Average Order Value – Why It Matters for Your Online Business & How to Increase It

AverageOrderValue

Much like the world, the Indian e-commerce market has changed drastically in the year 2020. With online shopping becoming the ‘new normal’ and in-store purchases going down, many business owners launched their online stores. From essentials in the start to niche products later, they started selling the right products and also attracted significant customers.

With beginner’s luck paired with hard work, everything started well. But then many of them noticed something strange even after the year had ended well.

A major proportion of all the orders received were of fairly low amounts. While they have been trying to sell more, the average revenue per order looks static. Why?

For once, they thought they needed to work on getting more traffic to the website. But that would mean spending more money on marketing than required.

Sounds like it is your story? This is more like a side-trap that you may eventually fall into. What’s the solution to grow business then?

The simplest answer is:

  • Convince your customers to buy more products online from your store
  • Persuade them to buy costlier products from you
  • Or both

That is where the concept of ‘Average Order Value’ comes into play.

What is an average order value?

As a significant e-commerce metric, average order value represents the average amount that each customer has spent on a store. It measures the average total of every order placed with a seller over a specified period. You can simply calculate the average order value on your online store using this formula:

Average Order Value = (Total revenue generated / Total Number of orders)

It is a critical metric for all businesses to make data-driven business decisions, such as product pricing optimization and marketing spend. It is also a Key Performance Indicator (KPI) that can help you understand the buying behavior of customers on your online store.

Why does average order value matter?

Knowing the average order value of your online store helps evaluate how you market and price your products. Keep in mind that it does not describe profit margins or gross profit. To understand why it matters, consider this example –

You sold three pairs of men’s shoes each of which were priced at INR 1,400, INR 550, and INR 750 in three different orders, making the average order value to be INR 1,500. This consumer behavior trend on your online store indicates that:

  • The low-cost shoes in your product inventory are mostly sold via your store.
  • No customer has bought multiple shoes in one go.

With these insights, you can plan to promote product bundles at a discounted price in your store while also highlighting more expensive shoes having higher profit margins. By increasing the average order value, you can increase the Return on Investment (ROI) and ultimately, profits.

Some other crucial pointers related to average order value are:

  • It should be monitored regularly – either daily, weekly, or monthly
  • Any dips or peaks in it should be carefully examined to understand the cause behind
  • Based on the trends in the average order value on your store, you can create marketing campaigns or set flash sales for your customers

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How to increase average order value on your online store

  • Offer discounts on minimum order thresholds
  • Provide bigger volume discounts
  • Get customers enrolled in a loyalty program
  • Create product bundles or packages
  • Provide purchase recommendations
  • Focus on cross-sell and up-sell
  • Add a free shipping threshold
  • Optimize product price
  • Offer discount coupons for next purchase

Let’s get into their details one step at a time.

  • Offer discounts on minimum order thresholds

A simple way to increase the average order value on your online store is to encourage customers to spend a minimum amount to become eligible for a discount. For example: a 10% discount on orders above Rs. 2,000 or a surprise freebie on all orders above Rs. 800.

Discount is a great attraction of low-spend customers. Anyone spending near this minimum order threshold will likely feel enticed to spend a little more to get the discount. You can keep this as an evergreen or time-bound offer available on your online store.

  • Provide bigger volume discounts

It is simply about making your customers add more items to the cart to become eligible for a special offer. For example, buy 3 round-neck men’s T-shirts at the price of Rs. 399 and get the fourth one free. Similarly, get a 30% discount on buying 4 formal men’s shirts priced at Rs. 699.

On one hand, potential customers are lured to buy more items than just one. While on the business side, you get bigger orders that increase the average order value in your store.

  • Get customers enrolled in a loyalty program

A customer loyalty program is more like a retention strategy that most online stores follow these days. It helps build relationships with customers, which ultimately makes them buy from you again.

If you particularly sell consumable products like soaps and cooking oils in your store, a loyalty program can work wonders for you. It will not only help retain loyal customers but also increase the average order value of your online shop.

Fun Fact: 81% of respondents (millennials) of KPMG’s survey say being a loyalty program member encourages them to spend more.

  • Create product bundles or packages

Increasing average order value means convincing customers to buy more items, which can be done by creating bundles or packages of related products. Ideally, this bundle should cost less than if the products in it are purchased individually.

One way to bundle products the right way is to select a range of products that falls in a comprehensive use case. For example, cooking stove and kitchen accessories – the basic essentials that people mostly buy together. This will make it easier for your customers to buy things all at once without searching for each product individually.

  • Provide purchase recommendations

A lower average order value can also be the result of focused purchase intent of customers because of which they do not want to browse around. To address such behavior, add product recommendations to the inner product pages and even checkout page. You can recommend popular products or the ones purchased by other customers in addition to the products in a user’s shopping cart.

Bonus Tip: Set product recommendations based on your business priorities without limiting yourself to popular or similar items. Add less-popular products in these recommendations to get traction on them.

  • Focus on cross-sell and up-sell

Cross-selling involves hand-picking products that are complementary to the item added into the cart by a user and then suggesting them as recommendations. For example: doormats with living room rugs. On the other hand, upselling is about suggesting an expensive version of the product added into the cart.

Both these are tried-and-tested strategies that can help in increasing the average order value of your online store.

Recommended Read: A Business’s Essential Guide to Payment Processing Methods

  • Add a free shipping threshold

Most people look for a way to eliminate the shipping cost related to their online orders. With a very small order, the shipping cost falls on them, while the seller pays for it when they place an order above a certain threshold.

You can set this threshold in such a way that you can afford the shipping along with profits and it is higher than the current average order value.

  • Optimize product price

In layman terms, increase the price of products sold on your website and the average order value will increase by itself. However, this should be done in a way that does not result in the loss of valuable customers.

Before you do this, evaluate price sensitivity of customers and figure out an optimal increase in the product prices that they are willing to pay.

  • Offer discount coupons for next purchase

Last but not least, you can boost average order value by offering next-order discounts to the customers on specific products or those spending a certain minimum amount. This is an effective way to get customers back into your store and buy from you.

The bottom line

Launching and growing an online business requires keeping track of various parameters, one of which is average order value. If measured and optimized the right way, it can help you define the growth and marketing strategy for your business.

Keep in mind that your loyal customers play a key role in increasing the average order value at your store. Focus on customer retention along with calculated acquisition to grow your business towards greater heights.

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