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Average Order Value

Published by Eric T. Peterson on July 31, 2005 All posts from Eric T. Peterson

For retailers, average order value is considered a “key” key performance indicator by many, when combined with revenue per visitor or visit and order conversion rate, is essentially the pulse of the web site.

Definition
The basic calculation is:

Sum of Revenue Generated / Number of Orders Taken = Average Order Value

In the ongoing effort to optimize the online business there are two major KPIs describing the site’s ability to generate revenue: average order value and order conversion rate. Smart business owners work diligently to improve both but segmenting visitors and marketing campaigns into high, medium and low AOV groups can help identify where the “best” (e.g., high AOV) customers are coming from.

Presentation
As with other dollar-based KPIs, presentation should be fairly obvious. It is a good idea to present this indicator and average cost per conversion, order conversion rate and revenue per visitor together to provide context to each.

Expectation
Sites should determine a baseline AOV for all customers to use as a comparator for all marketing acquisition campaigns. For example, it might help to make and keep track of the average order value for the entire site, targeted email campaigns, untargeted email campaigns, search marketing efforts and so on. Assuming your conversion rate is same for all customer acquisition efforts (rarely the case), you’ll discover that you’re better off focusing your efforts on high-AOV generating campaign types.

Entire Site AOV Email AOV Keyword AOV Banner Ad AOV
$100.10 $95.50 $120.15 $101.25

As you can see, the average order value for customers associated with search keywords is 20 percent higher than the site-wide AOV.

Action
A decrease in average order value should be compared to changes in the order conversion rate. If AOV decreases but order conversion rate increases revenue per visitor should stay roughly the same; if AOV and order conversion rate both drop revenue per visitor will likely be strongly impacted. Regardless, average order value should be closely watched and any changes should be diagnosed, looking at changes in the checkout process and marketing acquisition programs.

This key performance indicator makes the list of “RED BUTTON” KPIs that, when they go wrong, should bring everyone to a screeching halt while the problem is diagnosed. Especially when compared to marketing acquisition indicators like average cost per visit, the value of conversions are critical.

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Categorized under Key Performance Indicators

 


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