Marketing Is Math (Part 1): Understanding Your AOV
In Part 1 of ‘Marketing Is Math’ explains the importance of knowing and understanding your Average Order Value, or AOV as I’ll refer to for short.
This number is similar to Lifetime Value, except this is the value of the customer on day one of doing business with you. The Order Value is the total amount that a client/customer spends with you at the time of his first transaction.
One of the three pillars in Jay Abraham’s model of how to exponentially grow a business is to ‘increase the size of the transaction’. This should be studied at every level of the business, but the most important transaction size in terms of being able to acquire more customers is the transaction size of the first order.
Is your typical day one transaction size kind of small? It’s going to be difficult to break even on your ad campaigns…
Consider this example:
XYZ Inc. wants to generate new customers and decides to try information marketing. They create and publish a good quality ebook and sell it for $17 each. The intention of XYZ Inc. is to acquire new buyers into their list to be able to sell to later for a Lifetime Value much higher than $17.
How much can XYZ afford to spend to acquire new customers?
If they keep all costs of fulfillment internally among existing expenses, then we could suppose that as long as XYZ is able to acquire new buyers at $17 per buyer on average, that the campaign is a break even and profits should come from the back end.
Depending on the channel of paid media being used, $17 per new customer may not be enough. In this situation, XYZ has only given themselves the possibility of an Average Order Value (AOV) of $17 per customer. They’re going to have to bid low for traffic and run the risk of the campaign failing rapidly if the average ad cost per new buyer is larger than $17.
How could XYZ Inc. increase the AOV for these new customers?
Option #1: Raise the price of the ebook
I make an ugly face as I say that. As good as the information may be, if it’s only worth $17, it should only cost $17. Price-gouging isn’t a scalable model. Suppose the campaign still doesn’t work for the ebook that costs $27, or even $37 or more? In this option, all you can do is keep gouging your customers until you find the maximum threshold people are still willing to pay. Conversion rates are likely to plummet as the price goes up, which means fewer customers.
Remember that the goal of the campaign isn’t to make money on the front-end. The company’s goal with this campaign is to acquire a lot of new paying customers.
This is why XYZ Inc. should be using Option #2 to increase the size of the transaction…
Option #2: Make irresistible one-time additional offers after checkout
Keep the ebook priced low but as soon as people buy it, pitch them on something much more valuable that’s relevant to these new customers.
Will they need software to be able to use the information in the ebook? Offer it to them.
Is there an online training course that will allow them to reap the maximum benefits from what’s explained in the ebook? Sell it to them right then and there.
The difference between the upsell funnel and price-gouging is that you’re offering MORE VALUE to the customer in the upsell funnel.
When people are in ‘buying-mode’ it’s really easy to add on something else to the order. Consider when you go into McDonald’s and you’re asked ‘Would you like fries with that?’ or in Wendy’s I remember being asked ‘Biggie size for $1.00 more?’. By making it easy for people to acquire additional value, you are instantly increasing the size of the average order from your company.
So let’s help out XYZ Inc.
XYZ can immediately boost the average order value by offering an additional or several additional ebooks just after checkout. In this case, we want to be able to charge more than $17 for this additional value, so let’s offer a package deal of SIX more ebooks that all retail for $17 but if they buy right then, they can have all 6 for just $67, $35 off from what the retail price would be.
That’s a good deal, but many will say no.
Don’t give up so easy! If they turn down that offer, offer them the option to choose any 3 of those books for just $47. That’s still less than retail, but not as good of a deal as the first one. The price is lower though, and maybe people didn’t like one or two of the books in the first package. Now they can customize their order and still save.
If they STILL say no, on the next page offer them the chance to choose any ONE additional ebook for $15, still $2.00 off retail and less than they just paid for the first book. If you can’t sell anything additional at less than the front-end offer, this customer just isn’t going to spend any more at the moment and the order value for this customer is going to be strictly for the front-end offer only.
But what do statistics show?
In testing these kinds of funnels, it’s typical for 10-20% of buyers to take the first offer, and 5% of total buyers to take each of the lower offers.
In our example then, we start with an order value of $17. The upsell is $67, and let’s suppose it’s a good market and 15% take it. We can add 15% of the first upsell price to the total order value. $67 x 0.15 = $10.05. The downsell offer is for $47, so let’s assume 5% of the total take that. $47 x 0.05 = $2.35. The final offer of $15 let’s assume 5% take that one, which is only $0.75 additional.
Now our total AOV on day one is $17 + $10.05 + $2.35 + $0.75 = $30.15.
Nearly double what it was going to be, and that’s calculating with REAL statistical numbers. The conversion rate could be higher, and that number could climb considerably by simply adding more valuable products at higher prices in the upsell funnel or by improving the upsell offers to convert better.
Now XYZ Inc. can afford to spend about double what they were able to before to acquire new customers since the AOV is now about double what it would have been without using an upsell funnel.
Understanding what your AOV is and the role it plays in determining your ad budget is essential to any successful direct marketing campaign on paid media channels such as Google Adwords or Facebook.