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Is Increasing Your Average Order Value (AOV) the Solution?
21st June 2024 β€’ The Google Ads Podcast β€’ Solutions 8
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Are you trying to increase your average order value (AOV)? This episode is for you! Caden Thompson, one of our brilliant Google Ads Strategists, sits down with Nathan Perdriau to discuss AOVβ€”its complexities, common misconceptions marketers have about it, what you should understand, and how you should approach it so you can make informed decisions for the success of your Google Ads campaigns. Listen to this episode to learn about:

- How simply looking at the AOV in Shopify doesn't provide actionable insights

- The nuances of AOV

- New customer AOV vs. returning customer AOV

- Strategies to increase AOV

- Relationship between initial purchase price and repeat purchase rates


Nathan Perdriau is the Co-Founder and Head of Paid Media at Blue Sense Digital; connect with him and Blue Sense Digital here:

Blue Sense Digital website: https://www.bluesensedigital.com.au/

Nathan on LinkedIn:  

 / nathan-perdriau  

YouTube channel:   

 / @bluesensedigital  

Podcast:   

 / @blues-brothers-podcast  


Related videos:

πŸ’£ Deep Dive Into Contribution Margin and Why It's Important in Marketing:   

 β€’ πŸ’£ Deep Dive Into Contribution Margin ...  

πŸ’° Why You Should Increase Your Average Order Value (AOV):   

 β€’ πŸ’° Why You Should Increase Your Averag...  

πŸ”₯ The Move to a One-Click World and How It’s Changing the Agency Space:   

 β€’ πŸ”₯ The Move to a One-Click World and H...  

πŸš€ Measuring Ad Success: Key Business Metrics Beyond CPA and ROAS:   

 β€’ πŸš€ Measuring Ad Success: Key Business ...  

πŸš€ Mastering Key Business Metrics to Boost Revenue:   

 β€’ πŸš€ Mastering Key Business Metrics to B...  



0:00 Intro

0:21 Is AOV the Solution?

5:23 New customer AOV vs returning customer AOV

8:32 The common misconception marketers have about AOV

12:56 Relationship between product pricing and repeat purchase rates


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πŸ”₯ Get your copy of You vs. Google: The (Very) Unauthorized Guide to Google Ads

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⬇️️ You can find us here ⬇️️:

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Transcripts

Caden:

Average order value in Shopify, that metric by itself doesn't

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:

really tell you anything in terms

of actionables off the back end.

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:

And so when you look at that number and 80

or 90, it's not really telling you much.

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:

And so you can break

it down a step further.

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:

Hey, how's it going, everyone?

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:

So we're back again with Nathan.

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:

and he just been, getting blown

up by all the comments and

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:

like people reaching out to us.

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:

we want to hear more about what's going

on with PNLs, how to understand and

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:

demystify everything that CFOs talk about.

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:

and so when it comes to marketing, it's

not just about running Google ads a

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:

certain way or Facebook ads a certain way.

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:

It's about actually

understanding the business.

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:

and so Nathan's a really good resource

for both me and other people at

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Solutions 8, to have chats about,

more of the, back and finance side

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:

of things and how that kind of comes

into, place with, marketing as a whole.

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:

now I think we're going

to talk more about AOV.

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:

and when I think of AV, I just think of

average order value, the type of customer

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and more of the psychology behind it.

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:

But, yeah, I just wanted to hear your

thoughts on that and also welcome back

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and, yeah, let's jump right into it.

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Thank you.

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Thank you for having me back.

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Looking forward to it.

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I thought AV would be a good topic

for this video because I think it

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encapsulates well, the lack of a deep

understanding of e commerce analytics.

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by most e commerce operators, as

well as even, performance marketers

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that are actually in the field.

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And this isn't to say that you need

to have this deep of an understanding

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:

of each individual metric, but it

should help you uncover that if you

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do have an AOV problem, or if you've

tried to increase average order value

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in the past through a threshold or

through a bundle, and it hasn't worked

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:

like what we're about to run through

should hopefully contextualize why.

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:

All right.

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and give you a better understanding of all

of the levers on the average order value

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and how complex it actually is so that you

can make a more educated decision on how

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you're going to try to fix it or whether

you even need to fix it within the context

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of the unit economics of your brand.

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:

So to start would be, average

order value in Shopify.

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:

That metric by itself doesn't

really tell you anything in terms

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:

of actionables off the back end.

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:

And so when you look at

that number and 80 or 90.

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It's not really telling you much.

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:

And so you can break it down a step

further and you can look at new customer

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AOV versus returning customer AOV.

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And that starts to tell you a

little bit more because those

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two numbers are very different.

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And for almost every

brand, they're different.

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And the reason they're different

is because Of usually two parts.

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The first part is customers don't

have the ability to return and

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spend more money because of the way

that the product suite is set up.

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And so they might sell a wallet, but

then the only product that anyone

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can come back and buy is like a pen.

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And so the returning customer

average order value was really

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low, but the first time customer

average order value was really high.

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Or vice versa, maybe they do have a really

large skew of products and they have, I

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don't know, a thousand different products.

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What will always be the case is returning

customers will have a higher AOV.

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And that's because they have

increased purchasing power because

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they already trust the brand.

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They've experienced the brand,

they liked it, they're coming back,

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they're willing to spend more.

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and so they're much more

likely to be upsold and spend

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two, 300 on the initial 150.

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:

And so now you start to have a little bit

more of a nuanced understanding of, okay.

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When we say increase AOV, we're really

trying to increase either new customer

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:

AOV or returning customer AOV, and they're

two very different problems because the

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:

consumer psychology on returning customers

is very different from the consumer

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:

psychology on people that are just

entering into the brand and the website.

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:

it goes even a step further to

that, which is that AOV is a mean.

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So it's an average output of the dataset,

but the average tells you nothing

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:

because it doesn't show you the cohort

distribution of the customers over the,

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the cohort of customers over pricing.

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And so when you look at the actual

cohort, your majority of brands,

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once again, you'll usually see that

there's a bimodal distribution.

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And so average order value

doesn't look like up to 80 and

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then back down on the other side.

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It'll be a peak at 40

and then a peak at 100.

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:

And so now if you think that there's a

peak at 40 and a peak at 100 and you're

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trying to move an 80 AOV, you're not

going to move it correctly because you

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don't understand where the cohorts sit.

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If you want to move 80 up to 100, and

we've done this for multiple times for

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multiple brands, it's not by setting

a 100 free shipping threshold, it's by

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setting a 50 free shipping threshold.

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And you get that doesn't.

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Why that doesn't make sense because you're

sitting at way under what it currently is.

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But it's because we're

moving the lower cohort up.

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And if we can drag that bottom cohort

upwards to 60 to 70 dollars, then

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suddenly the average moves to 100.

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it's only through looking at cohort

distributions and then breaking it

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:

down by new customer and returning

customer that you can start to make

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really educated decisions on how you're

actually pulling individual audiences and

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moving them around on that cohort graph.

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I guess more so a question for, agencies,

because, I would think email marketing

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is probably more geared towards return,

whereas pay is gonna be more geared

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towards, actual top of funnel traffic.

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have you had instances or have, said,

Hey, like we need to increase our

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bottom of funnel on, let's say Facebook.

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Or, and that actually translates

to, an increased AOV on, the top

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line numbers for return customers.

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Or do you think that's something that

people should leave more so for like

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sales and email and that side of things?

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Yeah.

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for sure.

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I've seen it.

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it depends.

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It's very brand specific.

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generally as a marketer on paid

ads, I would be KPI'ing yourselves

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around first time customer AOV.

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returning customer AOV is normally

going to be predictive of where you're

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driving traffic to through emails.

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And so if you're driving traffic to lower

end products or to individual product

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pages, you'll generally see lower AOVs.

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It doesn't allow the consumer to increase

the discoverability of other products.

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so that's a really interesting

insight in itself, which is that.

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Consumers that come from email are already

highly likely to buy because they've

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already experienced the brand, they've

made the click, they're very high intent.

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If you silo them into a single

product, they're just going

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to buy the single product.

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But if you drop them onto a collection

page where there's now 10 products,

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normally, in regular, buying psychology,

you would go, that's too many options,

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they're not going to be able to choose.

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But in this instance, they're

already super high intent.

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And so now, it's not going to go,

they can't choose, it's going to go,

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how many are they going to choose?

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And so that's when you start to

see an increase in like units per

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:

transaction within individual orders.

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And that's when you'll see the

uplift in returning customer AOV.

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it makes sense.

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cause of the same mindset of,

we're paying for all this traffic.

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Let's maximize the potential of

the traffic, let's try to optimize

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for new customers, not repeat

customers and trying to increase AOV.

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:

We have other channels for that, right?

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obviously you can run email

sales, all that kind of stuff.

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:

Yeah.

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But I think one of the most interesting

points too, that I think we can maybe,

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I guess just be aware of, is that when

someone buys more of your product,

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depending on what business you have,

so if it's a clothing brand, let's

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say, you can pair other products

together in the remarketing side of it.

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:

So the hero product might be like,

a shirt or, pants, whatever the case

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may be, bundle that all together.

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:

And then on the return you have, like

you said, that full collection, to

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where they say, oh, complete the,

the look by getting, this, and this.

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:

and then it makes a lot of sense

from a returning standpoint versus,

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:

just purely going after the same

customer again and again, because

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clothing is extremely competitive.

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and so I think it makes a lot of sense

on just trying to get the entry point

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AOV up, because I assume if someone buys

more on the first time order, they're

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:

going to buy more on the second time

order if it's, a product like that.

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:

And this is a really common misconception

that I see a lot, which is, Okay, you

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:

shouldn't optimize for the highest

average order value on first purchase

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because that's smaller end product that's

only 40 that might drive better LTV.

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:

Not true.

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Like it's never true.

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it's so rarely the case because if you're

looking at lifetime contribution margin,

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you're not If you maximize first order

contribution margin, most instances,

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that's 50 percent of the lifetime anyway.

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And so if you can make sure you're getting

as much revenue or as much margin on

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that first order, that's significantly

going to inflate the LTV of that product.

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And so it's very rarely the case that

you'll go, okay, a 40 product is going

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to drive better LTV than an 80 product.

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Just maximize for average order

value on first purchase, because

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that scenario is so unlikely.

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:

Okay.

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:

and then what you were talking about

there was really like the next level of

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average order value, which I don't think

many people look at, but intuitively a

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lot of people understand it, which is

that to increase average order value,

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we need to have more items in cart.

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We need to have people buying more,

we need them buying two, or we need

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them putting other products into

their carts that have increases.

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Fundamentally, you can calculate average

order value at an individual unit level.

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Based on average unit retail, which

is the average price of a product,

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times units per transaction, which

is how many products are in the cart,

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plus 1 minus return rates, plus 1

minus discount rates, so that's just

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taking returns off, taking discounts

off, and then plus shipping collected.

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Because within e commerce,

you also collect shipping.

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And so that's a part of

the average order value.

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equation and the final

number that you get.

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And so when you start to look at

those five levers, because anytime

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you have a metric and you're trying to

move it, it all depends on the levers

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that are the subsets of that metric.

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Shipping collected, not really

much control over returns, not

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really much control over discounts.

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You can control, and that's what

we talked about in the last video.

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So I would make sure you're

not discounting too heavily.

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average unit retail, so the price,

you've got control of that, but most

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brands don't want to move their pricing.

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And also, it's risky because of

the elasticity of demand that might

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exist with their current price.

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And so that's, that is a lever,

I understand that you can

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change that, but not a huge one.

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And so what you're ultimately left

with is units per transaction.

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If you want to increase average

order value, you need to

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increase units per transaction.

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And so if you can track units per

transaction as an Ecom operator as

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well, and then you can KPI around that's

going to be the predictor of what your

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average order value ends up looking like.

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and then you can get really nuanced with

this, was like, I just feel my brain

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exploding with information, topics to

talk about, but no, it makes sense.

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I think from a implementation standpoint,

something as simple as with the mindset,

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like you just said of like increasing the

overall products that you're trying to

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get someone to have added to their cart.

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I'm trying to increase the amount of

investment they have put into the actual

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company, because yeah, like for some

reason people think Oh no, they spent

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more money, so they're not going to

spend more on the second transaction.

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It's like people's money with you

is investing in like your company.

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Is not a finite number, It's variable.

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You don't know the

situation of the person.

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You don't know if this is going

to be like, they're testing it out

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and then they want to get more.

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it could be a one off by we don't

have that information, right?

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So why not just maximize that

first initial touch point?

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And then just by the basis of

psychology, if someone's more

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invested in your brand itself.

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They're going to buy again, if it's

a good product and that's the key,

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obviously is having a good product,

but you still get that, from a initial

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marketing standpoint, you get that profit

up front and then you can use that to

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increase, scale, wherever the case may

be, just makes things a lot easier.

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And then the return AOV is obviously a

whole nother, area, like you were talking

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about, that's more of, like you could say

the icing on top of your leverage points.

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to focus on outside of just the,

paid marketing set of things.

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completely makes sense.

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But, I can just see how, we can rabbit

hole on this for hours and hours.

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maybe we'll have another though,

talking about AOV and like sales.

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I think that might be cool.

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but yeah.

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Anything else you wanted to

add to, the topic of AOV?

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No, the only one is you made a really

interesting point there and I might

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actually go and pull some data on

it, which is that, what you said was.

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the higher price the item that,

consumer buys on first purchase,

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the higher likelihood of repeat

purchase rates being higher.

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and I think that's actually a really

interesting concept because technically

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speaking, the higher price an item is

across a brand, generally speaking,

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the more value the product's driving,

because pricing of a product is generally

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indicative of the value of the product.

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And so if people are buying a more

valuable product, it generally

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should drive them more value.

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And so then they should likely.

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Repeated higher purchase rates.

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And so I'm actually going to pull data

on that to see if that actually holds

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across like 10 to 20 different brands.

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But that's really interesting is

drive people to the premium product.

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Cause if they experienced the premium

product, they're more likely to buy it

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now because they had a better experience.

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it all depends on your

business model too, right?

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If you have a consumable,

then makes a lot of sense.

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If you have a one off buy, then

probably doesn't make as much sense.

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So I think that's another caveat

to add to the equation is.

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Making sure it's the right business

for that to actually be possible.

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But, yeah, I think it

makes a lot of sense.

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So a lot of levers to pull outside

of just marketing, not just in

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the marketing side of things.

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So if you're a business owner and you're

like, Hey, I want to try to squeeze more.

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I don't think this agency is

doing X, Y, Z, or, there's

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something that I want to change.

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Then, cause I know I have a

lot of business owners that

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say I want to change something.

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Like we need to move something.

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We need to have an adjustment.

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It's like focus on these concepts to

then change the back end of the business.

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And then have that trickle out to,

for example, the marketing side of it.

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I think that makes a lot of sense.

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Yeah.

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So anyways, thanks again guys.

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And we'll probably have some more

videos coming out here soon, whenever

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you guys want to learn more about

financial stuff and have your head

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explode, Nathan's the guy for you.

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where can they find you?

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blue sense digital on YouTube.

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So I'll give you the link.

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It'll be in the description,

blues brothers podcast.

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If you want to listen to that long

format and then my LinkedIn, which

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is Nathan Padreo, alright, perfect.

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Thanks again.

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See you guys.

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Thanks Caden..

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