March 14, 2009

Mega-Metrics: Average Order Value

Average order value is one of the most well tracked mega-metrics.

As mentioned earlier, average order value is the multiplication of items per order and price per item. Because it is the product of two metrics, increases or decreases in the metric are dependent upon the sub-metrics that comprise it.

During the bubble years, average order value frequently increased. Upon drilling down, we saw that items per order were slowly decreasing, while price per item was rapidly increasing, yielding an increase in average order value.

Traditional direct marketers know that management of average order value results in short-term profit. This is why McDonalds asked you if you wanted "fries" with your meal --- the add-on resulted in an increase in short-term profit. Walk into Walgreens sometime ... the employee at the cash register will tell you that chocolates are the featured item of the day, long before checking out the first of your three items. Walgreens is looking to increase average order value.

Traditional direct marketers also know that the organic component of average order value dictates long-term value. In many cases, new customers spending $150 per order are worth more, long-term, than are customers spending $110 per order. If you're not making these inferences from average order value, go look at your most valuable sources of new customers, and you are likely to see this phenomenon in action.

Some folks argue that "what gets measured gets done". Well, average order value gets measured. And as a result, there are a ton of marketing programs in place, designed to get you to spend more of your hard-earned money.