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Every ecommerce business needs to keep a close eye on their performance metrics to see where they stand and what needs improving. This is essential to gauge the overall financial health of the business. They may carefully keep track of SKUs and measure their cost per order and average order value.
However, the essential KPIs can also vary depending on the business model. For example, subscription services and product bundle sales will need to measure performance using average revenue per unit or ARPU.
In this post, we take a closer look at what average revenue per unit is, why it’s important, and how to measure it for your own business. Let’s get started.
What is average revenue per unit (ARPU)?
Average revenue per unit or ARPU is an important ecommerce and inventory management KPI that measures how much you’re earning on average from selling one unit of inventory. Commonly used in subscription-based businesses, it’s also an indicator of how much revenue you’re generating from each subscriber or user.
ARPU is mostly used in the media and streaming industry as well as by phone carriers, internet service providers, and software-as-a-service companies. In the ecommerce context, it can also be used for subscription box services and membership-based ecommerce businesses. So while it’s an important metric for managing inventory, it’s also useful for calculating performance when individual product sales can’t be measured.
Why is calculating average revenue per unit a necessity?
Whether you’re a regular ecommerce brand or a subscription box service, there are many reasons to calculate your average revenue per unit. While these benefits are unique, they ultimately contribute to better profitability and increased revenue.
Managing SKUs more accurately
When used in coordination with SKU tracking, your average revenue per unit helps you to improve your SKU management process. This enables you to keep a close eye on which SKUs are selling fast, which ones are slow-moving, which ones are more profitable, and which ones are draining your funds.
You can then use these insights to inform your SKU rationalization efforts. This is the process of identifying SKUs that need to be discontinued because of low sales and profitability. An efficient SKU rationalization process improves your ecommerce revenue in the long run because the sooner you discontinue slow-moving and unprofitable SKUs, the less you have to spend on procurement and holding costs. So by using your ARPU to optimise your SKU management, you can effectively grow your revenue.
Optimising your pricing strategy
One of the biggest ways in which calculating your average revenue per unit can benefit your business is by helping you optimise your pricing strategy. You can use this KPI to see if you need to reevaluate your product or plan pricing to boost profitability. This reevaluation may involve adjusting your product bundles to increase average order value, which will subsequently help to raise your average revenue per unit. It may also involve increasing your product markup at a reasonable rate.
This is an important step for every ecommerce business as they scale. Pricing structures and product markups need to be constantly adjusted over time. And having a clear idea of your average revenue per unit can set a baseline to guide your decisions.
In fact, ProfitWell reports that companies that update their pricing at least every six months have almost two times higher ARPU gain than companies that update their pricing less frequently (once a year or less).
However, it’s important to carefully plan this out so that your prices still remain competitive and you don’t lose your customers to the competition. Find a good balance between a profitable pricing model and an increase that your customers would find reasonable. It’s important to look at what your competitors are doing to inform your pricing strategy.
Improving your inventory management
Measuring your average revenue per unit is also a vital step in your inventory management process. It gives you an idea of whether you’re maintaining optimal inventory levels because if you have too much inventory, you may see a lower ARPU as you’re spending more on procurement and inventory holding costs.
Moreover, having too much inventory in stock increases your risk of ending up with deadstock as inventory sits unsold on the shelves. This further reduces your average revenue per unit because you’re spending money to procure items that don’t end up selling.
But when you’re closely monitoring your inventory movement and ARPU, it’s easier to see whether there are any slow-moving SKUs that need to be discontinued and identify SKUs with higher profitability and inventory turnover. This allows you to determine the minimum order quantity for each unit, which is essential for maintaining optimal inventory levels across your warehouses and fulfilment centres. That way, you’re not over-ordering slow-moving items and under-ordering fast-moving ones.
Identifying opportunities to reduce cost
Another major benefit of calculating your average revenue per unit is in terms of cost reduction. Your inventory-related costs can significantly reduce your ARPU because higher spending often translates to lower revenue. So looking at your average revenue per unit can give you an idea of whether you’re spending too much on procuring and holding inventory.
This is a good opportunity to identify any areas in which you can lower your costs in terms of cost per unit and cost of goods sold. Ideally, you should look at your ARPU in coordination with the different costs incurred.
For example, high inventory holding costs eventually drive up the cost of goods sold and cost per unit. And if you see that it’s affecting your average revenue per unit, it’s a sign that you should look for solutions to reduce it. This could involve better demand forecasting and inventory tracking to avoid overstocking and ensure that you keep optimal levels of inventory across your warehouses and fulfilment centres.
Identifying opportunities to increase revenue
Perhaps one of the biggest reasons to calculate your average revenue per unit is the ability to identify more opportunities to grow your revenue. This metric helps you understand which products and services are good at generating revenue and which ones are not. So you can identify how to optimise your offering in a way that will boost your revenue.
For example, if a certain subscription box has a high ARPU, you might want to lean on it a bit harder, stock more of it, and try to increase subscriptions for it. Or you could consider bundling popular and highly profitable SKUs with slow-moving SKUs to generate more revenue while preventing deadstock.
Projecting future revenue growth
Every business needs to accurately make projections for the future so they can plan and strategize accordingly. Average revenue per unit plays an important role in helping ecommerce businesses to project revenue growth for the future. This calculation involves multiplying your ARPU with your projected acquisition and retention numbers.
Forecasting your revenue enables you to better manage your cash flow and plan your working capital needs ahead of time. This means you can even determine in advance whether you’ll need more credit or access to capital. Accurately forecasting revenue also allows you to forecast future demand, which is important for planning your production or procurement more accurately.
Average revenue per unit formula
So if it’s so important to keep track of your average revenue per unit, how do you calculate it? This involves dividing your total revenue by the total units sold. The following average revenue per unit formula can be used:
Average Revenue Per Unit = Total Revenue / Total Units Sold
So for example, let’s say you made $45,000 in total revenue and sold a total of 370 units. In this case, your average revenue per unit would be as follows:
Average Revenue Per Unit = $45,000 / 370 = $121.62
The same formula applies for subscriptions, although instead of total units solid, you’d use the total subscriptions sold. So let’s say you earned $50,000 in total revenue and sold a total of 480 subscriptions. In this case, your average revenue per unit or average revenue per subscription would be as follows:
Average Revenue Per Unit = $50,000 / 480 = $104.16
Average revenue per unit vs. customer lifetime value
Average revenue per unit is sometimes confused for customer lifetime value (LTV). While the two metrics are closely connected and equally important, they’re very different.
Customer lifetime value is a metric for measuring the average revenue generated from a customer during a certain period such as a month or a year. In other words, it calculates the average value of each customer during that given period.
So while lifetime value is used for measuring the profitability of each customer, average revenue per unit is used for measuring the revenue generated from selling inventory on a unit basis.
LTV accounts for a number of variable costs including refunds and transaction fees. And the formula for calculating it is as follows:
Customer Lifetime Value = (Lifetime Spend – Variable Costs) / Total Number of Customers Acquired
Revenue per unit FAQs
Here are the answers to the top questions about revenue per unit:
What is an example of a company with a high ARPU?
With an average revenue per customer of $245, Blue Apron is an example of a company with a high ARPU. This is owing to the high fee structures, which enable the company to generate higher revenues even with a smaller customer base.
How do you calculate revenue per unit?
Revenue per unit can be calculated by dividing total revenue by total units sold. The formula is: Average Revenue Per Unit = Total Revenue / Total Units Sold. This can be adjusted based on the business model. For example, subscription services will replace the total units sold with total subscriptions sold.
What is the goal of ARPU?
The goal of measuring average revenue per user is to understand and improve the overall health of a business in terms of revenue generation. By enabling you to determine the profitability of your inventory, ARPU can play a crucial role in gauging other aspects of your performance. You can use it to improve your pricing strategy, optimise your inventory, discover new ways to generate revenue, and project revenue growth.
What is a typical ARPU?
The typical ARPU varies across different industries. For instance, the U.S retail ecommerce industry sees an average revenue per user of $1,884.70. Meanwhile, the average ARPU for the mobile games industry is around $1.96. So it’s important to check the typical ARPU specific to your industry and use it as a benchmark for measuring your performance.