Which KPI is most important when it comes to measuring marketing success: average shopping cart amount or long-term worth of a customer? Both AOV and CLTV can offer distinct insights for e-commerce brands looking to optimize short-term sales and long-term revenue impact. We’ll explore the differences between the two KPIs, when each should be considered, and which is most useful.
AOV or CLTV?
A question as old as e-commerce itself: Average Order Value (AOV) or Customer Lifetime Value (CLTV) — which one is more telling? When should you measure each? How do we calculate them? What are the best ways to take action on insights that AOV and CLTV provide?
The truth is that both metrics are of value and are necessary to drive real growth, but understanding which to look at in a specific use case depends on your business model, industry, customer, and what you’re trying to measure — or prove.
We’ll share what we’ve learned — based on our client data — about these two popular metrics, when they’re best used, and which is most important.
What Is AOV and When Is It Best Used?
As defined by our partner BigCommerce:
“Average Order Value (AOV) is an e-commerce metric that measures the average total of every order placed with a merchant over a defined period of time. AOV is one of the most important metrics for online stores to be aware of, driving key business decisions such as advertising spend, store layout, and product pricing.”
In general, AOV is an in-the-moment metric. The insights it provides can help maximize every revenue opportunity by up-selling and cross-selling, so understanding your AOV can help you make it count. AOV is best used when describing transactional value of a group of customers, a defined segment, or an individual consumer. Here’s how you calculate AOV:
| Average Order Value = Revenue / Number of transactions
AOV is a more situational, transactional measurement. It’s critical for calculating revenue and conversions, and AOV can help inform your keyword bidding and display budgets.
Our clients, for instance, can afford to spend more on advertising because each month there is more revenue coming from their existing customers than there is coming from new customers. This means that they can pay higher costs to acquire customers and be safe knowing that they can monetize that contact over time by getting more purchases from them.
What metrics matter most to your business? Find out at Benchmarketing.io
What Is CLTV, and When Is It Best Used?
CLTV is one of the most telling metrics available because it predicts the net profit attributed to the entire future relationship with a customer. If it’s sustained revenue growth that you want, you’ve got to play the long-term game — CLTV is the best metric, here, but it often takes a year or more to generate the figures, so you have to be persistent and patient. CLTV offers a “look into the future,” giving you a good idea of the snowball effect for a particular customer or segment. For this reason, it’s more uncertain than AOV as AOV is black and white, set in stone, based on conversions in the moment. What CLTV lacks in certainty it makes up for by helping you understand growth and revenue and create an informed assessment of projected value.
“#CLTV is less set in stone than #AOV, but it’s a better long-term, informed prediction of #value per #customer,” says @ARTimlin CLICK TO TWEET
CLTV also enables you to understand the relationship between your Customer Acquisition Costs (CAC) and your ability to maximize the return on that initial investment over time. Essentially, CLTV feeds CAC, especially when it comes down to the specific amount to spend on customer acquisition.
The entire equation looks complex.
And while it is complex, you don’t need to know all of that. Simplified, here’s what it means:
| Customer Lifetime Value = Customer Revenue – Cost of Acquiring and Servicing Customer
Many e-commerce businesses try to make acquisition and budget decisions in the most simplistic way: if the customer’s first transaction costs the company more in CAC than they will make in AOV, the company basically thinks that acquiring that customer won’t be worth the effort. However, a good marketing strategy will likely monetize that customer over time and drive repeated purchases at an ever-lower CAC.
Reviewing a customer’s CLTV (quarterly or semi-annually) enables you to devote more budget to your Google AdWords, Display, and Facebook budgets. You’ll pay a higher percentage of sales to your affiliate and retargeting partners on that first purchase, but you’ll make this up as customers stay with you for the long haul.
For subscription-based e-commerce companies, mobile-first apps, high-end luxury fashion brands, and B2B brands, CLTV is a more interesting metric than AOV.
Uncover strategies that make an impact on revenue with Benchmarketing.io
Which Is the Most Important Metric?
Don’t be fooled into disregarding AOV or thinking that CLTV is the only one you should measure. Using a single metric to gauge success is ineffective and limiting.
While AOV may be too specific, CLTV may be too broad. You really need both metrics for comparison because you get a clearer picture of a particular objective when you provide multiple points of context and perspectives.
For instance, some customers buy big, but only once in a while. Some customers make small purchases, but they buy often — they might have the same Customer Lifetime Value, but the path that they took to purchase is very different.
Similarly, Average Order Value is an important metric to understand, but it’s as nuanced and finicky as your customers’ buying habits are. It can’t project growth over a long period of time.
If you don’t have a tried-and-true test model or experience in working with data, the “outliers” (those customers with really big Customer Lifetime Values or really big single transaction values) can easily skew your data up or down. Yet you need to take CLTV into account to understand where your business is headed in terms of growth.
AOV only shows growth in a specific time period
AOV can be a telling metric to understand campaign performance or growth over a specific time period. It’s a good indicator of up-front or short-term success, but it also has limitations. For example, AOV places emphasis on individual orders and single-order customers — in other words, it’s a transactional metric. It lacks much value when it comes to judging longevity. What about a 3-year or 5-year customer? What if you want to step back and understand the business impact of a customer or segment over time? AOV doesn’t do a whole lot for you there.
CLTV is more indicative of long-term revenue growth
To draw generalities and identify overarching trends, lifetime value delivers the goods. Our data shows that the fastest-growing brands are orientated around growing revenue and CLV. The vast majority of businesses, particularly high-growth or early-stage businesses, choose CLTV over AOV as their “primary” metric because it allows them to invest more heavily in acquisition and retention, and boost exposure to get new business.
Here is the key that brings this all full circle:
When you’re early in your growth, AOV is most important because you need customers. Once you build your database and begin increasing the amount of customers, lifetime value becomes the most effective path to profit and growth. You need both — and you need to get more customers to buy more often and at a higher value.
In other words, the longer you get someone to spend with you — the more purchases you get them to make over time — the more definable their CLV becomes, the higher their CLV goes, and the more they’re worth.
The only way you can actually achieve this is by embracing a full-scale customer lifecycle marketing approach. CLV and lifecycle marketing go hand in hand.
Not all customers are created equally. The trick is to understand that, put the insights into practice, and appreciate that a single metric might not do justice to the hundreds or thousands or millions of engagements you have with your customers.
Ultimately, we want both AOV and CLTV to go up, right? Uniting all customer data for further personalization is as close as we can get to a silver bullet that increases both AOV and CLTV.
When you choose and measure the right KPIs at the right time, along with personalizing the customer’s journey, you will see both metrics begin to steadily climb.
Handpicked Related Content:
- RFM Modeling 101: Predict Churn, Purchase, & Retention with Simple Segmentation: Caren Carrasco [Podcast]
- The Best Metrics for Understanding Your Most Valuable Customers — CLTV or AOV?
- Lifecycle Marketing: Your Complete Guide to Reaching & Retaining Customers
Uncover the KPIs and strategies that impact your business most. Visit Benchmarketing.io today.