Every e-commerce company should carefully monitor its performance metrics to assess where they currently stand and identify areas in which it may make improvements. It is vital to have this information to evaluate the overall state of the company's finances.
An essential key performance indicator (KPI) for e-commerce and inventory management is the average revenue per unit, often known as ARPU. This metric determines how much money you make on average from selling one unit of inventory. It is an indicator of how much revenue you are generating from each subscriber or user, and it is most commonly used in businesses that are based on the sale of subscriptions.
What is ARPU(Average Revenue Per Unit)?
The amount of money a firm makes from selling one of its products on a unit basis is the amount that is referred to as the average revenue per unit. Compared to subscription services or SaaS (Software As A Service), companies that deal in tangible goods are likelier to employ this statistic. This data point illustrates a vendor's typical per-user earnings.
E-commerce businesses can analyze their customer base, the amount of revenue they generate, and their profitability by looking at this characteristic. The average revenue that a user generates over a given period may be determined with the assistance of the ARPU, which is a helpful metric for the owners of businesses.
By looking deeper into the data for this measure, companies can obtain a more accurate picture of their user base, discover revenue growth trends, and design more well-informed strategies. The analysis of "average revenue per customer," also known as ARPU, can be used to hone pricing and inventory control strategies.
How To Calculate ARPU?
The average revenue per unit (ARPU) can only be calculated with any degree of precision after a standard period has been established. Most telephone and communications carriers calculate the annual average revenue per unit (ARPU) monthly. After that, the total revenue generated during the predetermined period is divided by the total number of units or users.
Because it would not capture fluctuations that occurred throughout the time, the end date of the period is not used for the denominator. Instead, the beginning and end dates of the period are often combined to create an average.
It is important to remember that the number of users varies within any given period, particularly in fields like the media and telecommunications. Therefore, the number of units for a particular period needs to be calculated to arrive at an ARPU statistic that is as exact as is humanly possible.
Why Is It Important?
Calculating the ARPU might be helpful for several different reasons. It can be utilized in comparing competing businesses to ascertain which one is more successful at successfully producing income from the accounts of its subscribers. Suppose one Internet service provider creates a higher average revenue per unit (ARPU) than another while maintaining comparable expenses.
In that case, assuming that the ISP producing the higher ARPU has better profits is a safe bet. Or, it can demonstrate to investors which items, services, and promotions are effective at growing revenue per-customer basis and should be prioritized.
To put it another way, if a telecommunications firm adds 50,000 new clients, it is inevitable that the business will see an increase in income, which may or may not result in increased profitability. On the other hand, increasing a company's profitability may be accomplished more simply if it can generate more income from its current clientele.
What Is The Difference Between Per Unit And Per User?
A different approach to calculating ARPU is to focus on 'units' rather than 'users.' The term "average revenue per unit" refers to money made from a product line's units. It is commonly used to comprehend how big of a discount there has been on the list price, which is especially essential if you are selling a product in large quantities.
The term "Average Revenue Per Unit" is used more frequently in the context of firms that sell actual things as opposed to pure SaaS enterprises, which are, by definition, businesses that provide services. More established technology businesses frequently have legacy hardware goods in their product range. As a result, these businesses will need to evaluate ARPU on a "per user" and "per unit" basis.
ARPU And LTV
There is a common misunderstanding that client lifetime value (LTV) equals average revenue per unit. Even though the two measurements are closely related and hold the same significance level, they are extremely different.
A metric used to measure the average revenue made from a customer over a specific period, such as a month or a year, is known as Customer lifetime value. Put another way; it determines each client's average value over the specified period.
Therefore, although lifetime value is utilized in determining how profitable each customer is, average revenue per unit is utilized in determining how much money is earned from the sale of goods on a unit-by-unit basis. The LTV considers various expenditures that are not fixed, such as transaction fees and refunds.
Conclusion:
The amount of money that a corporation can anticipate receiving from the sale of one unit of goods is the amount that is referred to as the "average revenue per unit." It is determined in the same way as the average revenue per unit, dividing the company's total revenue by the total number of units it has sold.
The average revenue per unit is frequently employed by businesses that sell physical goods instead of providing services or software. It can be applied to membership-based and subscription-based enterprises like box delivery services. It is a crucial indicator for inventory management and helps with performance calculations when sales of particular products are unavailable.
