Influencing Average Order Value, Part 1
Here is the last variable from the revenue formula—how do you influence the average order value (AOV) of your store?
If you increase traffic, increase conversion rate, but drastically decrease AOV, your revenue won’t go up. Your customer support efforts, order fulfillment and admin will undoubtedly jump through the roof, though. So you should aim to increase your average order value over time, not decrease it.
Could you increase your prices without your customers batting an eyelash?
If so, do it. This means that you are charging way less for the value you are providing in your Shopify store. The additional work of sourcing the right products, providing useful information and organizing your products in a way for people to find them is valuable for the people in your niche. Experiment with increasing your prices to charge accordingly.
How much can you increase the prices, before conversion rate starts to go down?
The more expensive a product is, the more friction the price creates in the mind of the potential customer. At some point increasing your prices will result in conversion rate drop. “How much of a drop?” is the important question. To answer that, measure the movement of conversion rate AND total revenue while running the “price hike” experiment. Why? Oftentimes I’ve seen revenue go up with a price increase, despite the friction. Here is how that happens:
Imagine that you decide to charge premium rates for your $50 product. You recognize the value you are providing to your customers and you want to signal that by increasing your prices. What could happen when you start offering the product at $75?
Say before the price hike your revenue formula looked like this:
10000 visitors/month x 1% conversion rate x $50 AOV = $5000
Now, increasing the product price to $75 (and thus the AOV if this is your only product), the expected drop in the CR occurs, but total revenue is still better than before:
10000visitors/month x 0.75% CR x $75 = $5625
Your store’s revenue has grown by 12.5% while reducing the number of served customers by 25%.
That is good! Should you find yourself in such situation you now have more mental bandwidth to improve your website and get that conversion rate up again :) ! That’s why, in all of these articles I insisted you don’t measure the numbers in isolation. A decrease in one metric combined with the growth of another may still result in increased revenue.Post by: Rumen Dimitrov