How Average Order Value affects your Shopify store’s margin

Understanding how all of the different ecommerce metrics relate and affect each other is difficult. I’m going to explain how Average Order Value (AOV) relates to your margin.

Once you know how AOV and margin relate, you’ll be able to take advise for either of those metrics and adapt it to the other metric. After reading an article on increasing your AOV you’ll be able to think "If I do this then my margin would…"

Average Order Value

AOV is the average of how much a customer spends per order. You can think of it as revenue or sales per order. It functions as a rough metric for your store’s sales process. To learn how to calculate AOV, you can learn here.

Roughly speaking the more AOV, the better your store will perform. This means that customers are spending more per order on average.

Margin

Margin is how much profit your store is making after all direct and indirect costs are subtracted from the order. Usually margin is expressed as a percentage and averaged across all of your orders. It is a rough profitability metric: e.g. if you’re forecasting $100,000 in orders next month with a margin of 10% then you’re looking at $10,000 in profit.

The higher margin you can get, the more profit is left in each order.

As AOV increase, margin should increase

Increases in your AOV should also increase your margin. For example if this was your previous average order:

  • $100 product, $100 order
  • $ 50 cost of product
  • $ 30 fixed costs (staff, overhead)
  • $ 10 shipping
  • $ 10 profit (100 – 50 – 30 – 10)
  • 10% margin

With an increase in AOV, the costs of the product remain the same (you’re still paying suppliers for each one) but the relative amount of fixed costs and shipping costs will decrease.

This is because in most cases it doesn’t cost you 2x to warehouse, pick, pack, and ship two products in one order. In fact, depending on the product types, it might cost you nothing more to add additional quantities. You get some "free profit" by having larger orders. For example:

  • $100 product x 2, $200 order
  • $100 cost of products
  • $ 30 fixed costs (staff, overhead)
  • $ 10 shipping
  • $ 60 profit (200 – 100 – 30 – 10)
  • 30% margin

Now that you know how Average Order Value and margin relate, you should start thinking about what you can do to increase your Average Order Value. Every additional dollar increase in AOV means potentially many dollars of profit in your pocket.

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