The Average Transaction (AT) is the fundamental building block to having an understanding of your business - if you don't currently know the Average Transaction (AT) for the business you own or manage, your level of business intelligence is severely lacking.
In today's works of easy record keeping, storage, and plenty of computerized analytic powers, there is no excuse to not be keenly aware of such basic and fundamental metrics such as your business's AT.
Average Transaction (AT) simply represents the mean transaction over a given period of time. Stayed more appropriately to business, AT is the expected transaction - it is the revenue you can "expect" (in the statistical sense of the term) to receive from the next individual or organization that you do business with.
Calculating Your Average Transaction (AT)
Calculating your AT is quite simple - you simply take the arithmetic average of all your transactions:
AT = (sum of transactions)/(# of transactions)
If the formula sounds very simple, it's because it is - you hopefully already know your business's AT. Of course, there are a few important things to keep in mind in order to make sure your AT is accurate and useful.
There are two points to be made regarding timeframe. The first is easy and hopefully obvious - you must use the same timeframe for both parts of the formula. So, if you sum the transaction over 2016, you need to divide by the number of transactions in 2016. Imagine you didn't follow this rule and instead only used 6 months worth of transaction for the top part of the formula (for the sum of the transactions). What would happen? It should be clear that you would significantly understate your AT (it works like be one-half) because you're not taking the full year's worth of transaction into account. If you only had 6 months worth of transaction, you would need to divide by the number of transactions you had in that year in order to calculate your AT properly.
The second point on the timeframe is that it's better to use a full year of data instead of just a few months. A full year of data (if your business is in a stable state) will allow the kinks and gyrations caused by changing seasons, holidays, etc. to be evened out - a full year of data will allow the full spectrum of things that occur in a year to be captured within your data.
Focus on Transaction, NOT Customers
A key part of calculation your Average Transaction (AT) is to make sure you're using transaction and not customers - it's called Average TRANSACTION after all. The distinction is key because focusing on a transaction will allow granularizing your metrics down the line - you'll be able to not just calculate AT, but you'll be able to calculate multiple ATs for different types of transactions (eg. those arising from Google, those arising from referrals, etc.). More on this is covered below, but let's look at an example to really understand the difference between using transactions instead of customers.
Imagine you have a customer that comes in once every month for a year. You'll want to count each of the 12 transactions separately instead of counting the customer as a whole. So, you'll sum each transaction and divide by 12. If you have 10 such customers, you'll sum each transaction and divide by 120 (10 x 12) because there are 120 total transactions for the year.
The benefit of doing this for transactions instead of customers can be explained by doing a thought experiment. Which would you rather have when a customer comes into your business to execute a transaction:
Clearly, the first one allows you to predict what will happen in the immediate future and put things to a close. The second one, however, only allows you to make a prediction about the overall general future - you really won't know what's going to happen today. What this example illustrates is that it's quite useful to be able to predict what's going to happen today instead of-of having today only fit into a larger long-term prediction.
You can break down your AT even further to determine you AT for various types of transactions - transactions arising from Google, from Facebook, from referrals, etc.
This gradual AT is useful because it will allow you to understand where your most valuable transactions come from so that you can channel more money into those pipelines and away from less-profitable transactions.