teams find the root cause.