The average price per unit, when discounts and promo codes are taken into account, is an important key performance indicator (KPI) for e-commerce businesses. This metric reveals the actual selling price of products and takes into account the various promotions or discounts that may have been applied.
Analyzing this metric provides a realistic view of revenue generated per product and allows businesses to gauge the effectiveness of their pricing strategies.
Key Takeaways
- Definition: Average price per unit (APPU) is the average amount of money received for each product sold, taking into account any discounts or promo codes applied.
- Calculation: APPU is calculated by dividing total revenue by the number of units sold.
- Strategic Importance: The APPU provides insight into the actual revenue generated per product, helping companies measure the efficiency of their pricing and the effectiveness of their promotions.
- Optimization Strategies: Improving APPU can be achieved through strategies such as re-evaluating pricing, limiting excessive discounting, analyzing promo code usage, introducing bundled offers, and implementing dynamic pricing.
- Limitations: While insightful, APPU may not reflect product variety, may be distorted by volume discounts, does not account for margins, does not provide insight into inventory turns, is subject to promotional fluctuations, does not indicate customer loyalty or retention, may not reflect the success of pricing strategies, and requires context for accurate interpretation.
- Complementary metrics: APPU should be evaluated alongside metrics such as net profit margin, inventory turns, and customer lifetime value (CLV) to gain a holistic understanding of e-commerce performance.
Why does Average Price Per Unit matter for your business?
Gaining insights from the Average Price Per Unit is crucial for several reasons:
- Financial Planning: By understanding the real revenue earned per product, businesses can make informed decisions regarding budgeting, inventory purchases, and overall financial planning.
- Pricing Strategy Insights: Observing fluctuations in the Average Price Per Unit can hint at the effectiveness of ongoing promotions or the need to revise pricing strategies.
- Promotion Effectiveness: This metric can help businesses discern which discounts or promo codes are most effective in driving sales and, at the same time, maintaining a healthy revenue per unit.
- Category Analysis: By breaking down the Average Price Per Unit by product category, businesses can identify which categories are more susceptible to discounts and which ones maintain a steady price point.
- Temporal Insights: Analyzing this metric over time can unveil seasonal trends, the success of periodic sales events, and the overall price trajectory of products.
How to calculate Average Price Per Unit (APPU)?
Explanation of the parts of the formula:
- Total Sales represents the total revenue generated from all product sales after applying discounts and promo codes. It gives an overall picture of the financial inflow from product sales within a specific period.
- Number of Units Sold is the total quantity of products that were successfully sold during a particular period. This includes every individual item sold, regardless of its price or category.
- The ratio gives us the average price at which each unit of product is sold. It reflects the price point at which the majority of products are being sold, considering all the discounts and promotions applied.
In essence, the Average Price Per Unit provides insights into the actual revenue earned per product sale. It’s an indicator of how much, on average, a customer pays for a single unit of product, after taking into account all discounts and promotions.
Example Scenario
Imagine that in a certain month:
- Your ecommerce store made total sales amounting to $10,000.
- During this period, you sold 500 units of various products.
Insert the numbers from the example scenario into the above formula:
- Average Price Per Unit = $10,000 / 500
- Average Price Per Unit = $20
This means that, on average, each product unit was sold for $20 during this month.
Tips and recommendations for optimizing Average Price Per Unit
To improve the average price per unit, companies should
Reevaluate pricing strategies
Reevaluating your pricing strategies is a critical first step in optimizing your average unit price. This involves a comprehensive review of your existing product prices and consideration of adjustments based on factors such as market demand, competitive pricing, and perceived product value. It’s important to ensure that your prices are not only competitive, but also reflect the value your products provide to customers.
Limit excessive discounts
While discounts and promotions can be effective in attracting customers, they can also drive down the average unit price if used excessively. It’s important to strike a balance between attracting customers through discounts and maintaining a profitable average unit price. This could include limiting the frequency or size of discounts and ensuring that they are strategically targeted to drive sales without significantly reducing revenue.
Analyze promo code usage
Promo codes are a popular tool for attracting customers, but it’s important to evaluate how they’re being used and their impact on your average price per unit. By analyzing which promo codes are being used the most, you can determine if certain codes are offering too much discount and lowering your average unit price. This analysis can provide valuable insights for optimizing your promo codes to better balance customer attraction and profitability.
Introduce bundle offers
Introducing bundle offers is another effective strategy for maintaining a higher average unit price. By encouraging customers to purchase multiple products together in a bundle, you can maintain a higher overall price while still giving customers the perceived value of a deal. Bundling can also encourage customers to purchase more items than they originally intended, potentially increasing both sales and the average unit price.
Implement dynamic pricing
Dynamic pricing is a strategy that adjusts prices based on real-time market data, including changes in demand, competitor prices, and other external factors. It can be an effective way to optimize the average price per unit because it allows for flexible pricing that can respond to changes in the marketplace. By using dynamic pricing, you can ensure that your prices are always optimized for current market conditions, potentially leading to increased profitability.
Examples of use
Seasonal Pricing Adjustments
- Scenario: An ecommerce business selling winter clothing notices a drop in the Average Price Per Unit during off-season sales.
- Use Case Application: Instead of offering steep discounts during the summer, the business could introduce bundle offers, encouraging customers to buy winter sets at a slightly reduced price, maintaining a healthier Average Price Per Unit.
Loyalty Program Discounts
- Scenario: An online bookstore observes that loyal customers often use promo codes, reducing the Average Price Per Unit.
- Use Case Application: The store could offer loyalty points instead of direct discounts, allowing customers to accumulate points for future purchases. This approach ensures that while customers get a benefit, the Average Price Per Unit remains stable.
Flash Sale Analysis
- Scenario: A tech ecommerce store conducts flash sales for electronic gadgets, noticing a significant drop in the Average Price Per Unit during these events.
- Use Case Application: To maintain a higher Average Price Per Unit, the store could bundle gadgets with accessories at a special price during flash sales. For instance, selling a smartphone with a discounted case or earphones. This way, the perceived value is higher for the customer, and the store can sustain a more favorable Average Price Per Unit.
Product Launch Discounts
- Scenario: A beauty ecommerce platform launching a new product line offers introductory discounts, leading to a reduced Average Price Per Unit for the new products.
- Use Case Application: Instead of direct discounts, the platform could provide value-added services like a free makeup tutorial session or samples of other products with the purchase of the new line. This adds value to the purchase, encourages higher spending, and maintains the Average Price Per Unit.
Membership-Based Pricing
- Scenario: A fashion ecommerce site offers a membership program where members receive exclusive discounts, causing a dip in the Average Price Per Unit for member purchases.
- Use Case Application: To counteract this, the site could introduce a tiered membership system. Higher-tier members, who might have a history of larger purchases, could receive exclusive access to premium collections or early sale access, encouraging them to maintain or increase their spending, thus balancing out the Average Price Per Unit.
Average Price Per Unit SMART goal example
Specific – Increase the average price per unit by 15% (from $20 to $23).
Measurable – The average price per unit will be tracked and compared monthly to monitor the growth rate and ensure it’s moving toward the targeted increase.
Achievable – Yes, by introducing premium product lines, optimizing bundling, revising pricing strategies, and implementing effective up-selling and cross-selling techniques.
Relevant – Yes. This goal is consistent with the quarterly goal of increasing revenue and profitability without significantly increasing sales volume.
Timed – Within the next quarter (3 months).
Limitations of using Average Price Per Unit
While the Average Price Per Unit (APPU) is a valuable metric for understanding the revenue generated per product sale in an ecommerce scenario, it has certain limitations when utilized for in-depth business analysis:
- Doesn’t Reflect Product Diversity: APPU provides an average across all products sold, but doesn’t distinguish between different types or categories of products. It doesn’t give insights into which specific products or categories are driving the average.
- Can Be Skewed by Volume Discounts: If a significant portion of sales comes from bulk purchases or volume discounts, the APPU may be lower, not necessarily indicating a pricing problem but rather a sales strategy.
- Doesn’t Account for Profit Margins: Two products might have the same selling price, but different costs of production. The APPU doesn’t differentiate between them, so it doesn’t indicate the profitability of the units sold.
- No Insight into Stock Turnover: A consistent APPU doesn’t mean products are moving efficiently. It’s possible to have a stable APPU but slow-moving stock, which can tie up capital and lead to storage issues.
- Subject to Promotional Variations: APPU can fluctuate based on promotions, discounts, and sales events. It’s crucial to consider these variables when analyzing changes in APPU over time.
- Doesn’t Indicate Customer Loyalty or Retention: APPU measures the average price of units sold, but doesn’t provide insights into who’s buying – whether they’re new or returning customers.
- May Not Reflect Pricing Strategy Success: A business might intentionally have a low APPU as part of a strategy to attract more customers or penetrate a new market. In such cases, a low APPU isn’t necessarily a negative indicator.
- Requires Context for Accurate Interpretation: Like any metric, APPU requires context. An APPU that’s considered low in one industry might be high in another. Without industry benchmarks or historical data, it’s hard to interpret the APPU’s significance.
In conclusion, while APPU is an insightful metric in ecommerce analytics, it should not be viewed in isolation. Companies should consider it alongside other relevant metrics to gain a holistic understanding of their operations and financial health.
KPIs and metrics relevant to Average Price Per Unit
- Net Profit Margin: This metric evaluates the profitability of a business after all expenses. A stable Average Price Per Unit combined with a good net profit margin indicates healthy financials.
- Inventory Turnover: This measures how often inventory is sold and replaced. If products have a high turnover but a low Average Price Per Unit, it might indicate excessive discounting.
- Customer Lifetime Value (CLV): Analyzing CLV alongside Average Price Per Unit can help businesses understand long-term customer value and spending patterns.
By examining and optimizing the average unit price in correlation with these metrics, your organization can ensure profitability while maintaining competitive pricing.
Final thoughts
The average price per unit, especially when discounts and promo codes are taken into account, provides a transparent view of a product’s revenue generation. By understanding this metric, ecommerce businesses can refine their pricing and promotional strategies to ensure profitability and customer satisfaction.
Average Price Per Unit (APPU) FAQ
What is Average Price Per Unit?
Average Price Per Unit denotes the mean monetary amount received for each product sold, taking into account any applied discounts or promo codes.
Why is this metric essential for ecommerce businesses?
It offers insights into actual revenue per product, helping businesses understand their pricing efficiency and the effectiveness of promotions.
How can I optimize the Average Price Per Unit?
Strategies such as re-evaluating pricing, limiting excessive discounts, analyzing promo code usage, introducing bundle offers, and implementing dynamic pricing can help.
Which other metrics are related to Average Price Per Unit?
Metrics like Net Profit Margin, Inventory Turnover, and Customer Lifetime Value offer complementary insights to the Average Price Per Unit, providing a holistic view of ecommerce performance.
Does a higher Average Price Per Unit always mean more profitability?
Not necessarily. A higher Average Price Per Unit is beneficial, but it’s essential to consider other factors like overall sales volume, expenses, and net profit margin to determine actual profitability.