5 MIN READ | July 21 2020, 12:19:34
Value Per Transaction: The North Star Metric for Optimizing Transactions and Driving Revenue
As a modern e-commerce business, we know you likely already have a diverse marketing mix driving towards maximizing the value of, and experience for, each individual customer. At Rokt, we believe in order to get a holistic view, you need a north star metric that encompasses your programs of work, allowing you to optimize performance across the board. While many e-commerce marketing teams rely on Average Transaction Value (ATV) for measuring campaign effectiveness, this approach can be extremely limited. Value Per Transaction offers a holistic approach that captures additional value, allowing businesses to optimize and maximize on the full potential of their transaction experience.
The Limitations of Average Transaction Value
Average Transaction Value (ATV) is calculated by dividing the total value of all transactions by the number of transactions or sales.
ATV = Total Value of all Transactions / # of transactions or sales
This approach can be insightful, but very limited and easily skewed by outliers resulting in misleading data. A few extremely high or extremely low value orders have the power to throw off the entire data set. This can occur often when the range of products spans a wide price range. For example, say 9 customers purchase a product for $5 on your site on a given day, and 1 customer makes a $200 purchase, the ATV for this day would be $25 – which doesn’t fully capture the full story, or provide an accurate picture of these transactions.
Furthermore, ATV represents the value if all customers and data points were equal, but this is not the case. By treating each customer identically, businesses sacrifice the potential for long-term profits in the transaction. We know that all customers are different, so basing campaign effectiveness on the average of all transactions only provides a small piece of the full picture. Brands miss out on including important value points such as a customer’s lifetime value, or potential ancillary revenue in the transaction.
While ATV can be an important piece in optimizing campaigns, it is ultimately limiting since it only takes into account the value of goods or services and results, limiting the ability to have a holistic performance measurement.
Understanding All Value Types of Your E-Commerce Experience
Value per Transaction (VPT) bridges the gap in ATV by capturing additional types of value, including lifetime value, average order amount, and ancillary revenue. This provides a clearer, more complete understanding of your marketing strategy’s effectiveness.
Lifetime Value captures how valuable a customer can be to your brand beyond the initial transaction, it takes into account the entire period of a customer’s relationship with a business. Lifetime value (LTV) is calculated by multiplying the value of the customer to the business by their average lifespan. It helps a company identify how much revenue they can expect to earn from a customer over the life of their relationship with the company. Increasing the value of your existing customers is a great way to drive long-term growth. With loyalty programs, personalized offers, referral perks, spending rewards, and engaging content, customer relationships are strengthened and lifetime value increases. It is important to factor this key metric into campaign performance evaluations, so brands can capture the full potential of a customer.
For example, if Jenny purchases a $5 product on an e-commerce retail site – this is usually calculated into the brand’s ATV, and that is all. But if, during her checkout experience, Jenny is shown a relevant offer to opt into the brand’s loyalty program, now she is incentivized to spend more or buy more often. Her $5 purchase remains the same, (as does the ATV amount) but her lifetime value as a customer increased, as she is likely to be a repeat customer. Lifetime value considers the full potential of each customer beyond the initial sale.
Average Order Value tracks the average dollar amount spent each time a customer places an order. Growing this amount with relevant offers can significantly impact a company’s bottom line. Increasing Average Order Value (AOV) is how brands offset customer acquisition costs and increase return on investment (ROI) which accelerates profitability and allows brands to put more money into product development, advertising, talent, etc. ultimately leading to long term business growth. Add-to-cart campaigns such as insurance, parking, car rentals, gift cards, and merchandise, as well as upsells such as VIP experiences, free shipping, baggage, expedited check-in, and more can all be highly useful to boost average order value.
Ancillary Revenue, or revenue derived from goods or services other than a company’s primary product offering, is an often overlooked but powerful factor for companies looking to grow their bottom line. Ancillary revenue is particularly popular with airlines – think frequent flyer partnerships with credit card companies or commissions received from hotel partnerships. The travel industry leads in driving ancillary revenue through upsells. For a more in-depth look into smarter e-commerce marketing, including insights from global brands, download our latest paper: The Anatomy of the Upsell: Making the Most of the Travel Transaction Moments.
Ancillary Revenue is a tremendous opportunity for additional revenue for brands beyond the travel industry, but many brands do not take full advantage of it. Examples outside of the airline industry include concessions at sporting events, car-wash services sold by gas stations, or retail stores that offer installation services. In E-commerce, this can include brands offering warranties on items like electronics or furniture, online retailers offering delivery services, or the entertainment industry offering insurance on ticket purchases. Ancillary revenue is important because it can help companies diversify a company’s revenue stream. Businesses are able to generate higher revenue per customer, increase retention levels and repeat customers, and contribute to their bottom line. In the e-commerce space, this can be done through strategic partnerships and by optimizing the offerings in the Transaction Moment ™.
Bringing It All Together with VPT
As described above, there are numerous value opportunities to consider that go far beyond calculating averages. Value Per Transaction is a unifying metric that gives clear insight into the entire spectrum of customers interacting with your site by capturing each of these additional value types. Using VPT, businesses can optimize and maximize on the full potential of their transaction experience. Calculating the actual value per transaction is critical to ensuring that accurate comparisons are made between internal vs. external marketing objectives and short-term vs. long-term value for each customer.
Optimizing and Personalizing the Transaction – The Rokt Solution
There are thousands of software providers helping e-commerce brands to locate prospects, optimize the customer journey, and nurture conversion. Once they reach the checkout process however, the optimization usually ends. Rokt has a laser focus on the transaction. We help our partners unlock more value throughout their transaction by measuring and optimizing to VPT across competing objectives and personalizing the experience for each of your customers. Value is maximized for each customer by dynamically changing the user’s experience based on what is in their cart as well as who they are (i.e. demographic information, previous interactions, and purchase behavior). We optimize which offers are presented, design elements, the language used for each offer, the price and promotion of the offer, and more strategically based on what the user is most likely to engage with, thereby increasing VPT.
Rokt’s partners use VPT as a north star metric that encompasses their sophisticated marketing mix, allowing them to optimize performance across the board and maximize the value of, and experience for, each individual customer in the Transaction Moment ™.
We’ve condensed this information for your convenience here.