How Important is the Average Order Size?

by Stephen Lett

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 our analysis. Yes, the average order size is key. However, monitoring your response rate and the change (growth) of your 12-month buyer file are much more important than worrying about the average order size. Often times, a decrease in the average order size can result in an increase in the 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 should not 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 buyers to the 12-month buyer file. Increasing the average order size is not as important as increasing the response rate. Offers should not be structured to increase the average order because these offers will generally be at the expense of the response rate.

RESPONSE RATE vs. AVERAGE ORDER
OFFER		RATE	ORDER	ORDERS	SALES	RPC
A	100,000	1.73%	$75.00	1,733	$130,000	$1.30
B	100,000	2.00%	$65.00	2,000	$130,000	$1.30

WHAT REALLY DETERMINES THE AVERAGE ORDER SIZE

The average order size is determined by your merchandise assortment. It is the make-up of your SKU’s and the number of line items purchased per order. It is a result of how you merchandise and assort your catalog. It is “merchandising” not “marketing” driven. Average order is a function of the lowest priced items; not the highest price. For example, eliminating items that retail 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% to 65% of the units sold fall below the overall average order size.  Approximately 35% to 40% are above the average. It is important to use a square inch analysis and sorted based on price point ranges.  You will most likely see that the low retail items drive unit volume, which is critical for success.  If you eliminate or reduce low retail items, the average order might increase, but it will be at the expense of volume.

INCREASING THE AVERAGE ORDER SIZE

We can design marketing promotions to raise the average order.   But again, they are generally at the expense of the response rate. While the average dollar will be higher, most likely we will 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 is not sustainable. The promo may increase the average order but once the promotional period is over, the average order size will go back 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 20% higher as compared to web-generated orders. This is because consumers do not shop the web the way they shop 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, are shoppers and tend to be more loyal. They peruse (shop) the pages of a catalog, where they often find multiple items to order and ultimately they go to the web to actually place their order.

SUMMARY

Don’t worry about the average order size.  It is what it is. Work on ways to increase your response rate for both house file 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% your sales should increase by approximately 10%. If you focus on growing your 12-month buyer file, everything else will take care of itself.