The naive way of calculating average order value is to simply take the total revenue for the store and divide it by the number of orders, like this:
average order value = total revenue / number of orders
Simple enough, right?
However, this top-down method is limiting, because it can only tell us if average order value is increasing or decreasing. But we need to know why it’s changing and more importantly, what we can do about it.
For that, we need more than just the average revenue generated by each order. We’ll need to:
- see the whole distribution of order values to discover who spends the most,
- filter by new and returning customers to see how our remarketing campaigns perform,
- compare order values to other metrics like discounts and prices to create new strategies for increasing the revenue generated by each order,
And more.
To do that, we need to calculate the order value from the bottom-up by assigning every order in our store an accurate value. Then we can combine those values any way we like to discover how to increase our store’s profits.