With KPI’s or key performance indicators you are able to direct your business in the direction you want it to go and measure progress in that direction. In the previous post I went over the benefits on knowing KPI’s and how they will help your business, now I want to begin explaining some of the most important KPI’s.
The first one is going to be AOV or average order AOV value, it’s name tells you what it is going to calculate. There is a little more to it then just that though, first of all we are looking at revenue when calculating this KPI and not profit. Profit margins are something that can changing for a number of reasons, different suppliers, better production, new software, outsourcing and so on and so forth. Each business is going to have different profit margins and they will also differ by product as well, so in this case I will just focus on the revenues for AOV. The next thing about AOV is we want to look over a longer period of time then just a week or two, the longer period of time we can look at the better.
So now that we have some of the details on what the AOV is going to cover lets get started in covering how to calculate it. It is a very simple formula we will take total revenue for a set period of time and divide that by the number of orders for that time period and that will give us the AOV.
Total Revenue ________
/ Divided by
So with the formula in mind you can see how covering a 3 month time period instead of a 1 week time period will give you a more accurate AOV. Especially if a business has monthly fees or subscriptions or makes more money from a customers 2nd or 3rd purchase. In these cases you would definitely want to look at a larger time frame so that you can capture those larger revenues into the AOV.
Why is AOV important? You need to know what you make off an order so you know how much you can spend to get it. With out that knowledge you can not run a very effective marketing campaign, you need to spend less on marketing than what your average order value is. If you get use to using this KPI as well as others you will feel more comfortable and confident with your marketing efforts.