June 11, 2012

The Magic of Average Order Value

Let's walk you through an example of why merchandise productivity, expressed via Average Order Value, is so darn important.

We'll use Paid Search as an example.  Here's what happens when you have, say, a garden-variety $100 AOV that hasn't changed much in the past five years ... and next to that column, you have a business that has a $115 AOV, achieved via increased merchandise productivity.

     $100 AOV       $115 AOV
Clicks              1,000              1,250
Cost per Click              $0.53              $0.59
Conversion Rate             1.30%             1.27%
Average Order Value          $100.00          $115.00
Demand $1,300 $1,826
Net Sales $1,105 $1,552
Gross Margin $663 $931
Less Ad Cost $530 $738
Less Pick/Pack/Ship $111 $155
Variable Profit $23 $38

Merchandise productivity is the best friend of a marketer.  In this case, a 15% increase in merchandise productivity causes the marketer to be able to spend more money per click, which drives incremental clicks, causing a 40% increase in demand.

Does that make sense?

A 15% increase in merchandise productivity gives the marketer the ability to spend more per click, causing a 40% increase in Paid Search demand, and in this case, a 65% increase in profit.

Instead of focusing on the gimmick that can be "offered" to the customer, why not invest energy figuring out how to merchandise your site, your landing pages, and your advertising, so that you have the productivity that enables you to spend more money marketing?

Marketing * Merchandise Productivity ... it's a multiplicative relationship.  Take advantage of it.

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