Learn effective strategies to increase Average Order Value (AOV) and Lifetime Value (LTV) in e-com

Average Order Value (AOV)

What is AOV?

Average Order Value (AOV) is a crucial metric for any e-commerce business. It is the average amount of money that a customer spends per transaction on your website. Understanding your AOV can help you optimize your pricing strategy, improve your marketing campaigns, and increase your overall revenue.

How is AOV calculated?

Average Order Value = Revenue/ Orders

        (AOV)

Example:

Last year your Shopify store’s sales were $1.3Million and you had a total of 10K orders. $1.3M divided by 10K is $130 so your AOV was $130 for last year.

This of course is if you have one type of customer. If you have multiple types who spend differently, then you would need to figure out which type of customer they are and what their AOV is.

Why is AOV important?

Marketing and Pricing Strategies

By understanding your company's average order value, you can effectively evaluate your online marketing efforts and pricing strategy, as it provides you with the necessary metrics to measure the long-term value of individual customers. AOV serves as a benchmark for customer behavior, allowing you to set goals and strategies while also evaluating their effectiveness.

For example, if you know your AOV is $130 and customers usually only make one purchase with you because it lasts a lifetime, then you know you can spend $130 in acquiring them, aka your CAC or Customer Acquisition Cost.

This is also where AOV means LTV or lifetime value. If customers purchase from you twice a year for five years on average, and you know your AOV is $130, then you can figure out the LTV. $130 AOV x two purchases a year x five years= and LTV of $1300. This means that you know you can spend up to $1300 to acquire a customer (minus the cost of product and shipping).

Revenue Generation

While some marketers tend to focus on increasing website traffic, it may be more profitable to prioritize increasing AOV. This is because increasing website traffic often requires additional costs, whereas increasing AOV does not.

Since every order incurs transaction costs, increasing AOV can directly drive revenue and boost profits, particularly when customers are already making purchases from your store. For instance, if a company's current AOV is $50, and they receive 100 orders per day, their daily revenue would be $5,000. However, if the company manages to increase their AOV to $75 per order, their daily revenue would increase to $7,500. That's an increase of $2,500 in daily revenue just by increasing the AOV by $25.

By increasing AOV, businesses can also benefit from economies of scale. With a higher AOV, businesses can cover their fixed costs more efficiently, such as shipping fees or production costs, which means that they can increase profits and lower costs over time.

Moreover, increasing AOV can help businesses to achieve their revenue goals more quickly. For instance, if a company aims to achieve $1 million in revenue within a year, increasing their AOV from $50 to $75 per order can help them achieve this goal with fewer transactions. This is particularly important for companies that have limited resources, as it allows them to maximize their revenue without having to spend a significant amount on marketing or advertising.

Pricing Strategy

AOV is a crucial metric that can help companies optimize their pricing strategy. By analyzing customer spending patterns and understanding their purchase behavior, businesses can adjust their pricing to incentivize larger purchases and increase AOV.

One way to optimize pricing is to offer product bundles that encourage customers to buy multiple items at once. For example, a company selling home furniture can offer a bundle that includes a sofa, a coffee table, and an armchair at a discounted price. This can incentivize customers to make a larger purchase than they would have otherwise, increasing their AOV.

Another pricing strategy is to offer tiered pricing based on the quantity of items purchased. For example, a company selling skincare products can offer a discount on orders of three or more products. This can encourage customers to add additional items to their cart, ultimately increasing AOV.

By analyzing customer spending patterns and purchase behavior, businesses can also adjust their pricing to target different customer segments. For instance, a company targeting budget-conscious customers may offer lower-priced products or discounts, while a company targeting premium customers may offer higher-priced products with exclusive features and benefits.

Furthermore, businesses can use AOV to optimize their marketing strategies. By analyzing the AOV of different marketing campaigns, companies can determine which campaigns are driving higher AOV and adjust their marketing spend accordingly. This can help to optimize marketing ROI and ultimately increase revenue.

Inventory Management

Understanding AOV can also help businesses manage their inventory more effectively. By analyzing AOV data, companies can gain insight into which products are selling well and generating higher revenue. This information can help businesses to adjust their inventory levels to meet customer demand more effectively.

For example, a company that sells sports equipment may notice that their higher-priced products generate a higher AOV than their lower-priced products. Armed with this knowledge, they can adjust their inventory levels to prioritize the higher-priced products, knowing that they are more likely to generate higher revenue. They may also adjust pricing or promotions for lower-priced products to encourage customers to purchase complementary items, which can ultimately increase AOV.

Moreover, understanding AOV can help businesses to forecast inventory needs more accurately. By tracking AOV data over time, businesses can identify trends and seasonal patterns in customer behavior. This information can help them to make more informed decisions about inventory levels, purchasing, and merchandising strategies.

For instance, a company may notice that a particular product generates a higher AOV during the holiday season, indicating that customers are more likely to make larger purchases during this time. Armed with this knowledge, the company can adjust their inventory levels to ensure that they have enough stock to meet customer demand during the holiday season.

By analyzing AOV data, businesses can gain insight into which products generate higher revenue, adjust inventory levels to meet customer demand, and make more informed decisions about purchasing and merchandising strategies. This can help businesses to optimize their inventory management processes, increase revenue, and ultimately drive growth.

Customer Experience

The customer experience is an essential factor in any e-commerce business's success. By offering product bundles or recommending complementary products, businesses can improve the overall customer experience and ultimately increase AOV.

One way to improve the customer experience is to offer product bundles. Bundling related products together can make it easier for customers to find what they need and make larger purchases more efficiently. For example, a company selling office supplies could bundle together a printer, ink cartridges, and printer paper at a discounted price. This can encourage customers to purchase more items than they would have otherwise, ultimately increasing their AOV.

Another way to improve the customer experience is to recommend complementary products. By using data and analytics to analyze customer purchase behavior, businesses can recommend products that complement what the customer is already buying. For example, if a customer is buying a new laptop, the company could recommend a laptop case or a wireless mouse. This can not only increase AOV but also improve the overall customer experience by making it easier for customers to find everything they need in one place.

Moreover, businesses can use personalized marketing messages to recommend products based on a customer's purchase history. By analyzing customer data, businesses can recommend products that are relevant to the customer's interests, preferences, and previous purchases. This can make the customer feel valued and appreciated, leading to increased loyalty and repeat purchases over time.

What affects AOV?

1. Product pricing: The price of your products can significantly impact your AOV. If your products are priced too high, customers may be deterred from making a purchase. Conversely, if your products are priced too low, customers may not perceive them as valuable, and you may miss out on potential revenue. Therefore, it's essential to find a balance between pricing and value.
2. Product bundling: Offering product bundles is a popular way to increase AOV. By bundling complementary items together, customers are more likely to purchase more items than they would if they bought each product separately. For example, if you sell athletic wear, you could bundle a pair of leggings with a matching top and offer a discount on the bundle.
3. Cross-selling and upselling: Encouraging customers to purchase related products or upgrade to a higher-priced version of the product they're considering can also increase AOV. For instance, if a customer is buying a smartphone, you could recommend a phone case or screen protector. You could also offer an upgraded version of the phone with additional features.
4. Free shipping threshold: Many e-commerce businesses offer free shipping for orders above a certain amount. Setting a reasonable threshold for free shipping can encourage customers to add more items to their cart to reach that threshold, ultimately increasing AOV.
5. Discounts and promotions: While discounts and promotions can lower the AOV, they can also encourage customers to make larger purchases. For example, offering a discount code for a percentage off a purchase above a certain amount can incentivize customers to add more items to their cart to reach that threshold.

Lifetime Value (LTV)

What is LTV?

Lifetime Value (LTV) is a crucial metric for any business, especially e-commerce businesses. LTV is the total amount of money a customer is expected to spend with your business over the course of their relationship. Understanding LTV is essential because it can inform your marketing strategies, customer retention efforts, and overall revenue projections.

How is LTV calculated?

Lifetime Value = Customer Value X Average Customer Lifespan

LTV

Example:

If customers purchase from you twice a year for five years on average, and you know your AOV is $130, then you can figure out the LTV. $130 AOV x two purchases a year x five years= and LTV of $1300.

This of course is if you have one type of customer. If you have multiple types who spend differently, then you would need to figure out which type of customer they are and what their Value is (AOV as well as their purchase frequency and average lifespan).

Why is LTV important?

Lifetime Value (LTV) is a critical metric for any business, including e-commerce. LTV represents the total amount of revenue a customer is expected to generate for a business over the course of their lifetime. LTV is essential for businesses for the following reasons:

Helps in customer acquisition strategy‍

LTV helps businesses to understand the value of acquiring new customers. By calculating the LTV of a customer, businesses can determine how much they can spend on customer acquisition without losing money. This information can help businesses to allocate their marketing and advertising budgets effectively.

Enables businesses to set prices

Knowing the LTV of customers can help businesses to set prices more effectively. By understanding how much a customer is willing to spend on their products or services over their lifetime, businesses can price their products in a way that maximizes profits.

Helps in identifying valuable customers

By calculating the LTV of individual customers, businesses can identify their most valuable customers. This information can help businesses to target their marketing efforts on those customers, offer them exclusive deals and promotions, and create personalized experiences that keep them engaged and loyal.

Enables businesses to optimize their marketing strategies

‍LTV helps businesses to optimize their marketing strategies by providing insights into which marketing channels and campaigns are driving the most valuable customers. This information can help businesses to allocate their marketing budgets effectively and focus on the channels that generate the highest return on investment.

Helps in business forecasting

‍LTV helps businesses to forecast their future revenue more accurately. By understanding the lifetime value of customers, businesses can predict future revenue more accurately and plan for future growth.

What affects LTV?

1. Customer loyalty: Customers who have a strong connection to your brand and are loyal to your business are more likely to make repeat purchases and refer others to your business. Building customer loyalty requires consistently delivering high-quality products, excellent customer service, and personalized experiences.
2. Average order value (AOV): Increasing AOV can also lead to an increase in LTV. Customers who spend more per transaction are more likely to continue doing business with your company and making repeat purchases over time.
3. Repeat purchases: Encouraging repeat purchases from existing customers is a critical aspect of increasing LTV. This can be done through targeted email campaigns, loyalty programs, or offering discounts on future purchases.
4. Customer retention: Retaining existing customers is often more cost-effective than acquiring new ones. A satisfied customer is more likely to continue doing business with your company, leading to higher LTV.
5. Upselling and cross-selling: Encouraging customers to upgrade to higher-priced versions of the product they're considering or adding complementary items to their cart can also increase LTV.

How to Increase AOV and LTV with Customers

It’s important to try different strategies to increase AOV and LTV for a few reasons, the most important is that you rarely only have one type of customer. What works on a high value customer who is brand-loyal, will not work on a customer who is discount shopping.

Having personas and segmentation in your marketing strategies is a base concept and should always be in play. Your customers should be segmented based on persona and behavior. This will allow you to experiment better and find success quicker and easier than treating all customers the same. This is why data is so important to marketing strategies.

1. Bundle Products: Create product bundles that encourage customers to buy multiple items at once. There are several ways to bundle:Complementary Products: Bundling complementary products is a popular strategy for e-commerce businesses. This involves bundling products that complement each other and are frequently purchased together. For example, a company selling kitchen appliances could bundle a toaster with a coffee maker, as customers who purchase one are likely to purchase the other. Another example is a company selling cosmetics bundling a lipstick with a lip liner or lip gloss.Starter Kit: Another great way to do a bundle is if you have a Starter Kit, especially if your products come with a learning curve or you sell a variety of products and customers are not sure where to start. A starter kit with special instructions and a special deal, will be more enticing because it is more approachable.Product Upgrades: Offering product upgrades is another bundling strategy that e-commerce businesses can use. This involves bundling products with upgrades or additional features at a higher price point. For example, a company selling smartphones could bundle a phone case and screen protector with a premium version of the phone at a higher price. Another example is a company selling laptops bundling a premium laptop bag and external hard drive with a high-end laptop at a higher price.Limited-time Offers: Offering limited-time bundle deals is another effective strategy for e-commerce businesses. This involves bundling products at a discounted price for a limited time. For example, a company selling outdoor gear could offer a bundle of a tent, sleeping bag, and camping stove at a discounted price for a limited time. Another example is a company selling jewelry bundling a necklace and a bracelet at a discounted price for a limited time.
2. Cross-sell and Upsell: One of the most effective strategies for cross-selling and upselling is to provide product recommendations based on the customer's purchase history or browsing behavior. For example, when a customer is adding a product to their cart, the e-commerce website can recommend complementary or higher-priced items that the customer may also be interested in. Product recommendations can come at check out but if that’s a missed opportunity, you can reiterate the recommendations in email flows such as the Purchase Confirmation email, Shipping Confirmation email, or an email flow you send after a product has arrived to ensure the customer is enjoying their purchase.Another strategy for cross-selling and upselling is to offer discounts or promotions when customers purchase multiple items or upgrade to higher-priced products. For example, a company selling laptops could offer a discount when customers purchase a laptop with a larger hard drive or a higher RAM capacity.Providing personalized product recommendations based on the customer's interests, preferences, and past purchases can be a highly effective strategy for cross-selling and upselling. By using data and analytics to analyze customer behavior, e-commerce businesses can offer tailored product recommendations that are highly relevant to the customer's needs.
3. Implement Loyalty Programs: Reward customers for their repeat business with a loyalty program. This can include offering discounts, early access to sales, and other exclusive perks. Customers who feel appreciated and valued are more likely to continue doing business with your company. Adding a “shot clock” to these types of programs is a great way to keep customers coming back as well. Earned points that expire unless spent or another purchase is made add a layer of gamification to this strategy, as do discounts and special offers that expire quickly.
4. Volume Discounts: Also known as the Costco method, if you sell items that need to be purchased regularly, you can sell the items at a large discount if the customer is willing to buy bulk. They get a savings in product as well as shipping since they are purchasing less frequently. If you have a variety of items that you can sell with volume discounts, you can even charge a membership fee to access these deals. This provides an extra revenue stream for your business, so even though you’re making less on product, you’re making that money back in membership fees and beating out your competitors.
5. Subscription Box: If you have the right products for it, a subscription box can be the ultimate fast-track to higher AOV and LTV. Subscription boxes are typically bundled with multiple products, which can encourage customers to make larger purchases. By offering a range of products in a single subscription box, businesses can increase AOV and encourage customers to try new products they may not have purchased on their own.Offering personalized recommendations based on the customer's preferences and past purchases can be a highly effective strategy for subscription boxes. By using data and analytics to analyze customer behavior, subscription box businesses can offer tailored product recommendations that are highly relevant to the customer's needs, increasing the chances of repeat purchases and higher AOV.Offering exclusive products or discounts to subscribers can incentivize them to stay subscribed and make larger purchases. By offering unique products or discounts that are only available to subscribers, businesses can encourage customers to remain loyal and increase their AOV over time.A subscription box can be used by some as a trial, especially if you have a variety of products or are new. Offering “trial” sized items in a bundled subscription box lowers the risk and barrier to entry for new customers and gives you an opportunity to wow the buyer and make them a customer for life. Offering add-ons or upgrades to the subscription box can be a great way to increase AOV and LTV. For example, a beauty subscription box could offer customers the option to upgrade to a premium version of the subscription box for an additional fee, or offer add-on products that complement the products in the subscription box.Lastly, humans are, well, human. People forget to cancel subscriptions so that alone could increase your LTV, even though you’re not really doing anything besides offering a subscription.
6. Personalize Your Marketing: Use data and analytics to personalize your marketing messages. This can include recommending products based on a customer's purchase history or sending targeted emails with relevant promotions. Personalization can increase the likelihood that a customer will make a purchase and continue to do business with your company.
7. Provide Excellent Customer Service: Make sure your customers feel valued and cared for. Respond to their inquiries promptly, and be proactive in addressing any issues they may have. Happy customers are more likely to make repeat purchases and recommend your business to others.
8. Offer Free Shipping: Knowing your AOV means you can set a slightly higher than AOV target for free shipping. If your AOV is $40, offer free shipping at $50.
9. Special Offers and Promotions: Limited time offers that offer free shipping or discounts for spending a certain amount (again, target a number slightly higher than your AOV), can incentivize buyers to spend more to take advantage of a deal. This can also backfire if you do it too often as buyers will figure out that you have lots of sales and they will refuse to purchase your item at full price since they know it will be on sale soon.
10. Return Policy: Just as people forget to cancel subscriptions, they also forget or are too lazy to send back returns. Offering free returns could convince some on-the-fence buyers to make a purchase, and is also great customer service (be sure to make returns easy and hassle free).

By implementing these strategies, you can increase AOV and LTV, which can have a significant impact on your business's bottom line. Remember, it's essential to understand your customers and provide them with a personalized experience that meets their needs and exceeds their expectations.