Average Order Value (also known as AOV) is a key performance metric, primarily used in retail and e-commerce, that measures the average total of every order placed with a business over a defined period. In simple terms, it answers the question: “When customers buy from us, how much do they typically spend in one go?” The calculation is straightforward: Total Revenue / Number of Orders. For example, if a company generated $100,000 in revenue from 1,000 separate orders in a month, its AOV would be $100. While it might seem like a simple sales figure, for a value investor, AOV is a powerful lens through which to view a company's health, its relationship with its customers, and the effectiveness of its sales strategy. A consistently rising AOV can signal a company's growing ability to deliver value, encouraging customers to add more to their baskets, which often leads to healthier profits without the need to spend more on acquiring new customers.
Tracking AOV is like being a detective looking for clues about a company's underlying strength. It’s not just about the number itself, but the story it tells over time and in comparison to its peers. For a value investor, it helps separate well-managed, beloved brands from those that are merely treading water.
A steadily increasing AOV is often a sign of a vibrant, healthy business. It suggests several positive things are happening:
Conversely, a declining AOV can be a red flag, potentially pointing to increased competition, a weakening brand, or an over-reliance on discounts to drive sales.
Comparing the AOV of a company to its direct competitors can be incredibly insightful. A company with a consistently higher AOV than its rivals might be a premium brand with a loyal following, like Apple in the smartphone market. It could also mean the company has a more effective online checkout process or a smarter product recommendation engine. This metric helps you understand a company's position in the market—is it a high-volume, low-price player, or a premium, high-value brand?
While a high AOV is generally good, it must be viewed in context. A company that boosts its AOV through aggressive, margin-crushing promotions isn't necessarily creating sustainable value. It’s crucial to analyze AOV alongside other key metrics. For instance:
Smart companies are always working to increase their AOV, as it's one of the most efficient ways to grow revenue. As an investor, you should look for businesses that implement these strategies effectively and sustainably, without harming their profit margins. Common strategies include: