Average Order Value

Average Order Value (also known as AOV) is a key performance metric, primarily used in retail and e-commerce, that measures the average total of every order placed with a business over a defined period. In simple terms, it answers the question: “When customers buy from us, how much do they typically spend in one go?” The calculation is straightforward: Total Revenue / Number of Orders. For example, if a company generated $100,000 in revenue from 1,000 separate orders in a month, its AOV would be $100. While it might seem like a simple sales figure, for a value investor, AOV is a powerful lens through which to view a company's health, its relationship with its customers, and the effectiveness of its sales strategy. A consistently rising AOV can signal a company's growing ability to deliver value, encouraging customers to add more to their baskets, which often leads to healthier profits without the need to spend more on acquiring new customers.

Tracking AOV is like being a detective looking for clues about a company's underlying strength. It’s not just about the number itself, but the story it tells over time and in comparison to its peers. For a value investor, it helps separate well-managed, beloved brands from those that are merely treading water.

A steadily increasing AOV is often a sign of a vibrant, healthy business. It suggests several positive things are happening:

• Strong Brand Loyalty: Happy, loyal customers tend to buy more and explore a wider range of a company's products.
• Effective Marketing: The company is successfully persuading customers to buy more expensive items (upselling) or add complementary products to their order (cross-selling).
• Pricing Power: The company may have the ability to raise prices without scaring away customers, indicating a strong competitive position or a superior product.

Conversely, a declining AOV can be a red flag, potentially pointing to increased competition, a weakening brand, or an over-reliance on discounts to drive sales.

Comparing the AOV of a company to its direct competitors can be incredibly insightful. A company with a consistently higher AOV than its rivals might be a premium brand with a loyal following, like Apple in the smartphone market. It could also mean the company has a more effective online checkout process or a smarter product recommendation engine. This metric helps you understand a company's position in the market—is it a high-volume, low-price player, or a premium, high-value brand?

While a high AOV is generally good, it must be viewed in context. A company that boosts its AOV through aggressive, margin-crushing promotions isn't necessarily creating sustainable value. It’s crucial to analyze AOV alongside other key metrics. For instance:

• Does the AOV exceed the Customer Acquisition Cost (CAC)? If it costs more to get a customer than they spend on their first order, the business model may be unsustainable.
• How does AOV relate to Customer Lifetime Value (CLV)? A business with a modest AOV but fantastic customer retention might be far more valuable than one with a high AOV but few repeat buyers.

Smart companies are always working to increase their AOV, as it's one of the most efficient ways to grow revenue. As an investor, you should look for businesses that implement these strategies effectively and sustainably, without harming their profit margins. Common strategies include:

• Cross-selling: The classic “Do you want fries with that?” approach. Online, this looks like “Customers who bought this also bought…” product suggestions.
• Upselling: Encouraging a customer to purchase a more expensive, premium version of a product. For example, offering a larger size, a more powerful model, or an extended warranty.
• Product Bundling: Grouping several products together as a “package deal” or “starter kit” for a single, often slightly discounted, price. This increases the total order value while providing convenience for the customer.
• Free Shipping Thresholds: Offering free shipping for orders over a certain amount (e.g., “Free shipping on orders over $50”). This cleverly incentivizes customers to add one more item to their cart to avoid delivery fees.