Definition
Average prices represent, quite simply, total sales revenue divided by total units sold. Many products, however, are sold in multiple variants, such as bottle sizes. In these cases, managers face a challenge: they must determine “comparable” units. Average unit price can be calculated by weighting different unit selling prices by the percentage of unit sales (mix) for each product variant. If we use a standard, rather than an actual mix of sizes and product varieties, the result is price per statistical unit.[1]
Average price per unit and price per statistical unit are needed by marketers who sell the same product in different packages, sizes, forms, or configurations at a variety of different prices. As in analyses of different channels, these product and price variations must be reflected accurately in overall average prices. If they are not, marketers may lose sight of what is happening to prices and why. If the price of each product variant remained unchanged, for example, but there was a shift in the mix of volume sold, then the average price per unit would change, but the price per statistical unit would not. Both of these metrics have value in identifying market movements. In a survey of nearly 200 senior marketing managers, 51 percent responded that they found the “average price per unit” metric very useful in managing and monitoring their businesses.
Purpose
Price per unit metrics allow marketers to calculate meaningful average selling prices within a product line that includes items of different sizes. Many brands or product lines include multiple models, versions, flavors, colors, sizes, or—more generally—stock-keeping units (SKUs). Brita water filters, for example, are sold in a number of SKUs. They are sold in single-filter packs, double-filter packs, and special banded packs that may be restricted to club stores. They are sold on a standalone basis and in combination with pitchers. These various packages and product forms may be known as SKUs, models, items, and so on.
The information gleaned from a price per statistical unit can be helpful in considering price movements within a market. Price per statistical unit, in combination with unit price averages, provides insight into the degree to which the average prices in a market are changing as a result of shifts in “mix”—proportions of sales generated by differently priced SKUs—versus price changes for individual items. Alterations in mix—such as a relative increase in the sale of larger versus smaller ice cream tubs at retail grocers, for example—will affect average unit price, but not price per statistical unit. Pricing changes in the SKUs that make up a statistical unit, however, will be reflected by a change in the price of that statistical unit.
Construction
As with other marketing averages, average price per unit can be calculated either from company totals or from the prices and shares of individual SKUs.
Average Price per Unit ($) = Revenue ($) ÷ Units Sold
or
Average Price per Unit ($) = [Price of SKU 1 ($) x SKU 1 Percentage of Sales (%)] + [Price of SKU 2 ($) x SKU 2 Percentage of Sales (%)] + . . .
The average price per unit depends on both unit prices and unit sales of individual SKUs. The average price per unit can be driven upward by a rise in unit prices, or by an increase in the unit shares of higher-priced SKUs, or by a combination of the two. An “average” price metric that is not sensitive to changes in SKU shares is the price per statistical unit.
References
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.