Tracking metrics can become an obsession for e-commerce entrepreneurs. As you gather data and measure your performance, it's easy to get hooked on a few numbers that seem to give you a clearer picture of what's happening with your business.
One of those key metrics is the AOV -- your average order value.
Calculating your AOV is pretty straightforward, like its name. Choose a timeframe, add up the order totals, and then divide by the number of orders you had. The answer is your AOV.
For example, if you had three orders totalling $10, $11, and $9, your AOV would be $10. Now let's put that number to work.
What Your AOV Tells You
Your AOV is extremely handy because it not only tells you how much your customers generally order every time they visit, but it gives you a way to see if your business is sustainable. By subtracting your costs from that number, you don't have to wonder if you're profitable.
For example, if your AOV is $100, your customer acquisition cost is $10, and margin is 20%, then you're making $10 profit per order: $100 - $80 COGS (20% margin) - $10 acquisition = $10 (for a more in-depth explanation, please see this article on calculating your AOV.
With one quick calculation, you can get a sense if each customer is ordering enough to cover your marketing costs, you can track ordering trends over months and years, you can find out if new customers are ordering at sustainable rates, and more.
If you're curious about how your business stacks up against others in your industry, you can use the AOV as a measuring stick. It won't be a perfect comparison, but it may give you a good idea if your costs or prices are out of line.
4 Ways AOVs Can Steer You Wrong
For all its advantages, AOV isn't the best tool for every situation, however. Here are some reasons you need to look beyond AOV for accurate data.
1. Your products have a wide price range.
AOV works best when you have a tight product price range, like our example above, where the order was $10, $11 and $9 for a $10 AOV. Keep in mind that you can still have an AOV of $10 if your order is made up of items costing $3, $24, and $3. Without cross-referencing AOV with other data, like most-purchased items or the range between your highest and lowest orders, you could miss buying patterns that would easily skew your AOV.
2. AOV doesn't account for cost of goods sold (COGS).
Some products are more profitable than others, but AOV doesn't take that into consideration. You may have a $24 item that has a COGS of $20, but a $10 with a COGS of $3. Your AOV won't tell you that it's better for your bottom line to sell more $10 items.
3. Comparing AOVs can lead to false conclusions.
It's important to pull your head out of daily operations to see how others in your industry are doing. You'll learn shortcuts and pick up on trends that can boost profitability or save you serious person-hours.
Be very careful about comparing your AOV to other leading stores, however. AOVs for supplement stores will be very different from sporting goods or furniture. These differences may seem obvious, but if you don't choose stores stores that have a similar product line and customer base as yours, you can draw a lot of false conclusions.
For example, if you're selling men's dress shirts and you're looking at AOVs for fashion, don't forget that women's couture fashion -- with an exceptionally high AOV -- could be thrown into a general "fashion" category. Even subcategories can have huge differences. Think of how the AOVs within men's fashion, like shoes versus accessories (wallets, belts, etc.), could be wildly different.
4. Differences in AOV might be just fine.
Even if your store's AOV is lower than a closely-matched AOV in your market, it may not be a big deal.
Instead of panicking, try to learn something about why your store is different. Does your location or the location of your target market make a difference? Are you intentionally choosing to sell at lower prices? Are you selling at a higher volume than other stores?
Before you decide to make any changes to your prices or marketing plants, take a look at a few variables. With a little research, you can either find a legitimate reason for the gap in AOVs or you can pinpoint what you need to change.
Compare, Don't Panic
There are multiple reasons why AOVs vary, so don't jump to any conclusions as you compare. In fact, the best kind of comparisons you can make with AOVs are ones within your own business. See how your AOV this month compares to a year ago or last month. It's more important to see trends within your own business than keep up with your business peers.
Measure which customers you're retaining and which you're losing
In order to keep your best customers, you need visibility into what's going on with them. Repeat Customer Insights will help you track down where you're losing customers and how to better target new ones.