What is your Average Order Value?

Last week my business mentor came in and during the session he asked me the AOV (Average Order Value) of Target Integration. I was able to give him the answer using our internal ERP system (Yes we walk the walk and use an ERP to manage our business as well). But it left me thinking that the answer was smaller than what I was expecting. The reason, we still had a number of small value invoices/clients on the books.

Let me clarify, no client is too small but you just have to define a line somewhere. The difference between after biggest invoice and our smallest invoice was 100 times. It made me think about the reality and validity of Average Order Value.

Averages are simple to calculate and hence easy to understand. But sometimes they are too simple to offer any valuable insight.

Average counts give very little useful information. For instance, consider the following the average statement,

“The sales on average have been up by 3% last month across our 5 stores”

It gives you no information on which stores did well and which were lagging. All you get is very generalized and misleading information that cannot be incorporated in a useful manner.

Average sales values are not the best way to assess your business performance because,

  • Average values may be distorted by outliers. But if you can assess the outliers (the very highs and very lows) then you can assess your business better.
  • The average sales you get may be from a mix of different populations. Never mix the sales of different demographics or unrelated products. Again, if you may have a high value product and a low value product. The average sales of these is never going to be correct interpretation of your business.

A good reporting tool is an important feature of an ERP system. When you are shopping for an ERP make sure the system either has good reporting inbuilt or is integrated with Business Analytics and Reporting tool.

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