Every commerce business needs to pay attention to its performance metric. With it, they can see where they stand and what needs to be improved. This is crucial to gauge the overall financial health of the company. The company may track the SKUs measuring the cost per order and average order value. However, the essential KPIs can also vary based on the business model. For instance, subscription-based services and product bundle sales will also have to measure performance using average revenue per unit or ARPU.
So, in this blog, we will take a deep dive to understand what is ARPU and why it’s important. You will also learn how to measure it for your business. Let’s start.
Understanding Average Revenue Per Unit (ARPU)
Grasping the concept of ARPU can change your business growth. This metric acts as an instrument that highlights user revenue and spotlights potential areas for enhancement. You can make substantial progress in your business expansion endeavours with efficient ARPU use.
Define Average Revenue
ARPU or Average Revenue Per User is an important metric that measures the average income generated from each customer or user. It provides a snapshot of your company’s financial performance and helps assess profitability.
ARPU is more than just a number. It encompasses the total income you get from all sources like subscriptions, sales or fees within a specific period.
Average Revenue Per Unit Formula
The ARPU or the average revenue formula calculates the average revenue generated per user over a specific period. To determine ARPU, divide the total revenue generated during that period by the number of users or customers. Here is how to calculate average revenue:
| ARPU= Total RevenueNumber of Users |
This metric helps businesses assess financial performance and profitability by providing insight into how much revenue each user earns on average.
The Importance of Average Revenue Per Unit
ARPU is a keystone metric for businesses. It reveals the average earnings per user within a specified timeframe. This metric showcases the financial status of how users interact with your products and services. Here is how ARPU is making a difference for your business:
Optimises Marketing Strategies
You need to understand your ARPu to optimise your marketing strategies. As you identify higher and lower-value users you can re-evaluate their campaigns, networks and channels to focus on resources on activities that generate the most revenue while cancelling underperforming efforts.
Enhancing Return on Ad Spend (ROAS)
Businesses can compare the average revenue per unit with acquisition costs like CPA (Cost Per Action) and CPI (Cost Per Install). This enables businesses to assess their ROAS and their marketing bottom line. They can decide their marketing spending, adjusting to ensure more effective resource allocation.
Identifying Revenue Opportunities
It gives companies insights into the potential revenue opportunities. Businesses can test strategies that move more users to this segment. They consider price adjustments or promote high subscription tiers. Another option you can try is bundling service that enhances perceived value amongst users.
Strategic Fine-Tuning
ARPU is an indicator of how well the business is meeting its customer demands. A decline in the ARPU signifies user dissatisfaction, prompting businesses to change or adapt their business offerings.
If there is a robust acquisition, but the ARPU remains the same then it might indicate underpricing. Then it would call for a review of communication and competitiveness of service benefits.
Business Health Check
Business leaders prefer ARPU for its efficiency in providing a snapshot of performance. It is a crucial metric for assessing a company’s financial health, predicting future performance, and benchmarking against competitors. The average revenue per unit offers valuable insights for strategic decision-making and plays a key role in maintaining long-term business success.
Accurately Managing SKUs
When you use average revenue per unit in coordination with SKU tracking, it helps you to improve your SKU management process. With this tracking, you can keep a close eye on which SKUs sell fast and which ones are slow, and see which ones are profitable and which ones are resulting in losses.
You can use these insights to inform your rationalisation efforts for SKU. A rationalisation process improves your e-commerce revenue in the long run as it removes unprofitable SKUs thus reducing holding costs.
Improve Your Inventory Management
Tracking your ARPU is crucial for effective inventory management. It helps you assess whether your inventory levels are optimal. Excess inventory can lead to a lower ARPU, as higher procurement and holding costs reduce profitability.
Additionally, too much stock increases the risk of deadstock, where unsold items further erode your ARPU due to wasted investment.
By closely monitoring inventory turnover and average revenue per unit, you can identify slow-moving SKUs that may need to be discontinued and recognize more profitable, high-turnover items.
This insight enables you to determine the minimum order quantity for each product, ensuring optimal inventory levels across your warehouses and fulfilment centres. This approach prevents over-ordering of slow-moving items and under-ordering of fast-moving ones.
Optimising Inventory with ARPU
Measuring your ARPU is a crucial step in your inventory management process. This gives you an idea of whether you can maintain optimal inventory levels. Because if you have too much inventory then you may see a lower average revenue per unit as you are likely to spend more on procurement and inventory golding costs.
Also, having excess inventory in your stock increases the risk of ending up with deadstock or unsold inventory sitting in your storage. This also reduces average revenue as you are spending money to maintain unsold stock.
Closely monitor your inventory management and ARPU to find whether there are any slow-moving SKUS that you need to discontinue. With this step, you can identify the minimum order quantity for each unit. This is essential for maintaining optimal inventory levels across all warehouses and fulfilment centres.
Grabbing Opportunities to Reduce Cost
Another major advantage of calculating your ARPU is the terms of cost reduction. Your inventory-related costs can significantly reduce your ARPU as higher spending means lower revenue. So, look at your ARPU to get an idea of whether you are spending more than the required amount of money on procuring and holding inventory.
This presents a good chance to identify any areas where you can lower the costs in terms of cost per unit and cost of goods sold. You must assess your ARPU in tandem with other costs that you incur.
For instance, high inventory costs drive up the costs of goods sold and cost per unit. If you see that is affecting your ARPU, then you should seek solutions to reduce it. This could be better demand forecasting and inventory tracking thus avoiding overstocking.
Opportunities to Increase Revenue
By calculating your ARPU, you can identify more opportunities to grow your revenue. This helps you to understand which products and goods are generating revenue and which are not. With this knowledge of ecommerce performance metrics, you can optimise the way to offer these services to maximise your revenue.
For instance, if a certain subscription box comes with a high average revenue per unit, then you might want to lean on it a little, keep it in stock and try to increase the subscriptions. Or you could bundle the popular and highly profitable SKUS with the slow-moving ones to generate more revenue while preventing any deadstock.
FAQs: How Average Revenue Per Unit Drives E-Commerce Success
What is average revenue?
Average revenue is derived by dividing the total sales income by the number of units sold and customers served, providing an understanding of the mean income per consumer or unit.
What is the difference between ARPPU and ARPU?
ARPPU (Average Revenue Per Paying User) focuses on paying users while ARPU (Average Revenue Per User) calculates depending on the number of active users you have.
Can ARPU be negative?
No, ARPU itself cannot be negative, but it can decrease if revenue declines or if the number of users increases significantly without a corresponding revenue increase.
Conclusion
Understanding and utilising average revenue per unit is vital for driving e-commerce success. By accurately measuring ARPU, businesses can optimise marketing strategies, enhance return on ad append, identify revenue opportunities and fine-tune inventory. For further guidance on improving your ARPU and inventory management, explore more resources at Qodenext.
