Average transaction value
Average transaction value and why it’s important for small businesses to understand?
This article is about average transaction value (ATV). The article also explains why the average transaction is important to small businesses. I also show you how this key performance indicator, together with seven other key numbers, become the most powerful numbers in your small business and how to use them to your advantage.
For those that are not too familiar with the term average transaction value, here’s a brief definition.
Average transaction value definition
What does average transaction value mean?
Put simply, the average transaction value is calculated by dividing the total of all sales transactions over a given period, by the number of transactions in the same period.
This period could be your financial year where you use your profit and loss sales total, or it could be a shorter period. For example it could be your daily total of sales transactions or your sales transactions over a week or a month too.
Average transaction value formula
This article wouldn’t be complete without including the average transaction value formula.
The average transaction value formula is calculated as follows:
Total sales or value of all transactions (over a given period, e.g. 12 months)/Number of transactions (or sales) over the same period
- Sales were £150,000 for the 12 months to 31 December 2017.
- Total number of transactions were 1,650 in the same 12 month period.
Therefore the average transaction value formula is: £150,000/1,650 = £90.91
Average transaction value calculation using Starbucks as an example
To understand the average transaction value calculation and how to calculate it is best demonstrated by way of an example.
For this example I’m going to use a well known retail brand Starbucks.
Average transaction value in retail example
I discovered that the average transaction value Starbucks has, is around $5 in the US, which equates to about £3.73 (@1.34 exchange rate) in the UK.
Here are the numbers for the 2017 accounts for Starbucks:
|Starbucks 2017 annual revenues||16,706,567,164||22,386,800,000|
|Number of Starbucks outlets||27,339||27,339|
|Annual sales per outlet||611,013||818,757|
|Monthly revenue per outlet||50,918||68,230|
|Weekly revenue per outlet||11,750||15,745|
|Daily revenue per outlet||1,674||2,243|
|Number of daily transactions per outlet (£1,674/£3.73; $2,243/$5)||449||449|
|Average transaction value||£3.73||$5.00|
These numbers demonstrate how to calculate average transaction value using historical figures and how easy it is to do.
3 easy ways to increase your average transaction value
There are a number of ways to increase your ATV and here are three of them.
Upselling your customers
Upselling is the most common technique used in business today. The most famous example of upselling is McDonald’s where they ask “do you want fries with that?” or “do you want to go large?”
The outcome of both of these where the customer say yes is an increased transaction value.
Where this becomes a successful campaign over a longer period of time, this will affect the average. This is why tracking ATV as a key performance indicator is key to small business growth.
The upsell must be complimentary to the original sale. Also, the upsell must be done at the point of sale, where the customer is ready to buy.
Product or service bundling
Similar to upselling, product or service bundling is where two or more products or services are offered as one saleable package.
However, the difference with bundling is the customer know’s upfront what they are buying. Whereas with an upsell, the customer has decided buy X product or service for £X. However, at the point of sale, customers are offered an upsell of product or service Y (or alternatively, a larger version of X).
Customers in the upsell process are effectly asked if they want to spend more at that point in the sales process. They are offered additional products or services in return for an additional £Y.
We’ve all seen the offers in retail stores offering “buy two and get the third for free.”
The idea behind this technique is the cost of the package to the customer is higher than the cost of the individual items, but less than the combined cost of the multiple items when sold separately.
The easiest method, but many times most controversial, is a simple price increase. I know many business owners struggle with price increases, which is why I developed the free Price Increase Calculator tool. However, the affect on the average value of transactions is an overall increase, which may be obvious, but not always appropriate in your market.
A price increase of more than 10% will be noticed more than one below this threshold. I therefore suggest you think carefully before raising your prices by more than this.
However, if your business could be divided into customer types. Or possibly into product types, where different customers groups buy different products. This creates an opportunity to affect prices with one group of customers, which doesn’t affect the other.
An article I wrote on my entrepreneur blog about customer lifetime value touched on the Pareto 80/20 principle. In this article I discuss about how I used the Pareto principle to my advantage in my Chartered Accounting Practice. I was able to increase my prices for a large percentage of my clients who represented a smaller percentage of my overall sales.
The most powerful 8 numbers in your small business and how to use them to your advantage
At the beginning of this article I mentioned about the most powerful numbers in your small business and how to use them to your advantage.
I’ve written a guide on this where it goes into more detail about what I consider to be your small business power numbers. One of which is your average transaction value.
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To see another example of the average transaction value and how it can be use to increase sales and profits, please watch the video below. The video demonstrates how sales of a restaurant increase by £39,285 from a £15.50 increase in the average transaction value (or average customer spend).
But in the same restaurant business example, the same average transaction value improvement, increased profits by 102% from £23,302 to £47,069.
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