What Your Average Order Value Means for Your Shop
While it might seem like busywork, tracking your shop's KPI's is actually a vital part of growing your business. In our last installment, How Your Closing Ratio Impacts Your Shop's Performance, we discussed ways to improve your closing ratio and why it's important to monitor. A metric closely related to the closing ratio and just as important to track is the average order value (also called the average repair order).
This number tells you how much on average a customer spends per transaction and can be calculated by dividing total revenue by the number of orders. So, if a shop has a total revenue of $2,000,000 and has 4,000 orders, then the average order value would be $500, meaning that, on average, a customer spent $500 on each transaction made at the shop. This number can give you insight into how successfully your shop is selling repairs.
How to Improve Your Average Order Value
There are several things to think about when trying to improve your average order value. After interviewing shop owners for their June 2018 issue, Ratchet+Wrench pointed to monitoring closing ratios as a key way to improve the average order value. In this way, it's not just how much each sale is making, but how many sales opportunities the sales staff closes. By tracking both, you get a much clearer picture as to the overall success of the sales team.
They also indicate that having the sales team push to have more billable hours on each order will help push up the average order value. We'll talk more about labor hours in later posts in the series.
Some strategies to raise the average order value overlap with those used to improve closing ratios. Building trust with customers plays an equally important role in both the closing ratio and average order value. By fully explaining necessary repairs to customers, and perhaps even showing them the issues on the vehicle directly, if possible, they become more likely to listen to the advice and purchase the recommended repairs. This also aids in building a solid repeat customer base. The more repairs they purchase on any given job, the higher the average order value becomes.
Similarly, presenting the customers with a thorough repair estimate is important to both metrics. By letting a customer know that there are more repairs necessary than what they came in for, you gain the opportunity for them to purchase more services. This, in turn, would help raise your average order value. Again, it's important not to try and sell them things they don't need—customers will often see through this strategy and you run the risk of driving them away. Instead, focus on their needs and the long-term health of their engine. Let them know why the repair has been recommended.
Things to Think About As You Track Your Average Order Value
There are some important things to consider as you begin to track your average order value and what it means for your shop.
The average order value is not an indicator of overall profit, but of how much the customer is spending. Costs are not taken into consideration for this calculation. Evaluating this would emphasize the financial side, which, while important, isn't really what the average order value is meant to do.
Instead, the average order value tracks customer buying trends. You're able to see what customers are historically spending each time they visit your shop and you can use this information as you build a sales plan moving forward. If you're getting a lot of orders, but the average is low, think about ways you could raise that average. On the other hand, if you notice the average order value is high, but there aren't as many orders as you'd like, you might want to evaluate how you can build a repeat customer base or revamp your marketing strategy to bring in new clients. Read our previous post, Creating Powerful Marketing Messages for Your Diesel Repair Shop to learn more about how to effectively market your shop.
Keep in mind that when looking at the average order value, it can be hard to differentiate between a customer who purchases many smaller things as opposed to one large job. It also doesn't take into consideration customers who complete multiple transactions. While this doesn't necessarily directly impact the profit, it could be useful to know when evaluating sales techniques. Gaps like this are why it's important to track multiple metrics. By doing so, you get the entire picture, rather than just guessing at what you think is happening.
Next up in our Profit Boosting Boot Camp, we'll focus on your gross profit margin. This very important number can let you know how you're actually doing at making money.
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