The compounding effect of average order value
The average order value (or average transaction value as some refer to) and the average number of product per transaction (or average ticket size) are two metrics that we constantly track in our management meetings. Why?
Even though we kinda know that these metrics are really important in helping us understand the health of our business, we don’t seem to spend enough time thinking about what these metrics actually represent for us.
Here is an example…
Say you are in the Men’s Grooming business and you have
- Average order value of $28
- Average number of products per transaction of 4
- 3,000 transactions per month
- and a 20% margin
That amounts to $84,000 in sales per month and $16,800 in gross profits.
What if you manage to increase the average order value by just $4? Well, that just increased your sales per month to $96,000 and $19,200 in gross profits.
That’s a 15% increase!!!
We are dealing with small numbers here but that’s a few thousand dollars more every month. How difficult is it to sell $4 more? Let’s break it down 3 easy ways…
- Increase the average price by $1: If you know the average number of items per transaction is 4, well $4 is just $1 more per product
- Sell just one more product for less: With the initial metrics of $28 per transaction and 4 products per transaction, each product was worth approximately $7. If you want to hit $32, you only need to sell one more product that is probably cheaper than most of your catalogue (maybe an accessory item)
- Pair accessory items that go well together: Make it an unbelievable bargain that they will just have to purchase two items together
It suddenly doesn’t feel that hard anymore. Yes, we know, this requires some analytics and might take you a couple of hours to crank out the numbers. Look at it this way, it might be 2 hours of work for a maybe a few extra percentage points of gross profits. That’s an amazing ROI- and it compounds.
The Super Amazing Compounding Effect
Let’s go back to our example of moving from $16,800 to $19,200. It doesn’t seem much if you leave it at that. Now think about in the time frame of a year, that’s a $28,800 difference.
Chances are, that if you buy into the concepts of using analytics for optimization, optimizing your average transaction value is not the only thing you are doing.
- Improve the average margin to 25%
- That’s an $86,400 difference
- Increase the store transactions by 5% monthly
- That’s a $104,008 difference
- Or both;
- That’s a $180,411 difference
Doesn’t that sound worth it now?
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