One of the primary goals of any business is to increase its profits. Growth is essential as it will allow brands to fund investments, acquire new assets, and improve their overall value. A common question is how to drive this growth. Most marketers focus on constantly targeting new customers and finding new markets to expand to. If there is a constant stream of new clients flowing through the sales pipeline, brands will be able to continue making sales and growing their businesses. While this powerful strategy should not be ignored, finding new customers is just part of the equation.
A much more sustainable and cheaper way to grow is to focus on people who are already interested in your products and target them to increase the amount they spend purchasing from your brand. In other words, companies can increase their revenue by focusing on improving customers' Average Order Value (AOV).
What is AOV?
Average Order Value (AOV) is one of the most important Key Performance Indicators (KPIs) every brand should track. It measures the average total of every order placed in an ecommerce store over a defined period.
The calculation for AOV is relatively simple. It is obtained by dividing the total revenue by the total number of orders.
For example, if a brand has 50 purchases in a month with a revenue of $5000, the AOV would equal $5000/50= $100.
AOV can also be segmented by source (e.g., Facebook Ads, Google Ads, Newsletter, Organic, etc.). Doing this will allow for a more granular AOV analysis, resulting in a better budget allocation geared toward the channels that return the highest AOVs.
For example, if the brand in the previous model determined that out of its 50 purchases, 30 came from Facebook Ads, 15 came from its Newsletter, and 5 came from organic content, by incorporating the revenue from each source and calculating AOV, it could determine the efficiency of each source. Following this example, let's assume that $2000 in revenue came from Facebook Ads, $1000 from its Newsletter, and $2000 from its organic content.
By inputting the numbers into the formula, the following results are obtained:
FB Ads= $2000/50 = $40
Newsletter= $1000/15 = $66.6
Organic= $2000/5 = $200
The results show that, despite organic having less overall sales, those sales had a much higher AOV than in the other two channels, evidencing a critical difference between the audience sourced from this channel.
Why is AOV important?
Based on the previous example, we can see how AOV is crucial for any business to consider within its KPIs, as it will allow them to make overall business decisions.
The overall AOV can be used to benchmark numbers against a brand's main competitors and industry standards, allowing it to assess the business's health. Furthermore, channel-specific AOVs can guide critical marketing decisions, such as advertising budget allocations and campaign strategies.
Lastly, companies can assess their AOV changes over specific periods to implement changes to increase AOV in the long term. The question is, what particular strategies can you implement to increase AOV?
4 strategies to increase AOV
1. Bundle Products together
A powerful strategy to increase AOV is bundling, which means grouping together different products as a single unit, selling them at a lower cost than when sold separately. This will encourage customers to buy more of your products, thus increasing their order value.
In addition, bundling products could also benefit the brand by allowing them to clear old inventory, save money on marketing and distribution costs, and in some cases, even accelerate the decision-making process for clients. It is estimated that bundling accounts for 10-30% of ecommerce revenue.
Some great examples of product bundling include subscription boxes, build-your-own bundles, and complimentary samples and products.
The key to product bundling, especially when starting out, is to keep it simple. Avoid creating overly-complex bundles, as this is likely to put customers off.
A great example of product bundling is Nintendo, who offers the option to purchase their Switch Console separately or bundled with complementary products.
2. Use a Minimum Dollar Threshold for Free Shipping
One of the simplest strategies to increase AOV is to include a minimum dollar threshold for Free Shipping. For example, Free Shipping on all orders over $100.
In today’s competitive market, 80% of consumers expect retailers to have a free shipping threshold. In addition to increasing AOV, offering a threshold also allows brands to meet client’s expectations.
The catch when implementing a threshold is that brands should strike a balance between protecting their profit margins and persuading clients to increase their spend. The calculations for this can get quite complex, but a good rule of thumb to begin with is to place the threshold 30% above your AOV. For example, if your AOV is $100, the minimum dollar threshold would then be $130.
Lastly, it’s important to communicate the threshold to potential clients as clearly as possible. Ideally, it’ll be visible to clients as soon as they enter your website. At a minimum, it should be visible during checkout.
3. Show cross-sell and upsell items during check out
Many small business owners consider the sales process completed when a client reaches the checkout page. However, this is an excellent opportunity to cross-sell or upsell to highly engaged individuals.
Upselling and cross-selling are commonly confused. However, they’re different terms. Upselling is a technique to persuade customers to acquire a more expensive or premium version of a product or service. On the other hand, cross-selling involves making recommendations to purchase additional, complementary products.
A great way to incentivize a cross-sell or upsell during the checkout process is to include complementary products to the item being purchased (e.g., clients who bought this also bought) or offer a potential upgrade.
The key to upselling and cross-selling during checkout is to offer relevant, related products. It should come off as advice to the client to complement their purchase rather than a selling strategy to maximize a sale with random products.
A great example of this is Zara’s check out page, where recommendations appear to add complementary products to your purchase based on the items already added to the cart.
4. Set up a Customer Loyalty Program
Lastly, a great way to increase AOV is to offer clients the option to join a customer loyalty program. This will allow brands to build deeper relationships with their clients, increase their lifetime value, and maximize AOV. Clients will be more likely to spend more and visit your site more often if rewarded.
Some great strategies to increase AOV within customer loyalty programs include offering a minimum order value that lets customers qualify for different rewards and giving members exclusive access to limited-time offers and early access to new products.
On average, businesses with customer loyalty programs see a 13.71% increase in AOV. Setting up a loyalty program from scratch can be daunting; however, many reward program providers are perfect for DTC businesses, such as smile.io, which can simplify the process for you.
Overall, maximizing AOV is a great strategy for a businesses to increase their bottom line without breaking the bank on expensive marketing and advertising campaigns. To recap, here are the 4 ways to increase AOV covered in this article:
If you're still unsure about how to increase your brand’s AOV, our knowledgeable Growth Partners are happy to answer any questions! Connect with us here to learn more about how we can help.