Does AOV Actually Matter Video? transcript

[Music] foreign [Music] podcast thanks so much for joining me for another episode of the show today I want to talk about the metric that I think is the most misunderstood sometimes the most overrated and sometimes really underrated metric in e-commerce marketing and that is average order value it is so obvious to people that a high aov is good for business but it is not so obvious to me and I'm going to tell you why and how I think you should be thinking about aov in your business let's jump in all right let's start with the obvious raising your average order value is obviously good assuming that your average order value goes up with no cost to any of your other metrics that is if you can generate the same number of orders at the same margin and at the same cost on your ad spend Etc as as you were on one aov but with a new higher aov you know if your aov goes up 20 and everything else stays the same it is obviously good more dollars per customer is good more profit per customer is good for your business and so in that respect aov is unquestionably a good thing and we should say something about d2c in particular here which is that there is some threshold of aov that you probably have to have to make the business work like you probably can't sell a product that is a physical product for like five dollars each in d2c and have it work because of shipping costs unless you can charge for shipping and make money on shipping as well it's just going to be too expensive especially in the world where clicks might cost a dollar like there's just some lower limit to where aov is it has to be above some threshold but one of my great contentions is that that threshold is lower than people think that actually aov may not be that big of an advantage and the first reason for that this is funny by the way the thing that inspired this episode was actually a an aov increase that was a huge win for a client I had very little to do with it and so I'm about to tell you why aov is not necessarily as good as you think but I want to also let you know that I'm this is more complicated than I'm about to make it sound because aov has been a big Advantage for a particular client of mine I'm going to tell you why okay but first to understand why the first thing to notice is that when I just laid out the scenario where you get more dollars per order I I said that is assuming it comes at no cost to anything else but the truth is probably in all of life there is a trade-off for almost everything you do and that getting a win over here might cost you something over there and that point is the key point with the average order value that people really underestimate when they talk about how aov is good they do not talk enough about the costs associated with that so some of those might be really obvious right like if you double your aov but you triple your cost of goods it is not a win for your business and all likelihood unless it creates a whole bunch more LTV or something like that it has to be a win in some other area of the business for it to be worth you doing that another possibility for that is that if you are not a peer play d2c or if you have a huge amount of organic Revenue more aov even at the cost of more margin might be really good as long as it's not coming at the cost of the number of customers you can acquire I'll talk about that in a second but if you have a bunch of organic Revenue it can be really really good but the big problem with raising aov and this is like the really fundamental thing I think is that the costs associated with raising your aov normally are actually not margin in fact normally it's the opposite and I'll walk more through that in a second but the big problem with raising your aov typically is that it comes at a direct cost to your conversion rate and and in turn very likely your CAC if you're using paid to generate growth in your business so increasing your aov may be extremely valuable for your business and again it depends on what your Baseline aov is and all kinds of other things if your aov is pretty low it can be really really helpful to get it up a little bit but it's it's just not usually for the reasons people think because aov and conversion rate are inversely correlated right the simple example of this is like I've worked on a brand at one point that was selling the aov was like three thousand dollars or something and you know big pieces of really nice furniture and when I worked on that brand the aov on a three thousand dollar piece of furniture is uh the conversion rate on a three thousand dollar piece of furniture is very low right whereas compared to Curie deodorant where we actually have been able to drive an aov that's a little bit higher than you might expect in that business and yet for that business this conversion rate is drastically higher and it's for a simple reason which is that the consideration cycle on deodorant is much shorter than the consideration cycle on a three thousand dollar sofa okay and so so the conversion rate goes with that so this behavior of conversion rate and aov where those where one goes up and the other goes down is why it might not be the case that aov is actually so good and here's the ultimate evidence that you need or all the evidence I need to give you for me to tell you that you actually intuitively understand this and it's this if that was not true go raise your price right now just go do it because the increase in aov would be really good in fact that would be pure margin but you know that what would happen there is there'd be a decrease in conversion rate commensurate with that and so what most people mean when they say aov is getting people to buy different products or add bundles or add products to a bundle or something like that and those things can all be really really good but the key is can you raise aov without a commensurate lowering of your conversion rate and without a commensurate raising of your commensurate lowering of your margin if you can do that a raisin aov can be very beneficial for your business no question about it but oftentimes that is much harder than it sounds and so that's the reason why it's not so obvious to me that a higher aov is necessarily better in a business I'm going to give you three other reasons why that's oh actually before I do that let me give you four reasons let's say four reasons why more aov is not necessarily good okay the first is commensurate with the conversion rate issue is or along the same lines the conversion rate issue is the CAC issue if you are driving lots of your growth with Facebook ads and you increase your aov by 50 it's pretty likely that your CAC will also go up a whole bunch as well so you will exist the same row ass but a much higher CAC and so then there's a question of the marginal efficiency of that roast and that can create a real problem actually you can just end up spending more money on ads acquiring the same amount of customers at the same margin but it doesn't actually generate any additional profit for your business okay so there's problem number one problem number two related to that is potentially it's this is not always true but it's possible that a higher aov can also equal a lower total addressable Market okay and if you want evidence that a low aov can work really really well in an e-commerce business in surprising ways specifically by having a very large total addressable Market just look at simple modern as a business these guys have been really public about this and so I don't think this is me talking out of turn I've worked on this business with them but simple modern runs at a pretty low aov like I mean I don't know I I don't even know exactly what it is but I mean a water bottle sometimes like 20 bucks 18 bucks something like that so most people are not buying five water bottles right so the aov is not very high you can just sort of do the quick math in your head there even if people on average buy one and a half it's pretty low but the reason why that business can still work well first of all that's why it was an Amazon business first is that it's a it's a price oriented business and you should go listen to my episodes with Brian Porter about how they approached their growth on Amazon with that product in that category and with their pricing specifically and that that is in the show notes of course that's Linked In the show notes but the reason it still works on d2c is because everybody needs a water bottle and so the low aov can work really really well because there are just so many people to talk to which means is essentially another way of saying that conversion rate can get really really high because there's so many people who need a water bottle and so you are able to generate all kinds of information and the higher your aov you're just going to exclude some amount of people who are financially unable to buy your products because the aov has gone up because more and more of a luxury go or something like that now that does not mean that you can't build a very big and very good business that way right just talk to lvmh and see that you can sell a lot of expensive stuff to people in fact if there Revenue gets big enough that ratio again that trade-off and it is a trade-off can be really really advantageous and can actually create you know brand value in a unique way and all these other things right but it's not so obvious and specifically for new entrepreneurial brands in D to C specifically this can be a real challenge because there's this question of like who is going to buy your product what is the audience ultimately for your product can you convert enough people at that aov to make that work I've been thinking recently about the question of why people when they hire in their businesses don't hire in the Philippines with my friends at more Staffing when you hear these ads that I do with them why would you add talent to your team and not look in the Philippines I think there's three reasons people potentially do it one they're worried about the quality of work that is the last thing you have to worry about there is a deep infrastructure of e-commerce Professionals in the Philippines across all parts of the business who are really good and more Staffing is incredible at helping you find those employees and adding them to your team they also do all kinds of work to onboard coach train those employees to working with your business and make sure that they're in good shape to to get into whatever you were working on and it'll even give you a guarantee if the employee doesn't work out on a quality level or anything like that within a year if you don't retain them for within a year they will ultimately give you go through the work of finding you a replacement employee for no additional cost so on a quality level it's just simply not really an issue there are great and talented people in the Philippines I think people number two are worried about English speaking and is that going to be an issue in the Philippines the vast majority of people especially on the sort of millennial and younger age groups Generations are learning English growing up or are very very good in English I have personally worked with Filipino employees in multiple businesses now I've never seen English speaking actually create an issue okay and so that is just really not really a problem and number three I think some people are worried about the time zone issue and while that can be understandable many employees are willing to work graveyard shifts if that's the case in your business or I've actually seen in my own business when I've worked with Filipino employees that one of the advantages has been to pass workout off at different times and when I pass off that work and and wake up in the next morning I'll actually see that be done and I can review it Etc so there's a natural Rhythm instead of all the overlap and time wasted on slacks and all those things of getting work done giving feedback and going from there so that in all told I think uh there's not really a great reason at this point for you to not consider working with employees from the Philippines and my friends at more Staffing are the people to do it go to morenow.co to get a conversation started or if you just want to learn a little bit more about this go check out my interview with Lara the CEO of more Staffing she's worked in us-based e-commerce businesses for a long time and Laura can tell you what it is really like from the Filipino side of that so you can understand a little better go to more now.co add incredible talent to your business today number four this is the really hidden one and it's if you are driving value with paid media there is another problem which is slow purchase accumulation and this is something I think people really don't think about meta and Google both need data to optimize and so if you are generating less purchases and you don't have tons of money to throw around to spend it is really really hard I mean I've seen businesses that are like spending a thousand dollars a day and they're generating like four purchases in a day well if you have to get 50 purchases per week to get out of the learning phase in meta ads right or Google ads I've heard like five purchases per day you know begins to allow you to optimize or something like that like there's this question to me of how much money you are able to spend while getting data very slowly while sample sizes of purchases build very very slowly if that is the case that you you're building a slope I'm gonna purchases you you might not exit the learning phase very fast even if you're spending a decent amount of money you might get data really really slowly which will tell meta very slowly what ads are working now I think meta is really good at figuring this out I think Google's very good at figuring this kind of thing out but it can be a real problem whereas think about the other side like when I'm working on a deodorant brand or something I can I get a bunch of purchases every day pretty fast even without very much budget and that allows me to optimize and make decisions quicker and if there's no marginal difference then it's it doesn't really matter to me so that's I think actually a huge Challenge and that is a bigger challenge the larger the aov is again go back to my furniture brand example in that case it's really hard for them to get purchase data I mean you know generating a hundred thousand dollars is a three thousand dollar average order value is 33 purchases like that is really really tough so that makes that makes the optimization game a whole lot harder as your aov gets bigger okay all right so those are some disadvantages of aov this is why it's not quite clear let me tell you why I think it is still ultimately a good thing to raise your aov of course and give you a couple reasons why the first is more customer per or more Revenue per customer can be great assuming that assuming the total adjustment Market is what we said and this is just to kind of bring back around the obvious point if you can generate more Revenue per customer it can be really really good and this is where like a bundling strategy makes a ton of sense if you like post-purchase upsells as a product make a ton of sense here as well if you can convert customers with no risk to you at all you can create an additional offer that puts additional value on the order without any risk of losing the conversion which is what the whole concept of a post-purchase upsell is right that's really good yeah that's just additional dollars in your pocket on a customer that you're going to convert anyway some customers are going to do that you reduce the conversion rate risk you reduce the the negative effect there and it creates a really good outcome so that's that's really obvious okay but secondly it is often the case I I said that aov and conversion rate are inversely correlated that's true but it's not necessarily the case that they are linearly correlated what I mean is it's not necessarily the case that they go up and down at the exact same rates it may be the case and in fact it may be the case the conversion rate goes down faster than your aov goes up so so you have kind of this effect right something like that if conversion rate goes down much faster than aov that's the thing people are worried about with rating their price by the way they'd say it's great to raise my price but if my conversion rate tanks too much in the process then it's actually a loss even though I get more money per customer because now I've not converted enough customers at that price so that's the challenge is the trade-off on those two things and is this a linear trade-off now here's the thing though a lot of times the actual Trader it's actually non-linear in the other direction conversion rate goes down as aov goes up but non-linearly and aov will outpace the decrease in conversion rate so aob goes way up your conversion rate comes down some but ultimately it drives up what you might say is like Revenue per click so the total value you get per click is actually higher even if your conversion rate goes down and your Revenue per click is just conversion rate times aov okay so if your aov outpaces going out of places your conversion rate going down it's a really big win because that makes every click you get more valuable and that means that you can probably spend more money or take more profit per click Etc and that's the thing to really watch out for are you able essentially to provide enough additional value to your customer that they will go open aov faster than they will then you will lose customers based on the price drop off the price point drop off if you can do that then aov is definitely a win and probably a marginal win and this leads to the last Point here and this is the thing that I think in the easiest to overlook on this side and it is this in d2c shipping is a huge and fulfillment or a huge part of the central costs of the business model and if you can increase your aov without increasing your shipping commensurate with that and most times you can right then you get a marginal efficiency on aov and that's really really valuable what I mean is let's say it costs five dollars to ship your product right now and if you get another item into that package you raise your aov by let's say you have a hundred dollar or well let's let's do like this let's see a 50 order aov right now and it costs you five bucks to ship it okay but whether or not you're charging for shipping that five bucks is there and we could talk about you know how you charge for shipping and free shipping is kind of its own question mark and there's trade-offs with that with every brand as well I don't want to get into that so let's just assume 50 is how much money you collect five dollars is how much money you've given shipping okay if you raise that shipping cost from five dollars to six dollars so a twenty percent increase when at the same time as you raise your aov from 50 to 65 now your shipping has gotten uh smaller as a percentage of Revenue and that's usually how it works the first item you put in your package is the most expensive to ship adding a second item to that package does not go up at the same rate in cost as that first item does and so there's a major value on getting a second item in there for that reason that the shipping gets smaller further you're probably paying a flat processing fee to your 3pl that also gets amortized across more dollars in Revenue so if I'm paying two dollars in processing fees right you may have Pick and Pack separate from that or whatever but if I'm paying two dollars in processing fees and I go from fifty dollars to seventy five dollars or fifty dollars seventy dollars or whatever right in my aov that two dollars gets smaller as a percentage and I've opened up some margin just like that that's a really big Advantage as well so those things can really matter now this is where if you can if you can make a big aov jump if you're gonna get big aov jump while keeping those other things exactly the same there is a huge marginal efficiency to be gained there and so I'm working with a client right now whose aov looks like it's going to go up to the tune of 40 and the cost of shipping it fulfillment Pick and Pack and gross margin on the product will all be exactly the same as they were before if that is the case I mean that is a huge win because now I could spend more money increased contribution margin and and if I can do that while also raising my conversion rate it looks like we might be able to at this point then that's a massive win in the business and I'll tell you exactly what accomplished that in this case and this is the real thing to Target here the client worked for well over a year on building their product to provide a ton more value to the customer and launched it and it looks like that's going to really really work that customers are responding to it really positively and therefore they're going to be able to get more margin on that product or the product people like more more dollars per per customer now look the conversion rate definitely went down by adding that much aov it definitely left some people on the table but there's enough margin to make up for it and plenty of time still so it can it can ultimately work itself out now of course you've also heard plenty of cases oh by the way that effect is especially significant on a low aov product if you can go from like 25 or 30 bucks to 40 bucks that five dollars in shipping it's really hard to get shipping much lower than five bucks you know unless you have a very lightweight item that five dollars in shipping you know from 25 to 30 to 35 dollars goes from being 20 of the cost of the product to what's you know five over 35 that's a quick math Andrew five over 35 it goes to 14 14 of the product value now again this may change depending on how you're handling shipping and charging for shipping but you get the idea there's a massive massive has 10 points of margin that you just got back right there by going for 25 to 35. so at those lower levels in particular those shipping costs and fulfillment costs look very very large relative to the total margin of the of the product and relative to Total contribution margin so that can be a really really big win and that's a place where you'd probably be trying really hard to get that aov up because in that respect you just don't want to be too low but you get the idea now this all points to one thing and the scenario that I gave you and by the way there's plenty of scenarios where people are actively trying to lower their aov because of the conversion rate issue I think of Supply razors here I had an interview with Patrick could do recently talked to him about that I remember when he did this I was actually pushing him to go up in aov and he was already at like 80 bucks and 100 bucks or something for his products and he was trying to get the product down because he thought he was leaving too much total adjustable Market on the table and he just thought I'm if I'm charging a hundred dollars for a for a Razor that doesn't have any technology in it or anything like that just a single edge razor there's just gonna be too many people who I cannot get to come into my and buy my product and so how can I create enough margin to where I can get that some version of this at least down 50 bucks and create a 50 version that will attract a larger base and look he had a great exit it worked out great for him he purposefully went to lower his aov because of the total adjustable Market issue he was concerned about that particular issue so there can be value in doing that and that's where you have to look in your business to see which one is best for you okay in all of this one of the implications here is that pricing really is a very big lever because if you can raise your aov without hurting your conversion rate if you can do that by just increasing the price like it's just a massive margin win and it's a win and all those things and so it's really worth considering pricing is something people feel like is absolutely stuck in their business and they just have to keep it exactly where it is or the whole customer Revolt they will not you will not have a customer Revolt I've never seen a customer Revolt based on pricing it's not going to happen so you can test this more than you think and it's not going to create some wild problem in your business and if you can add dollars on top so you increase your aov without any cost to these other things this can be really really good and it can create all kinds of marginal efficiency in your business in a really valuable way people pick their price out of nowhere they have no reason why they picked their price really they just have some sense of what it should be and so it's really worth testing and playing with your price to see if you can get some additional value there but in the end aov has said is more complicated than it looks there are lots of reasons to go increase your aov and work on that there are reasons to decrease your aov and work on that don't believe anybody who says it's that simple instead look at the contribution margin being generated by the total system that you've created add as much value as you can to the customer and that's the path to profit with aod [Music] all right thanks so much for watching this episode or listening to this episode of the show whichever was the case go check out my interview with Brian Porter on the approach from simple modern if you want a conversation that gets around some of these issues as well that is in the show notes as I mentioned on the show today my sponsor is as always my friends at more Staffing virtual assistants can be helpful virtual professionals can transform your business go hire experienced incredible e-commerce professionals from the Philippines in your business at morenow.com link of course there is in the show notes as well if you would like to listen to any of my old podcasts they are available everywhere that find podcasts are found right Spotify Apple Etc and a good portion of my catalog is on YouTube so if you're listening to this you can go check me out there as well and I'm always grateful if you will share the show with somebody who would like it if you'll rate it if you'll review it Etc next week on the show Nate Legos excellent growth marketer who is talking about some success they've seen at original grain he walked through a bunch of different stuff that has worked for them in real tangible applicable detail you're going to like that show as well and as always you can follow me on Twitter at Andrew J Ferris and email me at podcast ajfgro.com And subscribe to the show to get that interview with Nate hear from me talk to me interact with me any way that can be helpful to you you get the idea you know where to find me I'll see you next time [Music] in the way