How Important is Average Order Size?
Catalog executives always seem to have a great deal of interest in their average order size. They become concerned when they see it decrease. What's more, catalogers often spend time trying to artificially increase the average order size without really understanding the implications of doing so. That's why I want to provide a good understanding of what's behind the average order size and other measurements that might be more important to your analysis.
Yes, average order size is important. However, monitoring your response rate and the change (i.e., growth) of your 12-month buyer file are much more important than worrying about the average order size. Oftentimes, a decrease in the average order size can result in an increase in response rate. Or, a large increase in the size of the average order can actually lower your response rate, resulting in fewer orders. So again, worrying about the average order size shouldn't be a primary concern.
Average Order Size vs. Response Rate
In the chart below, which offer is better, A or B? The results shown are identical in terms of the sales, revenue and RPC (revenue per catalog). However, the response rates and average order sizes vary. An operations person might prefer to offer "A" since there are fewer orders to pick and pack. However, offer "B" is better from a marketing viewpoint because the higher response rates result in a greater number of new buyers in the 12-month bucket. In the example below, we added 267 additional names to the 12-month buyer file. Increasing the average order size isn't as important as increasing the response rate. Offers shouldn't be structured to increase the average order because these offers will generally be at the expense of the response rate.
What Really Determines the Average Order Size
Average order size is determined by your merchandise assortment. It's the makeup of your SKUs and the number of line items purchased per order. It's a result of how you merchandise and assort your catalog. It's "merchandising" not "marketing" driven. Average order is a function of the lowest-priced items, not the highest price.
For example, eliminating items that sell for less than $20 will increase the average order size, but it could decrease the rate of response. When analyzing the average units sold, roughly 60 percent to 65 percent of the units sold fall below the overall average order size. Approximately 35 percent to 40 percent are above the average. It's important to use square-inch analysis and sortation based on price point ranges. You'll most likely see that the low-priced items drive unit volume, which is critical for success. If you eliminate or reduce low-priced items, your average order might increase, but it will be at the expense of volume.
Increasing the Average Order Size
You can design marketing promotions to raise the average order value, however, they're generally at the expense of the response rate. While the average order will be higher, most likely you'll end up generating fewer orders. An offer designed to increase the response rate would be more productive. What's more, increasing the average order size artificially through the use of a promotion isn't sustainable. The promo may increase the average order, but once the promotional period is over, the average order size will go back to seeking its true level. Increasing the average order size is achieved by altering your merchandising strategy.
Catalog vs. the Web
When studying the average order size, consider the variance between the catalog and the web. Typically, you'll find the average order size from a print catalog is approximately 10 percent to 20 percent higher compared to web-generated orders, especially for one-time, web-only buyers. This is because consumers don't shop the web the same way they do a print catalog. Web buyers tend to be "item" buyers. Consumers search the web for a particular item they want, find it and make their purchase. Catalog buyers, on the other hand, tend to be more loyal. They peruse (i.e., shop) the pages of a catalog, where they often find multiple items to order before ultimately going to the web to place their order.
Don't worry about average order size. It is what it is. Work on ways to increase your response rate for both your housefile and prospects. Focus on growing your 12-month buyer count. Your revenue will increase by approximately the same percent as the percentage increase of your 12-month buyer count. For example, if you increase your 12-month buyer count by 10 percent, your sales should increase by approximately 10 percent. If you focus on growing your 12-month buyer file, everything else will take care of itself.
Steve Lett graduated from Indiana University in 1970 and immediately began his 50-year career in Direct Marketing; mainly catalogs.
Steve spent the first 25 years of his career in executive level positions at both consumer and business-to-business companies. The next 25 years have been with Lett Direct, Inc., the company Steve founded in early 1995. Lett Direct, Inc., is a catalog and internet consulting firm specializing in circulation planning, plan execution, analysis and digital marketing (Google Premier Partner).
Steve has served on the Ethics Committee of the Direct Marketing Association (DMA) and on a number of company boards, both public and private. He served on the Board of the ACMA. He has been the subject of two Harvard Business School case studies. He is the author of a book, Strategic Catalog Marketing. Steve is a past Chairman of both the Catalog Council and Business Mail Council of the DMA. He spent a few years teaching Direct Marketing at Indiana University in Bloomington, Indiana.
You can contact Steve at firstname.lastname@example.org.