Product Average Order Value (Product AOV) is a specific metric that determines the average amount of revenue a particular product brings in per order.
It focuses on individual product performance, allowing ecommerce businesses to understand which products are most effective at driving revenue. Through this lens, companies can refine their inventory decisions, marketing efforts, and sales strategies for specific items.
Key Takeaways
- Definition: Product Average Order Value (Product AOV) is a metric that calculates the average revenue a given product generates per order.
- Calculation: Product AOV is calculated by dividing the total revenue generated by a specific product by the total number of orders for that product.
- Strategic Importance: Product AOV allows companies to understand the performance of individual products and guide decisions related to inventory, marketing, and pricing strategies.
- Optimization Strategies: Increasing product AOV can be achieved by highlighting product benefits, bundling with complementary products, offering limited-time discounts, collecting and displaying reviews, and implementing a loyalty program.
- Limitations: Product AOV doesn’t reflect the full product portfolio, can be influenced by promotions, doesn’t account for volume sold, doesn’t provide insight into the product lifecycle, is subject to inventory and supply chain issues, doesn’t indicate product profitability, can lead to neglect of product mix if overemphasized, and lacks context without a market benchmark.
- Complementary metrics: For a comprehensive view of product performance, product AOV should be evaluated alongside metrics such as product conversion rate, product return rate, and product sales volume.
Why does Product Average Order Value matter for your business?
The significance of Product AOV for an ecommerce business can be broken down into several benefits:
- Targeted Marketing Decisions: Recognizing products with a high AOV can guide businesses to focus marketing resources on these items, maximizing revenue.
- Inventory Prioritization: Products with a high Product AOV might be more profitable and therefore may deserve prioritized inventory space or restocking.
- Strategic Pricing: By understanding Product AOV, businesses can implement pricing strategies that incentivize purchases, like bundling or promotions, to boost overall revenue.
- Product Development: Insights from Product AOV can help businesses in refining or expanding product lines based on the products that customers value the most.
- Enhanced Customer Segmentation: Knowing the Product AOV can aid in segmenting customers based on their preferences, thereby crafting more personalized marketing campaigns.
How to calculate Product Average Order Value ?
Explanation of the parts of the formula:
- Total revenue generated by the product represents the overall income received from the sales of a particular product. This includes the cumulative total from every single unit of the product that was sold.
- Total number of orders for the product indicates how many times the specific product was ordered. If a customer orders the same product multiple times in a single order, each unit should be counted separately.
- The ratio gives us the average monetary value of each order placed for the specific product. It’s a measure of the average revenue received per order for that particular product.
In essence, the Product AOV provides an understanding of how much, on average, a business earns every time a specific product is ordered. A higher Product AOV for a particular item could suggest it’s a premium product or often purchased in bulk, while a lower Product AOV might indicate the product is cheaper or frequently bought in smaller quantities.
Example Scenario
Imagine you run an online store that sells handmade candles:
- In a certain month, your best-selling candle was ordered 200 times.
- The total revenue generated by this specific candle for the month was $2,000.
Insert the numbers from the example scenario into the above formula:
- Product AOV = $2,000 / 200
- Product AOV = $10.
This means that, on average, each order for this specific candle brings in $10 for the business.
Tips and recommendations for increasing Product Average Order Value
To improve Product AOV, businesses can:
Highlight product benefits
One effective way to increase the average order value (AOV) of any product is to highlight its unique features and benefits. This involves educating customers about the product’s superior qualities and how it differs from competing products. The goal is to help customers understand the level of value they receive from the product, thereby justifying its price. This can be done through a variety of channels, including product descriptions, social media posts, email newsletters, and blog posts.
Bundle with complementary products
Another strategy companies can use to increase AOV is to bundle the product with complementary items. This method works by creating a package deal that offers a better overall value than purchasing the items individually. The additional items in the bundle enhance the value of the main product, making the offer more attractive. In addition, bundling introduces customers to other products they may not have considered purchasing initially.
Offer limited-time discounts
Limited-time discounts can also be an effective tool for increasing AOV. Offering a product at a temporarily reduced price creates a sense of urgency in potential customers, encouraging them to make a purchase decision more quickly. In addition, this strategy can make the product more attractive to those who may have been hesitant due to price constraints. However, it is important to use this strategy judiciously, as overuse can lead customers to associate the product with less value.
Collect and display reviews
Positive customer reviews can be a significant factor in a customer’s purchase decision. By collecting and showcasing the best customer reviews, companies can demonstrate the value and quality of their products. This not only builds trust with potential customers, but also validates the value of the product, increasing its AOV. It’s important to update reviews regularly and include those that provide detailed insights into the product’s benefits and usage.
Implement a loyalty program
Finally, implementing a loyalty program can go a long way toward increasing a product’s AOV. Such programs reward customers for their repeat business, encouraging them to make more purchases or spend more. Loyalty programs can offer points, discounts, or exclusive offers for repeat purchases of the product. This not only encourages higher spending, but also promotes customer loyalty and retention.
Examples of use
Seasonal Product Launch
- Scenario: An ecommerce platform specializing in seasonal home decor notices that their autumn-themed table runners have an exceptionally high Product AOV compared to other items in the autumn range.
- Use Case Application: Recognizing this, the company can create bundled offers during the fall season, pairing the table runners with complementary items like placemats or centerpieces. By promoting the table runner as a premium product and suggesting related items to pair with it, the company can capitalize on its high Product AOV to drive additional sales and potentially increase the AOV of other items.
Inventory Stocking
- Scenario: A sports equipment store finds that their high-end tennis rackets have a higher Product AOV than other rackets in their range.
- Use Case Application: The store can ensure that they stock more of these high-end rackets, especially during tennis season or major tournaments. They can also run specialized marketing campaigns focusing on the benefits and quality of these rackets to attract more customers willing to invest in premium equipment.
Targeted Marketing Campaigns
- Scenario: A beauty ecommerce store identifies that anti-aging serums have a high Product AOV.
- Use Case Application: They can run targeted marketing campaigns focusing on the benefits of the serum, its ingredients, and user testimonials. By segmenting their email list, they can send tailored promotions to customers who have shown interest in skincare or have previously purchased related items, encouraging them to invest in the high AOV product.
Product Bundling
- Scenario: A tech ecommerce platform sees that their latest gaming laptop has a notably high Product AOV.
- Use Case Application: The company can create special bundles, offering the gaming laptop with complementary items like a gaming mouse, keyboard, or headset at a combined discount. Customers perceive this as added value, and it encourages them to spend more, potentially increasing the Product AOV even further.
Loyalty Programs and Exclusives
- Scenario: A fashion brand realizes that their limited-edition designer handbags consistently have a high Product AOV.
- Use Case Application: To incentivize customers and make them feel exclusive, the brand could offer early access to such high AOV products to members of their loyalty program. By giving loyal customers the first chance to purchase, it not only rewards them but also creates a sense of urgency and exclusivity around the product, maintaining its high AOV status.
Product Average Order Value SMART goal example
Specific – Increase product average order value (AOV) by 20% (from the current $50 to $60 per order).
Measurable – Product AOV will be tracked and compared monthly before and after implementing strategies to increase AOV (such as product bundling, upselling, and targeted marketing campaigns).
Achievable – Yes, by identifying high AOV products and promoting them more aggressively, offering discounts on bundled products, and personalizing the shopping experience based on customer behavior and preferences.
Relevant – Yes. This goal aligns with the quarterly goal of increasing sales without necessarily increasing the number of customers.
Timed – Within the next three months.
Limitations of using Product Average Order Value
While Product Average Order Value (Product AOV) is an important metric for understanding the average transaction value of a specific product in an e-commerce environment, it has limitations when used for business analysis:
- Doesn’t Reflect the Full Product Portfolio: Product AOV provides data on a particular product, but it doesn’t offer insights into how it performs relative to other products in the portfolio. A high Product AOV might not mean much if other products have even higher values.
- Can Be Influenced by Promotions: Temporary promotions or discounts can artificially inflate or deflate the Product AOV. For example, a week-long 50% off sale might lead to a short-term spike, but this isn’t indicative of the product’s regular performance.
- Doesn’t Account for Volume Sold: A high Product AOV doesn’t necessarily mean that the product is selling in high quantities. If a product is expensive but sells few units, it might still have a high AOV but low overall contribution to revenue.
- No Insight into Product Lifecycle: A product might have a high AOV during its launch phase due to initial excitement, but this might decline as the product matures or faces competition.
- Subject to Stock and Supply Chain Issues: Product AOV can be affected by stock levels or supply chain disruptions. If a product is often out of stock, it might have an inflated AOV when available due to increased demand.
- Not Indicative of Product Profitability: A product might have a high AOV but might also have high production or shipping costs, leading to lower profit margins.
- Overemphasis Can Lead to Neglecting Product Mix: Focusing solely on increasing the Product AOV might lead businesses to overlook the importance of having a balanced product mix to cater to various customer segments.
- Lacks Context Without Market Benchmark: Without understanding the AOV of similar products in the market, it’s hard to judge if the Product AOV is good, average, or below par.
In summary, while Product AOV provides useful insight into the average transaction value of a particular product, it should be considered in conjunction with other metrics and market benchmarks to make informed business decisions.
KPIs and metrics relevant to Product Average Order Value
- Product Conversion Rate: Measures the percentage of visitors who make a purchase of the specific product. A high Product AOV with a low conversion rate might indicate room for improvement in marketing or pricing strategy.
- Product Return Rate: Evaluates the number of returned orders for the product. A high return rate might offset a high Product AOV, indicating issues with product quality or customer satisfaction.
- Product Sales Volume: The sheer number of units sold. When evaluated alongside Product AOV, businesses can gain insights into both profitability and popularity.
When you look at Product AOV alongside these other metrics, you’re more equipped to make informed decisions that bolster the product’s profitability and appeal.
Final thoughts
Product Average Order Value (Product AOV) provides a detailed look at the average revenue per order for a specific product. By focusing on individual product performance, companies can make data-driven decisions about inventory, marketing, and sales strategies for each product. An optimized Product AOV can be instrumental in increasing profitability and understanding the true value of each product.
Product Average Order Value FAQ
What is Product AOV?
Product AOV calculates the average revenue a specific product generates per order, helping businesses understand individual product performance.
How does Product AOV differ from the overall AOV?
While AOV gives a general overview of average spending per order, Product AOV narrows down this metric to a specific product, offering insights into individual product profitability.
Why should I prioritize products with a higher Product AOV?
Products with a higher Product AOV are likely more profitable and can guide inventory, marketing, and pricing decisions to maximize revenue.
Can a product with a low Product AOV still be valuable to my business?
Yes, products with low Product AOV might sell in larger volumes or could be crucial in leading customers to more profitable items or upsells.
How can I use Product AOV in conjunction with other metrics?
Combining Product AOV with metrics like Product Conversion Rate or Product Return Rate can offer a comprehensive view of product performance and guide optimization strategies.