Editor’s Note: This post was originally published in February 2015 and was updated for accuracy and comprehensiveness on September 30, 2016.
There are two common ways to increase an online store’s profitability: increasing the average order value and increasing purchase frequency. In this post I will focus on increasing your average order value, and how an increase makes your store more profitable by boosting your store’s customer lifetime value.
How Do I Calculate Average Order Value?
Before we get into how to boost your average order value, let’s first make sure that we know how to calculate it. Knowing your current average order value is vital to setting goals and evaluating if new strategies are helping.
This is the simplest calculation of average order value. However, while it is good for bench-marking efforts, it does not give you an accurate representation of the margin you are generating per order. Make sure you subtract your expenses as well as the cost of goods sold for a better representation.
Tips to Increase Average Order Value
Now that you know how to calculate your average order value, we can go over some tips to help increase it. Below are 5 proven ways to increase average order value.
1. Create a Threshold for Free Shipping
This is one of the easiest ways to increase average order value, set a threshold that a customer must spend in order to receive free shipping. According to UPS, 61% of shoppers abandon their cart if they can’t get free shipping. Setting a free shipping threshold can help convert some of those shoppers into paying customers.
Since the majority of shoppers will leave your site if they can’t get free shipping, that also means that they will actively pursue it! You can motivate them to spend a little more in order to receive free shipping. The important thing here is to make the threshold obtainable.
The Grooming Lounge is an excellent example of an effective free shipping threshold. If you want to implement a similar strategy, all you need to do is find your AOV and make a threshold that is 15%-20% above that. If you set it too high, shoppers will see it as a hassle rather than a benefit. This is one of the most common mistakes according to Entrepreneur.com.
2. Start Cross-Selling
Cross-selling is presenting additional items that a shopper might see as valuable. Usually this is done by looking at what they have put in their basket, and recommending products that complement that item. Let me explain with an example:
When a shopper is looking at a product on bodybuilding.com, they are shown two recommended products that other customers usually purchase with it. So if I’m looking for Omega-3 capsules, the site also recommends a protein powder and multivitamin of the same brand.
Bodybuilding.com uses a system to automatically present cross-sells, but you don’t have to be that high-tech. Smaller merchants can simply place a static recommendation on a product listing. This could be putting a recommendation to jelly on all peanut butter listings or toothpaste on all tooth brush listings.
Cross-sells are a great way to boost average order size because they remind your customer of products they may have forgotten or didn’t realize they needed. You provide them with additional value and they provide you with additional order value. It is a win-win!
3. Offer a Product Bundle
This tactic is similar to cross-selling but is much easier for smaller ecommerce merchants. Product bundling is combining multiple products into a single item on your site. With this tactic, the cross-sell is predetermined and offered to the shopper all at once. There are a few types of bundles I have seen be very effective.
Starter bundles have to be the most effective type of bundled product. When someone decides they are going to get into a new hobby or sport they often don’t know everything they need. You can make it easy for them by including everything they need in one convenient bundle. Providing a starter bundle saves your customer time, research, and money while at the same time increasing your order value.
Another effective bundle is a sampler pack. This is especially effective for food and beverage companies. Shoppers are often looking for both a discount and variety. A sampler pack lets them try multiple products with one purchase. This also makes it more likely that customers will find a product they like, which will lead to more repeat purchases.
4. Use Coupons with a Threshold
Coupons are another method to increase your average order size, but they must be approached with caution. Coupons that increase AOV are often used in a similar fashion to free shipping offers – if the customer spends over a certain threshold they will receive 15% or $5 off. The problem with coupons is that they can create some negative associations.
I am a big advocate of providing value through addition rather than subtraction. When you look at it that way, it’s easy to see that offering free shipping creates value by adding something and rewarding coupons creates value by taking something. You want your shoppers to love you for what you sell, not because you discount.
Coupons can be effective as long as they match what your brand and store are trying to achieve. If you sell luxury goods, a discount won’t align with your brand strategy. If you discount too often, shoppers may come to expect it and never buy at full price.
5. Start a Loyalty Program
A loyalty program is one of just a few solutions that are effective at boosting both order value and purchase frequency. A loyalty program can help increase order value by rewarding extra points for purchase above your average order value.
Van-dal shoes uses their loyalty program to encourage a customer to spend more than the average order value. As you can see from the image above, Van-dal gives an additional 40 pts when you spend over £100 and 80 points if you spend over £150. In their program 1 pound is equal to 1 point, making the perceived value of spending £150 is £80 worth of saving.
This follows a similar principle to the thresholds presented before, but it costs you less. Even though the points have a perceived value of £80 , they really are worth £3.2 . If Van-dal’s AOV is £80 they are spending £3.2 to generate an additional £70 in revenue – not a bad return.
Loyalty programs can help boost AOV by encouraging additional spending with points. Customers see the points as more valuable than they really are which leads to a greater return than using actual money.
Maximizing Your Average Order Value
Ultimately average order value boils down to increased profits and continued success for your brand. Incorporating tactics such as free shipping, cross-selling, bundling, and a loyalty program will deliver immediate results while amplifying your customer experience. These considerations will keep customers coming back and make them want to spend more, which is exactly what you’re looking to accomplish.