What is Average Order Value (AOV)?

Average order value (AOV) is an important performance metric for your e-commerce business. AOV is the average amount a customer spends each time they complete a purchase on your website. It’s calculated using this simple formula:

AOV = Total Revenue / Total Number of Orders (over a specific period of time).

For example, if your store generates $10,000 from 100 orders in a month, your AOV is $100. The average order value formula does not consider the number of customers, only the number of orders.

Tracking AOV over various time frames helps identify valuable trends, such as year-over-year growth, seasonal patterns, or the impact of specific marketing campaigns.

Why is AOV Important?

An effective way to boost revenue for an e-commerce business is by increasing the amount customers spend per order. Since you’ve already invested in attracting these customers and capturing their interest in your products, the next step is to encourage them to enhance their purchase. This could mean opting for a higher-value product or adding complementary items to their cart.

Consider a coffee product company as an example. If most of your customers come to you for low-price individual items, such as a bag of coffee beans or jar of instant coffee, then your AOV will be low.

However if you can convince more of your customers to purchase product bundles—like a sampler set of different flavours—or include instant coffee along with their ground coffee or whole beans, your AOV will increase along with your overall revenue. Even better—sign them up to a subscription so they get regular deliveries without having to think about it.

We know that growing traffic usually results in more money in the form of more customers or orders. This is why businesses happily invest in SEO and other marketing techniques. However, merely getting visitors is not enough—you need to maximize the amount they buy when they place their order.

If you can get your customers to convert at a higher AOV on your store, their lifetime value (LTV) will also be higher. Therefore, this opens many re-marketing opportunities to them in the future.

Reasons to Measure Your AOV and Work on Increasing It

Maximizes Revenue Without New Customer Acquisition Costs

Increasing AOV means you’re earning more from your existing traffic, saving on customer acquisition costs.

Allow More Budget for Marketing to Acquire New Customers

If you can increase your average order value, you can afford to spend more on acquiring a customer. Spending $20 per customer on marketing when your AOV is $40 is not a great return after you deduct costs and taxes. The more you can get your AOV up, the more cost-effective and profitable your marketing becomes.

When your AOV strategy proves to be working, spending more on marketing to gain further customers is achievable.

Analyze & Improve Profitability

By factoring in your product costs and fulfillment expenses, AOV helps you determine your profit margins and identify areas for improvement.

For instance, many online businesses offer free shipping on orders over a certain dollar amount. This is a common tactic for increasing revenue, but you must carefully consider your AOV on this type of offer.

For example, suppose your online store offers free shipping on orders of at least $50. The average packaging and shipping cost for each order is $8, and your current AOV is $64.

In this example, the AOV isn’t much more than the free shipping threshold, and the shipping cost is eating significantly into your profit margin. However, if you can increase its AOV to $80, the profit margin will greatly improve. Using this data can help you decide to increase the free shipping threshold.

Encouraging customers to spend more per order also helps cover fixed costs, leading to higher profit margins.

Optimize Marketing Efficiency

AOV plays a crucial role in maximizing the return on investment (ROI) for your marketing efforts. Here are a few ways AOV can inform your marketing strategy:

Target high-value customers: By monitoring AOV, you can segment your marketing audience based on their spending habits. You can then target those customer segments with marketing campaigns for higher-priced products and product bundles.

Measure the impact of marketing campaigns: Track your AOV alongside various marketing initiatives. For instance, did your AOV increase after you executed an email marketing campaign with a coupon code?

Refine upselling and cross-selling strategies: Many e-commerce websites offer upsell and cross-sell suggestions during checkout. You can experiment with A/B testing to see which techniques have the greatest impact on AOV.

Optimize product bundles: If customers typically buy two products averaging $50 each, bundling three products at $140 might feel like a deal (boosting customer loyalty and LTV) while boosting AOV.

Behavioral Insights to Encourage Higher Spending

Psychological principles can play a significant role in AOV strategies. One such principle is anchoring, where the presence of a high-priced item makes mid-tier options appear more reasonable. For example, displaying a $2,000 premium laptop next to a $1,200 model can make the latter feel like a better deal, nudging customers to choose the higher-priced option over a cheaper alternative.

Another strategy is leveraging the decoy effect, where a third, slightly inferior product is introduced to guide customers toward the more profitable option. For example, offering three subscription plans—basic, premium, and a middle-tier option priced similarly to premium but with fewer benefits—can make the premium plan appear more attractive.

Finally, the scarcity principle—highlighting limited-time offers or low stock—can create urgency, encouraging customers to act quickly and potentially spend more.

Increasing AOV vs. Acquiring New Customers

Acquiring new customers is significantly more expensive than generating additional revenue from existing ones. Research indicates that attracting a new customer can cost five to seven times more than retaining an existing one. Moreover, increasing customer retention rates by just 5% can boost profits by 25% to 95%.

So while acquiring new customers is important (and necessary), don’t neglect your existing customers nor those who are new to your site and currently have products in their cart.

Real-World Examples of AOV Strategies in Action

Successful e-commerce businesses often employ AOV strategies that are simple yet highly effective. For instance, Amazon’s “Frequently Bought Together” feature is a prime example of cross-selling. When a customer views a product, they’re presented with related items frequently purchased alongside it. This not only enhances convenience but also increases the likelihood of customers adding multiple items to their cart. Similarly, Starbucks uses upselling effectively by suggesting drink customizations or larger sizes during the checkout process. These small additions might cost the customer a little more but can significantly impact AOV when scaled across millions of transactions.

Another example is Sephora’s use of product bundles. By grouping complementary beauty products into a set at a slightly discounted price compared to buying them individually, the brand encourages customers to spend more while feeling they’re getting better value. These examples highlight how AOV strategies can seamlessly integrate into the shopping experience.

Mean vs. Median

When calculating AOV, it’s important to consider the type of “average” being used. The formula provided earlier calculates the “mean,” which is typically the most appropriate choice for determining average order value.

However, there are cases where using the median might be more useful. The median represents the midpoint of your data — half the values are above it, and half are below. Both the mean and median can be easily calculated using tools like Microsoft Excel.

Imagine you sell products ranging from $40 to $400, but you also offer a high-ticket item, like a $3,000 personal coaching or consulting service. Most customers will purchase your standard products, but when someone buys the premium service, it significantly increases the mean order value, making it less representative of typical transactions. Using the median instead can help remove the impact of such extreme outliers.

Alternatively, you could calculate two separate means: one that excludes higher-priced items to better reflect the average transaction value of a typical customer, and another that includes all items to provide a more accurate picture of your overall revenue.

Benefits Beyond Profitability

Increasing AOV doesn’t just boost your bottom line—it can also enhance customer satisfaction. For example, offering well-thought-out product bundles or discounts on additional items can make customers feel they’re getting more value for their money. This perceived value fosters loyalty, increasing the likelihood of repeat purchases.

Additionally, focusing on AOV can improve the overall shopping experience. Personalizing recommendations or offering convenient options like subscriptions simplifies the buying process, saving customers time and effort. For example, a subscription service for consumable products such as coffee or skincare items ensures customers never run out while increasing their lifetime value (LTV).

The Limitations of AOV

AOV is a valuable metric, but it shouldn’t be the sole tool for gauging the success of your e-commerce website’s success. For instance, a high AOV might not translate to high profits if your product costs are also high. Focusing solely on AOV also neglects the expenses associated with acquiring new customers.

To get a complete picture of your e-commerce business health, it’s crucial to analyze AOV alongside other important metrics, including:

Conversion Rate: The percentage of visitors who complete a purchase.

Customer Lifetime Value (CLTV): The total revenue a customer generates over their relationship with your brand.

Customer Acquisition Cost (CAC): The average cost of acquiring a new customer.

Common Mistakes to Avoid When Focusing on AOV

While increasing AOV is a powerful strategy, there are pitfalls to watch out for. One common mistake is pushing irrelevant upsells or cross-sells. For example, suggesting a high-priced, unrelated product during checkout can frustrate customers and even deter them from completing their purchase. Instead, recommendations should be relevant and add genuine value to the shopping experience.

Another error is setting thresholds too high for incentives like free shipping. If your AOV is $50 and you set a free shipping threshold at $150, many customers may feel the goal is unattainable and abandon their carts. To avoid this, thresholds should feel achievable based on typical customer behaviour.

Lastly, neglecting the customer experience in pursuit of higher AOV can backfire. Aggressive upselling or overloading the customer with add-ons can lead to a negative perception of your brand. And while there is some data indicating the use of pop-ups is effective, customers almost universally abhor them (especially when used inappropriately).

Always prioritize the customer’s needs and preferences when crafting AOV strategies.

Conclusion

Every e-commerce business should track average order value and take steps to improve this valuable metric. Increasing your average order value is one of the smartest ways to grow your e-commerce store’s revenue.

However, you must monitor AOV within the context of your costs, profit margins, and overall business goals.

In our next article, we’ll explore actionable strategies to encourage customers to spend more per transaction, including proven upselling techniques, personalized recommendations, and optimizing product bundles.