AOV vs. LTV: Why Lifetime Value May Matter Most In eCommerce

The world of eCommerce is a competitive one and a successful marketing strategy is one of the best ways to get ahead.

It’s simple to say that marketing strategy is important, but much more difficult to determine which marketing strategy is best for you. Thankfully, this can be much easier when you’re making good use of data and statistics.

Many marketing techniques focus on increasing Average Order Value, or AOV. AOV isn’t the only important eCommerce metric to measure, though. Increasing your customers’ Lifetime Value, or LTV, could be key to long-lasting success.

Here, we discuss AOV and LTV, as well as the best ways to improve both metrics for bottom line profitability.

Average Order Value: A One-Time Revenue Boost

AOV, or average order value, is exactly what it sounds like: the average dollar amount of an individual order or transaction in your online store. 

AOV is an important metric to be aware of in determining how much any one transaction is worth to you. When you know your AOV, you know how much to expect to make from a new, first-time customer to eCommerce store. Knowing your AOV can help you decide how much effort you can afford to put into marketing that will likely lead to one-time purchases.

How To Calculate AOV

To calculate AOV, start with the dollar amount of your total revenue. Then, divide that number by the total number of orders placed. The result of this is an average value of how much customers spend on each separate purchase.

AOV takes into account how much you’re making per order and how many orders you process overall. However, AOV does not take into account how many individual customers have engaged with you or the production costs associated with your goods or products. 

For instance, the calculations used for AOV don’t take into account any percentage paid to credit card companies, the cost of production, or shipping costs. This makes a high AOV important, so that you’re still making a profit after these other costs are taken into account. The Average Order Profit, or AOP, does take these factors into account. AOP may be a better metric to use when looking at profit instead of simply revenue.

Why AOV Is Important

AOV is important because you’re making more money when your AOV is higher. Higher revenue allows you to pay for any associated production costs, marketing, or other expenses.

The higher your AOV, the less important it is to spend time and resources finding new customers. When each customer is likely to spend more money, you need fewer of them. With fewer customers, you can focus more on perfecting the customer experience for those that you do have.

AOV is increased via mechanical changes. These mechanical changes can include:

• Offering customizable features at a low additional price
• Focusing on making your eCommerce site easy to navigate, so that customers are willing to stay on your site longer
• Presenting a customer with other items related to those they’re already planning to buy
• Bundling items or services so that customers are encouraged to buy more at a good deal

Lifetime Customer Value: A Long-Term Profit Boost 

Customer Lifetime Value, or LTV, takes into account more than an individual order. LTV is a measure of the revenue generated by a single customer over the course of all of their involvement with your company.

While gross LTV refers to the revenue generated by a single customer over their lifetime, net LTV takes into account production and processing costs. Net LTV, then, measures total profit per customer.

How To Calculate LTV

I recommend measuring net LTV, not gross LTV. To do this, you’ll need an accurate measurement of the cost of production, distribution, and marketing. 

To begin with, you’ll calculate gross profit. You can do this by subtracting all COGS (cost of goods sold), shipping fees, transaction fees, refunds, and discount codes from total revenue.

Then, multiple gross profit by the number of orders placed in a year. This result is an annual customer value.

Net LTV is this customer value multiplied by average customer lifespan. 

Why LTV Is Important

LTV is more important if your eCommerce store has a high purchase frequency and large customer base. When these measures are lower, it’s likely easier to see patterns that are otherwise found with this calculation.

LTV is important because it helps determine the worth of a customer. With high LTVs, you need fewer customers to make the same amount of money overall. Knowing your customers’ LTV gives you a better idea of how much money you can spend on acquiring new customers. You can compare marketing costs with LTV and balance accordingly.

While AOV is adjusted by mechanical changes, LTV is adjusted with organic changes. This is because LTV is essentially a quantitative measure of customer satisfaction, rather than a quantitative measure of the price or profit of a single order. Customer satisfaction is improved via organic changes.

AOV vs. LTV: Which Matters Most for Your eCommerce Brand? 

Instead of choosing between AOV and LTV, it’s important to know when to use each measurement.

AOV can be an important metric in determining what types of items are most popular. An AOV that’s lower than the price of many store items may indicate that the lower-price items are more popular. If the higher-price items have a higher profit margin, you may need to market them differently or better.

LTV is important in deciding how much to spend on customer acquisition. Deciding on marketing costs can be tricky, but knowing how much each customer is worth can be helpful in deciding how much to spend to draw them in.

Different business models will focus more on the value that relates to their product. A company may focus more on AOV if they sell wedding dresses or dining sets, which are usually one-time purchases. A company may focus on LTV if they sell books or clothes, as these customers could return to buy more.

Many wholesale suppliers will also focus primarily on AOV, as a customer purchasing large amounts of a product likely won’t need more of it any time soon. 

For both types of products, though, both measurements may be important at some point. It’s important to never discount the value of one metric just because the other seems more useful in the moment.

7 Ways to Maximize LTV for Your eCommerce Brand 

There’s no one way to Organically Maximize Your Customer Lifetime Value, but there are many tried and true techniques that could bring you one step closer. Once you’ve tried some of these techniques, you can decide what works best for your eCommerce brand, product, and customers. Consider the following strategies:

• Make brand loyalty a primary business goal. If you start with the question “How can we keep customers coming back?” you’ll likely come up with answers spanning a whole spectrum of departments. Potential answers may fall into the categories of marketing, sales, customer service, or anything in between. What’s important is that you focus all aspects of your business on customer satisfaction and retention.
• Make marketing channels more efficient. You don’t want all of your communication with existing customers to feel like marketing. But you do want this communication to bring customers closer and closer to another purchase. Any marketing efforts should add value to customer interactions with your brand — you need to  make your brand, your products, and your site worth your customers’ time so they’re willing to come back.
• Make customer feedback a closed loop. Customers like to be heard. Even negative reviews can lead to better ratings if they are handled correctly. If you take the time to respond to customer feedback, find ways to make things right with customers who weren’t pleased with your service, and incorporate feedback into all of your processes and products, you can give customers the voice they crave and win them over so they come back again and again.
• Make personalization a key part of your martech. Customers want to feel known and understood, and personalization does just that. If you aren’t already offering your customers personalized landing pages, emails tailored to their interests or location, and suggestions for further purchases, personalizing your martech should be your first step moving forwards. This helps customers to feel recognized and increases buy-in.
• Make customer service a business pillar. Customer experience is the new marketing. As recently as 3 years ago, nearly 90 percent of companies expected to compete with other companies almost completely on the basis of customer service. This makes customer service more important than ever. To keep customers coming back, we need to make sure that every employee and platform that they interact with is prepared to give them the best possible experience.
• Make customer transactions easy. An easy checkout process will help increase AOV and an easy account creation process should increase LTV.  Account creation can be a pull factor for future site visits, but can be a strong deterrent if customers are frustrated or confused by the process. The same is true for other interactions with your company, whether it’s filing a complaint, asking for a refund, or adding a product to their online cart. If these interactions are easy, however, you’re providing an incentive for the customer to come to you again in the future.
• Make use of your customer data. You have a wealth of customer data at your fingertips. Whether it’s what’s in a customer’s cart or where they live, you can make use of this data in maximizing their experience and providing quality customer service. To best utilize all of this data, you can compile and analyze it using a customer data platform. This can help you realize the benefits of acting on data in real time. On the other side of the same coin, you can use this data analysis to assess how your actions affect your profits. 

Using Data to Increase LTV and AOV for Your eCommerce Brand

Whether LTV or AOV plays a more prominent role in your day to day functions as an eCommerce store, data plays a huge role. 

There’s plenty of data to be found and analyzed, and finding a tool that can make both finding and analyzing this data simple and quick is vital. With a tool like this, you can be sure that you aren’t missing out on important patterns or data points among your sales and customers. You can determine what processes are most profitable for you and which are dead weight, allowing you to streamline your company into what your customers want and what benefits you most.

Keeping this eCommerce data at your fingertips and using the right tools to track and analyze it can boost both customer satisfaction and profitability. 

About the Author

Brooklin writes on all things eCommerce for OrderMetrics. He is a professional B2B and SaaS writer with an affinity for GIFs.