Maximizing your Average Order Value (AOV) is some very popular advice given to ecommerce stores. Even I've written about that a few times.
But like any metric, there's some subtleties involved.
If you pursue maximizing your Average Order Value too much, you can end up losing money.
That's because AOV is a metric that uses only looks at two parts of your business:
- number of orders
- order amounts
Some of the problems with these are:
- they are both top-line metrics, only about revenue
- they aggregate those metrics into one number
- they also average the numbers, which can hide outliers
Lets break down what these mean.
As top-line revenue-based metrics AOV doesn't consider the cost of goods, cost to acquire the customer, or any other expenses. In the extreme case you could have a massive AOV with costs even more massive, resulting in a loss for each sale.
Average Order Value is also an aggregate metric and is also averaging the data in aggregate. That can hide an entire host of problems with your sales.
Are all of your sales very close to the AOV?
Or are they spread out so you have tiny orders and huge orders?
A broad range could mean a lot of things. It could be that you're losing money on the small orders so they are eating into your profit. It could mean that you're overly relying heavily on infrequent large orders.
A narrow range is easier to forecast and use. Especially with varying traffic sources.
Average order value also doesn't account for your number of sales.
Two stores with the same AOV could have a 1000x difference in the number of sales. If you sell one product this year for $1k, your AOV is going to look amazing but it's not as healthy as a company that sells a million units at $100 AOV.
Average Order Value can be a useful metric but you need to dig into it and understand why it is what it is and how it's influenced by other, underlying metrics. You also need to pair it with other metrics to make sure you can see your business as a whole.
Profit-based metrics and sales volume/traffic based metrics are great complements to AOV. So is segmenting your AOV by customer groups, product lines, or other defining characteristics.
Just don't blindly follow the AOV-maximizing advice you hear while ignoring other measurements of your business health.
If you haven't installed Repeat Customer Insights yet, it's an easy way to get a detailed look at your customer behavior including metrics around AOV for different customer segments.
Eric Davis
Measure your customer loyalty
Measure the different levels of customer loyalty with Repeat Customer Insights. It uses various models to segment and grade your customers based on their behavior.