Today, acquiring new customers is 5x more expensive than retaining existing ones. Despite this, many direct-to-consumer (DTC) brands still believe unlocking new revenue relies solely on attracting new customers.
Existing customers spend 33% more per order than new ones. So, if you increase your average order value, you can generate more revenue without increasing your spending.
Average order value (AOV) measures the typical amount a customer spends per transaction when they shop with an ecommerce brand via their online store or mobile app.
Business owners often use this metric to:
Why? Because average order value tells you which products your customers favor and who you’re reaching.
For example, say you sell wallets that range from $10 to $100, and your average value is $30. This indicates that your current customer base prefers your lower or mid-cost products.
So, you might use this information to expand your product line to include more of these mid-grade options so they buy multiple wallets. Alternatively, you might up-sell customers from a $30 wallet to a $40 option.
|Most retailers track average order value daily or weekly. But they’ll also monitor changes in this key performance indicator (KPI) over time to see how customer behavior changes and to change their business strategy accordingly.|
Average order value is an important metric for every ecommerce brand to track, regardless of what you sell or how long you’ve been in business, because it indicates how much you make per transaction.
You can then use this information to validate your pricing strategy, set revenue goals, and inform your marketing decisions.
Calculating average order value gives you a baseline for how much customers are willing to spend with your brand at one time. You can then use this information to gauge the effectiveness of your pricing strategy (and product offerings).
For example, say your hero product is a pair of $150 headphones. But you also offer a line of accessories ranging from $5-$30. Your average order value is $45.
Chances are, this AOV is much lower than you’d like. And it might indicate that your price is too high compared to competitor offerings. As such, customers are only willing to purchase from your accessories line.
So, you might consider running a competitor pricing analysis. Meaning, you’ll research how your prices stack up against your direct competitors and adjust accordingly.
|Raising your prices might seem like the best way to raise AOV, but it’d be a mistake. That’s because customers buy less when they think something is overpriced. Meanwhile, customers buy more (sometimes even more than they need) when they feel they’re getting a good deal.|
However, good headphones often don’t need to be replaced for years. So, this could indicate that the price is too high for existing customers to gift (because they already own the product).
As such, you might introduce a new, better version of your hero product and offer “last year’s model” at a lower price. This new price point will attract new customers while encouraging existing customers to upgrade (and gift their old headphones). All of which increase your AOV.
Alternatively, you can adjust your pricing strategy by:
Perhaps the best thing about average order value is that it’s easy to track (don’t worry, we’ll cover how to calculate AOV below).
So, you can quickly calculate this metric as often as needed. And you can use it to aid your bigger business objectives.
For instance, say your brand did $1m in sales last year. This year, you’re looking to do $1.2m.
You can seek out new customers to drive that 20% increase in sales (which, as you know, will be very expensive). You can increase your prices by 20% (which might drive folks away).
Or, you can run marketing initiatives that boost your AOV by 20% (this is by far the best and most cost-efficient option). But to do this, you need to track your average order value.
By continuously tracking AOV, you’ll quickly identify positive changes (like revenue rising) and negative changes (like sales falling off) that might keep you from reaching your business goals.
And you can take steps to improve your:
For example, say your average order value is tracking downward. Your AOV was $40, but now it’s closer to $35.
Then, you might introduce a minimum order quantity that unlocks some incentive, like free shipping if someone spends $50+. This MOQ will cover the cost of the incentive while lifting your AOV.
Average order value also proves whether your marketing efforts are working (and to what extent).
For example, maybe you test selling product bundles during your off-season to see how this impacts AOV.
If you notice that AOV jumps 5% YOY, you might consider offering this seasonal bundle annually or rethinking which products you’re bundling. Or if AOV jumps 15%, maybe consider offering this bundle year-round.
|🤿 Dive deeper: Steal Caraway’s bundling playbook.|
On the flip side, if AOV stays the same or dips, this strategy might not be worth the additional investment for your team. And you might instead test tailored product recommendations to see if that moves the needle instead.
Essentially, your current average order value should act as your baseline. Every time you rethink your marketing efforts, you should compare your new AOV to this number to determine the efforts’ effectiveness.
But that’s not all. Average order value can also justify how much you spend to get each new customer or your customer acquisition costs (CAC).
Think about it: If your CAC is $29 per new customer (as of 2022, that’s average), you need those customers to spend more than that amount.
So, you can use this number to set the lowest amount your AOV can be without threatening your brand’s profitability. If your AOV drops below that number, you need to cut back on CAC.
Alternatively, if your AOV is $75, you can spend $29 to acquire that new customer because the returns might justify the investment.
|Since customer acquisition costs are so high, focusing solely on winning new customers—rather than boosting the AOV of your existing customer base—can backfire. So, you don’t want to invest all (or even most of) your time and money in attracting new customers.|
While some ecommerce businesses focus on increasing traffic to their ecommerce site, it’s much more impactful (and profitable) to focus on improving AOV.
That’s because increasing traffic is typically expensive, whereas increasing AOV doesn’t come with the same added costs.
So, a higher AOV typically means higher revenue. Yes — it’s really that simple.
Let’s say your AOV in June is $100. In July, it spikes to $120. Even if you have 1,000 orders in both months, that’s a $20,000 increase in revenue MoM.
Meaning, if you can increase your average order value (and maintain your number of sales), revenue growth will follow.
To calculate your average order value, use the following formula:
|average order value = [total revenue ÷ total number of orders]|
Let’s run through an example. Say your online vitamins brand generated $5,000 in April. That month you had 250 orders come through. This would make your AOV for April $20.
[$5,000 ÷ 250] = $20
Keep in mind that this metric reflects revenue, not your gross profits. So, you can have a high AOV and still be unprofitable.
Instead, average order value offers insights into how your profit margins came to be.
If you see a significant dip or peak in AOV, you can investigate what’s causing the trend. New marketing campaigns and seasonal demand are two common causes of AOV fluctuations.
With this information, you can inform decisions on what expenses you’re willing to endure.
For instance, if the dip is seasonal, maybe you spin up a marketing campaign to offload potential dead stock while increasing AOV (think: an end-of-season sale).
|This formula uses sales per transaction, not sales per customer. So, say a customer returns multiple times in the period you’re calculating. Each of those orders is factored into your AOV formula separately.|
What constitutes a healthy AOV will vary widely across industries and niches. So, what’s considered a good AOV for another business might not make sense for yours.
That said, knowing what’s truly average can be beneficial, so you know where you stack up.
Let’s quickly run through the average AOV in some of retail’s most popular categories:
|Health & Fitness||$76|
|Home & Garden||$353|
Don’t forget that a “good” average order value will also vary depending on your sales channels, pricing, and seasonality.
For example, an average order value of $30 might be enough for a small Amazon business with low-profit margins. Meanwhile, a luxury beauty brand with high-profit margins might need its AOV to be $100+.
Why? Because retailers with lower AOV need a higher sales volume to stay afloat. Meanwhile, those with high AOV can get by with fewer sales.
Increasing average order value isn’t a one-size-fits-all approach. For instance, some brands might find that a new pricing strategy increases their AOV. For others, upselling customers at checkout might work.
As noted above, raising prices to increase your AOV can backfire big time (driving customers to buy less or opt for a competitor).
And that goes double when there’s a shaky economy (like we’re seeing in 2023). When inflation rises, customers tend to become more cost-conscious.
Your gut reaction might be to raise your prices to compensate for rising costs. (After all, everyone’s doing this.)
But Intelligems co-founder Drew Marconi has noticed a surprising pricing trend working for DTC brands in 2023: Lowering prices amid recession fears.
|🤿 Dive deeper: How to recession-proof your brand.|
But won’t that hurt my profit margins? Not necessarily.
Customers are less likely to opt for a competitor if they can get the same great product at a lower price. As a result, this strategy boosts brands’ sales volume (without wildly increasing marketing spend). And that increased volume makes up for lost margins.
So, as you redefine your pricing strategy, consider lower pricing or introducing a lower-cost line of products. This way, you encourage customers to buy more items in the same shopping trip (thus increasing your AOV).
Really want to raise your prices? Just make sure you do so strategically so you don’t chase customers away. Start by A/B testing different price to see how they impact demand.
|It’s best to do these price tests when a product is newer before customers expect a certain price point. This way, you can better gauge how much people are willing to spend on certain products.|
Cross-selling and upselling aim to nudge customers to buy complementary or upgraded versions of the products they already want. Thus, encouraging them to spend a bit more and increasing your AOV.
Amazon is a great example of this. The ecommerce marketplace provides a carousel of “related products” (upsells) and “frequently bought together” (cross-sells) on every product page.
And it works! An estimated 35% of Amazon’s sales come from product recommendations.
So, if you want to take a play out of Amazon’s playbook, you might add widgets to your ecommerce website that trigger on-site suggestions like “you might also like….”
For example, when people add a shirt to their shopping cart, maybe you recommend pants as an add-on to complete the look.
But don’t just suggest your most expensive products. This won’t work.
Why? Because cross-sell or upsell suggestions should be genuinely helpful (like how a friend recommends a product they use). This builds trust within your customer base and makes them more likely to purchase those additional products.
You can think of bundles as cross-selling’s cousin.
Product bundling is when brands sell several products as a combined package, typically at a lower price than if those items were sold separately.
By bundling multiple products together, you increase these items’ perceived value. So, customers are more likely to opt for the bundle, even if they typically would not have bought all those items individually.
This makes bundles a great way to boost SKUs that aren’t selling. How? By packaging these low-velocity SKUs with complementary, high-demand items from the same product line.
One of the most popular methods for creating product bundles is creating an “all-in-one” solution. (Think: Youth To The People offering a skincare starter set with face wash, serum, and cream.)
That said, customized bundles are having a big moment right now. With a build-your-own-bundle (BYOB) approach, customers have the power (and the freedom) to select products based on their tastes or preferences.
Letting shoppers choose what and how much they need can radically increase your AOV.
Take Huron, for example. The men’s skincare brand launched a BYOB feature in July 2022. And for the five days following the launch, Huron’s AOV increased by 85-110% on average for new and repeat customers.
|The hardest part about offering bundles is inventory management. Luckily, Cogsy tracks all your inventory in real-time and factors bundles into your demand plans. That way, you always have enough stock to meet this demand and actually increase your AOV. Try Cogsy free.|
Minimum order quantity refers to the smallest number of units someone must purchase.
Typically, your vendor enforces MOQs when you’re placing purchase orders. This keeps their business viable by ensuring their not fulfilling orders that waste resources (time, money, materials) and offer little-to-no profits.
Similarly, your brand can set soft, optional MOQs that unlock the volume discount or incentive. But, unlike your suppliers, you won’t require a minimum purchase amount (which could drive folks away).
For example, you might create an MOQ related to how much customers spend with your ecommerce store at one time. Maybe you offer free shipping on orders of $75+, like Primary Beans. Or maybe, you throw in a free gift if they buy a certain, higher-priced item on a random Tuesday.
This soft MOQ strategy encourages customers to add more to their cart in exchange for the perceived value of the unlocked perk.
If your brand sells consumable goods (AKA, products that need frequent repurchasing), consider setting up a loyalty program.
Loyalty programs offer discounts or gifts with purchases once customers pass certain milestones and reward people for spending more money with your brand.
Take Sephora’s Beauty Insider program, for example. The program currently has over 25 million members across three tiers.
And it runs on a 1-point equals $1 system. Members who collect 500 points get $10 off their next qualified purchase.
Customers who spend more with Sephora move to a higher level and unlock added benefits like first access, exclusive free gifts, and free shipping. (Alternatively, customers can buy their status – creating another revenue stream for the beauty retailer.)
But why bother? Customer loyalty programs can deepen your relationships with customers and (when done right) increase their lifetime value.
In other words, there’s a better chance they’ll buy more (and more consistently) over a long time when you incentivize customers to keep spending with you to earn points via a loyalty program.
In fact, McKinsey found that “top-performing loyalty programs can boost revenue from customers who redeem points by 15-25% annually, by increasing either their purchase frequency or basket size or both.”
That said, there’s still some debate about the effectiveness of loyalty programs. Only 37% of today’s consumers say loyalty programs are an effective way to earn their business.
Those who benefit from these programs are often already your best customers. So, they’re probably going to make a purchase anyway. Your rewards program makes it cheaper for them to do so (and there’s no guarantee it’ll increase retention).
Nobody wants to pay for shipping, right? But some customers will do whatever it takes to avoid shipping costs – even adding more items to their order.
That’s why offering free shipping (for a minimum order value) can be a great way to encourage customers to increase their spending.
Shopify recently confirmed customers spend and buy more when free shipping is at stake. According to Shopify, “customers spend over $3 more on the median average item with free shipping than with paid shipping.”
Even better, “customers buy over $22 more on the median order with free shipping than with paid shipping.”
If you want to go this route, select a minimum order value that’s not much higher than your AOV—but still high enough to cover the cost of that coveted free shipping. For instance, if your AOV hovers around $35, offer free shipping on orders over $50 (this is the MOQ route).
Alternatively, you can offer customers free shipping available when customers spend $500+ with you in a year (this is the loyalty program route).
The goal is to make free shipping available to the greatest number of customers, so you increase your overall revenue. But remember: Setting the free shipping threshold too high puts you at greater risk for more cart abandonment.
Plenty of coupon codes are floating around online, hoping to draw shoppers in.
Perhaps most popular after the iOS-14 update is offering customers a discount in exchange for signing up for emails or text message communications.
For example, Supergoop uses a pop-up to offer site visitors 10% off their first purchase in exchange for their email.
But isn’t that a massive hit to revenue? Yes, but it can pay off.
The idea here is that people might not convert on their first visit. However, if they think they might eventually buy something, they might sign up for emails just to secure that discount.
This allows the brand to communicate directly with this prospect on an owned channel. Here, they can continue to educate this lead on the benefits of their products or offer (perhaps) more enticing marketing offers until that person is ready to convert.
And at this point, this customer will hopefully try more products with their first purchase, thanks to the coupon code.
That said, while effective in the short term, discounts usually don’t increase average order value (or customer retention).
In fact, if you constantly offer sales, customers can grow accustomed to the lower price point, undermining your pricing strategy.
Why? Because this signals to consumers that your product is overpriced (because you can afford to eat the discounts). So, people will hold off on purchasing until the next discount period.
Ecommerce subscriptions let customers receive products on a recurring (automated) basis.
For example, Manscaped sells all its grooming replenishments via a subscription service (dubbed “The PeakHygiene Plan”).
On the surface, a subscription guarantees cash flow for your brand. But on a deeper level, subscriptions can also build strong customer relationships and increase your average order value. All while lowering acquisition costs in the long term.
That’s because subscriptions turn customers who already see your products’ value into reliable sources of recurring revenue. And the longer someone uses your products, the more loyal they become to your brand and the higher their customer lifetime value.
Let’s go back to the Manscaped example. The company’s known for its razors. However, the company also sells shampoo, exfoliators, and boxers.
So, some subscribers might opt to switch their products to Manscaped because they can add those products to their standing subscription plan and not have to worry about restocking, thus increasing your AOV.
|🧠 Keep in mind|
|Customers tend to set up subscriptions with a “better safe than sorry” mentality—which could mean they wind up with a stockpile of razors or toothbrushes in just a few months. When this happens, they’ll likely churn.|
Meanwhile, customers who stick to buying one-off (that is, they only buy what they run out of it) have a more inconvenient experience overall. So, there’s a greater risk this one-off customer will churn every time they run out or need to replenish.
After all, most people won’t buy new razors until they need to shave. At that point, they won’t be waiting another week for you to ship their order to them. Instead, they’ll go wherever is fastest and most convenient (likely a brick-and-mortar option).
|Subscription retention relies on having enough inventory available to fulfill these orders on time, every time. With Cogsy, you can factor subscriptions and one-off sales into your inventory plans, so you can easily meet all the demand that comes your way. Try for free.|
Let’s face it: Increasing your average order value is impossible if you don’t have the right inventory available.
Luckily, Cogsy ensures you always have the right stock at the right time. That way, you can increase your AOV (and maximize revenue).
But how exactly? Cogsy’s growth planning feature automatically builds 12-month demand plans with pinpoint accuracy.
Better yet? Cogsy’s actionable dashboard tracks your inventory levels in real-time.
So, whenever you’re running low on any of your products, the tool will send you a replenish alert, letting you know it’s time to restock.
You can even streamline the purchase order process with personalized restock recommendations and bulk-adding functionality.
That way, you know exactly how many units you’ll need to meet customer demand, can stock up accordingly, and avoid common inventory mistakes (like stockouts and overstock) that stand in the way of increasing your AOV.
But don’t take our word for it – try Cogsy free for 14 days!
Average order value (AOV) measures the typical amount a customer spends per transaction when they shop with an ecommerce brand. To calculate your AOV, use the following formula:
average order value = [total revenue ÷ total number of orders]
What constitutes a healthy AOV will vary widely across industries and niches. So, what’s considered a good AOV for another business might not make sense for yours. That said, $97 is the average AOV across all ecommerce sectors.
The average order value measures the average dollar amount of every customer order. Meanwhile, the average basket size refers to the number of items sold per transaction. Both ecommerce metrics are important for understanding customer buying habits and can help determine how to improve your revenue.