KPI Spotlight Feature: Average Order Value

How to increase your turnover using KPIs – Average Order Value

In this series of blogs we are looking at each of the different KPIs within UT400, to give you some practical help in getting the most from your ERP system. We’ve already looked at the Quote Conversion Rate and discussed how many ways it can be used to enhance your internal and external processes. This time we’re looking at a really important metric that can play a huge role in turnover: the Average Order Value.

What can your Average Order Value tell you?

Understanding what the average value of each of your orders is can be helpful in establishing where you need to focus, and how far away you might be from your targets. It’s fairly obvious at face value what it tells you – but the real value in any business metric is in knowing how to apply it, and how to use it to make changes and drive incremental revenue.

Using KPIs in conjunction with other KPIs

The Average Order Value is particularly helpful when looked at in relation to the Order Frequency. For example, if you are processing a lot of low value orders, your cost per order in terms of internal resource and admin time could be quite high – in effect, your staff will be kept extremely busy processing a lot of orders but each order isn’t necessarily worth a lot. This is often the case for larger branches with a public as well as trade footfall. If it’s a very high average order value but the order frequency is low, then chances are the internal cost per order is lower, which is often typical of more trade based businesses with a loyal and steady customer base.

You can look at the Average Order Value over time as well; are average orders higher at certain times of year? Why is that? And what can you do to even out, or at least accurately predict, those peaks and troughs? Is the Average Order Value gradually decreasing? Changes nearly always indicate that some other factor is at play; it may be something outside your control, but being aware of both the internal and external factors affecting your order values is extremely helpful.

Using KPIs to meet specific targets

If you have a particular sales target, looking at it in relation to your Average Order Value can help to make it more achievable. Perhaps you only need to add a small amount to each order across a year to reach your targets; that’s what Sainsburys did when they broke down a massive corporate target into average basket spend, realising that a £1.13 spend per customer per visit would surpass what was an initially challenging target. Or perhaps one additional order per month from regular customers would be enough to boost the bottom line. Whatever the scenario, understanding the numbers in relation to one another can help you put the steps in place to address it and introduce processes in your sales, stock or admin teams to meet those targets step by step.

Applying the data to drive change

Once you have a handle on the numbers you can decide for yourself what to do. There are plenty of opportunities here:

- Actively task your sale team to upsell additional products or related items to increase average order value

- Proactively follow up regular customers for repeat business, offer greater economies of scale to encourage larger orders or increased frequency, introduced some additional linked purchase opportunities (e.g. buy 3 to get 1 free, or spend £XX to get 5% extra discount

- Introduce customer loyalty schemes with incentivised order values and frequencies

- Streamline admin processes, such as automated quote chasing, invoicing and status updates, to reduce administration time and reduce your internal cost per order

- Cross-reference with high profitability products to see where you’re making good profits per order versus very low margin items; there could be some tactical pricing shifts to be done

The list is almost endless when it comes to how you can apply the data, and we are not here to tell you what to do. You may choose to do nothing at all; but the critical part is having that data in the first place, and having it clearly and simply displayed to make it a daily part of your business operations. When applying analytics becomes second nature, that’s when really smart, data-driven decision-making comes into its own and plays a bigger role in the direction and growth of your business.

If you'd like help with advanced reporting and analytics, or have a question about a particular KPI or system feature of UT400, please just drop us a line at info@ten-25.co.uk