I overheard a conversation between two colleagues last week about ecommerce average order value and there seemed to be confusion as to how to calculate it, so here is my guide to calculating Average Order Value.
Average Order Value (AOV) is calculated by dividing total revenue by the number of orders that generated the revenue. This calculation includes as revenue the price paid by the customer for the goods sold, shipping charges and other fees, but excludes sales tax. AOV is calculated for a specific time period, by including all orders received in that period.
AOV Calculation Example
If a customer places two orders, one for $20 and another for $40, the AOV will be $30 (i.e. revenue of 20 + 40, divided by 2 orders). However if that same customer had placed one order for $60 for the exact same goods (in this example we assume free shipping), the AOV will be $60.
The following image shows the calculation of AOV across 15 orders received in one day.
The total price paid by a customer = Price paid for goods + shipping charges + other fees + sales tax (i.e. all money received from the customer), but revenue used for calculation of AOV = Price paid for goods + shipping charges + other fees (i.e. excluding sales tax).
Why Calculate AOV
Some costs of processing ecommerce orders are fixed for each order rather than per item sold, so by having to process a smaller number of orders with higher value is normally preferable to large number of small value orders. Higher AOV is therefore an indicator of more profitability (or at least more potential to generate profit).
AOV is one measure of the success of your ecommerce operation, but no means the most important. The profitability of your orders typically increases as the AOV increases, but only if those higher order values are not for lower margin goods.
AOV Time Interval
The time interval over which you calculate Average Order Value will depend on your order volume. The largest retailers with thousands of orders per day calculate AOV daily or even hourly. A small merchant receiving a hundred orders a week will calculate AOV on a weekly, or even monthly, basis.
Seeing AOV increasing over time is the sign of a healthy business. If this trend reverses, this will be a warning to take corrective action.
AOV By Customer Segment
AOV can be calculated not only by time interval, but also for each customer segment. For example, AOV for first time customers, or AOV for VIP customers, or AOV for customers that normally purchase sale items. The larger a business becomes, the more selective it is about which orders to group together and calculate AOVs on, to better highlight trends and changes, and therefore identify corrections and improvements that need to be made.
How Does AOV Vary?
AOV is affected by many factors, some of which are within the merchant's control:
- Offering free shipping may increase the number of orders, but reduces the revenue from each order (because shipping charges are included as revenue and having to pay for shipping discourages customers splitting their orders), therefore reducing your AOV
- Successful promotion of higher priced goods may increase your AOV
- Encouraging cross-sell, to add multiple items to a shopping cart, will increase the revenue per order, hence also the AOV
- Encouraging up-sell, where a customer decides on a more expensive product, increases AOV
- Seasonality may affect price of goods that are popular (e.g. expensive winter coats versus cheap summer skirts) and hence impact AOV
- Newer businesses typically see AOV increase over time as repeat customers are more trusting in the business and place larger orders
AOV calculation variants
Some businesses calculate AOV in slightly different ways to the definition above, to better represent how they see and want to manage their business. Key variants are:
- Excluding revenue earned through shipping charges (since these are passed on to the carrier)
- Excluding revenue effect of discounts (i.e. a theoretical full-price AOV)
- Excluding orders that are subsequently returned and refunded
- Subtracting from revenue any gestures of goodwill paid to customer for service failures
- Including sales tax as part of the revenue
AOV is a relatively simple metric to calculate on a global site-wide basis and is one measure of success of an ecommerce business, and should be tracked over time. However, as a business grows it will begin to track several AOV metrics to maximize insight into the business and help identify changes to make to improve profitability.