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To grow store revenue, business owners typically look at acquiring more customers. However, while it is great to get more traffic through the door (physical or virtual), sometimes the activity costs don’t stack up. We’ve written about it before, but there are really only 3 ways to grow your ecommerce business – get more customers, get those customers to buy more often, and increase average order value.

Established businesses need to shift their focus to retaining customers and increasing their average order value (AOV). Of those, increasing average order value is the easiest to implement and gives you the quickest results. This post will show you how.

Why Average Order Value Matters

The average e-commerce store invests over 80% of its marketing budget on acquisition. However, the average conversion rate of new customers only sits between 1% and 3%. That means that acquiring new customers is difficult and expensive, so you absolutely want to make the most of each new customer you acquire by encouraging them to spend as much as possible.

According to Marketing Metrics, your top 1% of customers will spend five times more than those that are newly acquired.

Can you imagine how profitable your business will be if you get those top customers spending even more?

Source: http://blog.bigcommerce.com/

Increase Prices

It might sound obvious, but increasing prices is an excellent way to improve your average order value. However, the challenge is to increase prices in a way that won’t lose customers.

On average, retail giants will change prices every 3 months. Although you may see a fall in customer acquisition, the right customers who understand the value of your products will still be happy to purchase. Of course, that doesn’t mean doubling everything, an increase between 5% and 10% can be a good place to start. The strategy is low-risk as if there is a problem, it is easy for you to reverse the change.

Let’s take a simple example. Imagine you sell widgets that cost $100 with a 30% profit margin and you sell around 100 widgets a month. That means you make $30 per sale, and your gross profit for the month is $3000.

Now imagine you increase prices by 10% to $110. Your costs remain the same so you now make $40 per sale. Let’s say your price increase led to a 15% drop-off in sales (100 sales to 85 sales). Your gross profit for the month is now $40 x 85 = $3400.

So with a simple price increase, and even taking into account a drop off in sales, you have increased your monthly profit by $400. But you’ve also reduced your workload in terms of the number of orders you need to fulfil, number of returns to process, number of customer service queries, etc. Also, with a higher profit margin you can afford to increase your customer acquisition budget to bring in even more customers.

When raising prices, you should:

  • Conduct a competitor analysis to see where the new prices establish you in the market. From our example earlier, if the average competition price for similar widgets is $120, you could increase your prices even further.
  • Time it when customers are satisfied with your services. A happy customer will rarely complain about a marginal increase.
  • Explain why you are increasing prices and why the value of your product demands the additional amount.
  • Think about your loyal customers and not acquisition. You might lose out on some new customers, but this is about lifetime value.

If you want to work out how many customers you can afford to lose and still remain profitable after a price increase, Profits Collective offers an excellent guide. The two key factors are gross profit margin (GPM) and the increase percentage. The table below shows the percentage of customers you can afford to lose to retain profitability based on the GPM and increase you put in place.

Source: https://profitscollective.com/still-more-profitable-after-customers-flee-your-price-rise/

Upselling

Upselling means promoting a more expensive version of your product or persuading customers to upgrade. You can upsell to a larger size product, a better spec product, or even a multi-pack. Upselling can be done on the product page or when the customer reaches the checkout.

Away Travel upsells on the product page, using a side-by-side comparison technique.

Upselling to increase average order value

Source: https://www.awaytravel.com/uk/en/suitcases/carry-on/coast

When browsing a suitcase, customers are also presented with a larger version of the product at a slightly higher price, with reasons why they might need it. They can also add a personalised tag using different letters, fonts, and colours to add extra appeal. At the cost of only £10, it probably doesn’t take a tremendous amount of thought for the customer to add to their order.

Add-ons

Add-ons are generally lower priced accessories that are relevant to the main product, offered when you are at the shopping cart stage.

For example, The Perfume Shop offers gift bags and boxes for a small fee.

Add ons to increase average order value

Add-ons are simple to set up in most e-commerce platforms.

Product Bundles

Bundling products is an excellent way to influence customers to increase their spending from day one. There are three typical types of bundle:

  • Multi-buy deals such as buy two get one free
  • Products that are often sold together e.g., a duvet and pillows
  • Complimentary products like a dress and blouse or a t-shirt and shorts

Amazon also excels at bundling, and with the majority of products displaying with something like below.

Shipping options

Shipping can be used tactically to increase average order value, encouraging customers to spend extra to qualify for free shipping, or offering express shipping for additional price.

Free shipping to increase average order value

Free shipping above a certain threshold is a familiar tactic designed to encourage customers to spend more. In studies 9 out of 10 online shoppers say that free shipping is the No 1 incentive that would encourage them to shop online more, and orders with free shipping come average 30% higher in order value.

The key here is to make sure you set the free shipping threshold higher than your store’s average order value to encourage customers to add additional products to their carts.

A good tactic is to prompt customers each time they add to the cart, saying how much more they need to spend for free shipping.

Of course it’s important to consider margins when setting thresholds to ensure offering a free shipping service doesn’t impact profit too heavily.

Shipping threshold above average order value

Source: https://blog.2checkout.com/

In the example above, fashion retailer bebe deploys these tactics well. You will notice that the cart states “$33.01 from free shipping.” Customers will be willing to find additional products to remove the shipping charge, spending more in the process. They would rather have items than pay $7 for a shipping fee.

Express shipping

As well as setting thresholds, you can offer different shipping options. E-commerce sites will cater to varying types of customers, and some won’t care about free shipping. In a survey of over 2,000 customers, 77% said they shop last minute. That means they need express shipping services to get their products on time.

As a premium option you can add margin onto your express shipping price which gives you a nice little boost in average order value and profits.

Summary

  • An established business should focus on retention and average order value over customer acquisition
  • Increasing average order value is easy to implement and gives quick results
  • Increasing prices can boost average order value and profits even if you lose a few sales
  • Upsell relevant products to increase spend
  • Low-value add-on items positioned correctly will improve order value
  • Set free shipping thresholds to encourage customers to purchase more items