If you are like most eCommerce entrepreneurs we talk with, you know that measuring average order value and customer lifetime value in your financial dashboards and reports can be effective metrics for gauging how your business is faring.
However, most businesses either weigh both financial metrics the same or prioritize the wrong one for their specific business, which can have dire consequences. For instance, if you sell premium mattresses, you should prioritize AOV and use that to assess what your marketing budget should be since most people only buy a new mattress every 5-10 years.
In this post, we’ll cover everything you need to know about AOV and LTV, including how to measure, which one to prioritize, and tactics to help you improve your metrics.
What is average order value?
Average order value refers to the average amount spent when a customer places an order through your eCommerce store. You can calculate your AOV using the simple formula below:
revenue / number of orders = average order value (AOV)
Here’s an example. Let’s say you wanted to calculate the average order value for the quarter. Your Q1 sales revenue was $50,000, and there were 2,500 orders during that time. $50,000 divided by 2,500 equals an average order value of $20.
What is lifetime value?
Lifetime value refers to the revenue gained from customers as a whole over their lifetime purchasing from your company.
Here’s a simple formula to help you calculate the lifetime value of customers for your eCommerce store:
Average total order amount x average number of purchases per year x retention rate = customer lifetime value.
For example, if customers spend $2,000 in your store over a lifetime with lifetime CAC of $500, then the LTV is $1,500.
The difference between lifetime value and customer lifetime value
Lifetime value (LTV) and customer lifetime value (CLV) are similar metrics. They each calculate the revenue your customers bring into your business over time. However, customer lifetime value looks more at the customer as an individual, while lifetime value is the lifetime spend of customers in aggregate.
Now that you know customer value, you can calculate the lifetime value of your customers with this formula:
customer value x average customer lifespan = customer lifetime value (CLV)
Assuming the average lifespan of a customer ordering from your company is 6 years, you can calculate your CLV. Plug these numbers into the formula ($160 x 6), and you get a customer lifetime value of $960.
When to prioritize AOV
If your business mostly sells expensive one-off items or things that people only need to buy infrequently, then it is more profitable to work to increase your AOV. Since these items are likely not impulse buys, creating and selling add-ons to buy alongside the high-ticket product can be an effective strategy.
How to increase AOV
Here are a few actionable tactics you can implement to improve AOV for your store:
- Cross-sell: Recommend items that complement what your customer has in their cart. For example, if they’re buying a treadmill desk for their home office, you can suggest relevant add-ons like a custom water bottle, a portable stool, and a monitor stand.
- Upsell: Do you have two or more different versions of a popular, high-ticket item? Then, find ways to market the higher priced version to customers.
- Coupons: Give your customers coupons and discounts that incentivize higher spending. For instance, get free shipping if your order is over $50.
- Free returns: Removing a point of friction, such as the hassle of returns, can build trust and convince more shoppers to buy from you. For example, share your return policy at checkout to address your customer’s concerns before they abandon their carts.
- Buy now, pay later options: Integrate with payment methods, like Klarna or Affirm.
When to prioritize LTV
On the other hand, you should prioritize LTV over AOV if your business relies on repeat purchases. Subscription-based businesses and fast-moving consumer goods, in particular, can use LTV to measure success.
How to increase LTV
Improving LTV is all about focusing on improving customer experience and retention.
- Utilize data to personalize their shopping experience: First, get familiar with who your repeat customers are, what they are buying, and how often. Then, leverage this data to make it easy for them to purchase these items again. For instance, if you sell sleep supplements in a 90-day pack, send them a reminder email and text to reorder 1-2 weeks before they run out.
- Simplify your checkout experience: Your customers’ buying experience should feel as quick as easy as buying something on Amazon. Think: reducing unnecessary form fields, remembering past orders and payment details etc.
- Provide exceptional customer service: If customer service is inaccessible or poor at any point, then they’ve not likely to return to your store. For example, if a customer contacts your store about an item arriving broken, do not blame them by asking them to prove it. Respond promptly and offer to make it right. Their repeat business is worth more than the cost of shipping a replacement.
- Reward brand loyalty: Customers should feel valued and appreciated. It’s what keeps them coming back for more. This doesn’t necessarily mean you need to create a loyalty program. It can be as simple as sending a discount on their next purchase for being a valued customer or an email on their birthday or anniversary.
While it is useful to keep track of both AOV and LTV, knowing which to prioritize and act on will depend on your business.
If you mainly sell high-ticket items that aren’t bought frequently, then optimize for a higher AOV. Then, use that metric when you calculate your customer acquisition cost.
On the other hand, if you focus on selling purchases that are impulse buys or are things that people buy often, then prioritize lifetime value.