Unit price

Last updated

A product's average price is the result of dividing the product's total sales revenue by the total units sold. When one product is sold in variants, such as bottle sizes, managers must define "comparable" units. Average prices 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. Statistical units are also called equivalent units.

Contents

Average price per unit and prices 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, while only 16% found "price per statistical unit" very useful. [1]

In retail, unit price is the price for a single unit of measure of a product sold in more or less than the single unit. [2] The "unit price" tells you the cost per pound, quart, or other unit of weight or volume of a food package. It is usually posted on the shelf below the food. The shelf tag shows the total price (item price) and price per unit (unit price) for the food item. Research suggests that unit price information in supermarkets can lead shoppers to save around 17-18% when they are educated on how to use it, but that this figure drops off over time. [3]

Unit price is also a valuation method for buyers who purchase in bulk. Buyer seeks to purchase 10000 widgets. Seller One offers 1000 widgets packaged together for $5000. Seller Two offers 5000 widgets packaged together for $25000. Seller Three offers 500 widgets packaged together for $2000. All three sellers can offer a total of 10000 widgets to Buyer. Seller One offers widgets at a unit price of $5. Seller Two offers widgets at a unit price of $5. Seller Three offers widgets at a unit price of $4. Buyer uses unit price to value the packages offered by each of the three sellers and finds that Seller Three offers widgets at the best value, the best price.

Unit price is a common form of valuation in sales contract for goods sold in bulk purchasing.

The stock price of securities is a form of unit price because securities including capital stocks are often sold in bulks comprising many units. [4]

Unit price is also often used in the trade of consumable energy resources. [5]

Purpose

Price per unit metrics allow marketers to "calculate meaningful average selling prices within a product line that includes items of different sizes." [1]

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. [1]

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. [1]

Construction

Average price per unit 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." [1]

Average Price per Unit ($) = Revenue ($) / Units Sold
or
Average Price per Unit ($) = [Price of SKU 1 ($) * SKU 1 Percentage of Sales (%)] + [Price of SKU 2 ($) * 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. [1]

Price per statistical unit

Price per Statistical Unit ($) = Total Price of a Bundle of SKUs Comprising a Statistical Unit ($)

Procter & Gamble and other companies face a challenge in monitoring prices for a wide variety of product sizes, package types, and product formulations. There are as many as 25 to 30 different SKUs for some brands, and each SKU has its own price. In these situations, how do marketers determine a brand's overall price level in order to compare it to competitive offerings or to track whether prices are rising or falling? One solution is the 'statistical unit,' also known as the 'statistical case' or – in volumetric or weight measures – the statistical liter or statistical ton. A statistical case of 288 ounces of liquid detergent, for example, might be defined as comprising: [1]

Four 4-oz bottles = 16 oz
Twelve 12-oz bottles = 144 oz
Two 32-oz bottles = 64 oz
One 64-oz bottle = 64

Note that the contents of this statistical case were carefully chosen so that it contains the same number of ounces as a standard case of 24 12-ounce bottles. In this way, the statistical case is comparable in size to a standard case. The advantage of a statistical case is that its contents can approximate the mix of SKUs the company actually sells. [1]

Whereas a statistical case of liquid detergent will be filled with whole bottles, in other instances a statistical unit might contain fractions of certain packaging sizes in order for its total contents to match a required volumetric or weight total. [1]

Statistical units are composed of fixed proportions of different SKUs. These fixed proportions ensure that changes in the prices of the statistical unit reflect only changes in the prices of the SKUs that comprise it. [1]

The price of a statistical unit can be expressed either as a total price for the bundle of SKUs comprising it, or in terms of that total price divided by the total volume of its contents. The former might be called the 'price per statistical unit'; the latter, the 'unit price per statistical unit.' [1]

See also

Related Research Articles

<span class="mw-page-title-main">Sales</span> Activities related to the exchange of goods

Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. A period during which goods are sold for a reduced price may also be referred to as a "sale".

<span class="mw-page-title-main">Price</span> Amount of money given in order to purchase a thing or service

A price is the quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a physical good, the price for the service may be called something else such as "rent" or "tuition". Prices are influenced by production costs, supply of the desired product, and demand for the product. A price may be determined by a monopolist or may be imposed on the firm by market conditions.

In marketing jargon, product lining refers to the offering of several related products for individual sale. Unlike product bundling, where several products are combined into one group, which is then offered for sale as a units, product lining involves offering the products for sale separately. A line can comprise related products of various sizes, types, colors, qualities, or prices. Line depth refers to the number of subcategories under a category. Line consistency refers to how closely related the products that make up the line are. Line vulnerability refers to the percentage of sales or profits that are derived from only a few products in the line.

Sales promotion is one of the elements of the promotional mix. The primary elements in the promotional mix are advertising, personal selling, direct marketing and publicity/public relations. Sales promotion uses both media and non-media marketing communications for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability. Examples include contests, coupons, freebies, loss leaders, point of purchase displays, premiums, prizes, product samples, and rebates.

<span class="mw-page-title-main">Pricing</span> Process of determining what a company will receive in exchange for its products

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of product.

Marketing management is the strategic organizational discipline which focuses on the practical application of marketing orientation, techniques and methods inside enterprises and organizations and on the management of a firm's marketing resources and activities.

<span class="mw-page-title-main">Gross margin</span> Gross profit as a percentage

Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold, then divided by the same selling price. "Gross margin" is often used interchangeably with "gross profit", however, the terms are different: "gross profit" is technically an absolute monetary amount, and "gross margin" is technically a percentage or ratio.

<span class="mw-page-title-main">Metrication in Canada</span> Adoption of the metric system of measurements in Canada

Metrication in Canada began in 1970 and ceased in 1985. While Canada has converted to the metric system for many purposes, there is still significant use of non-metric units and standards in many sectors of the Canadian economy and everyday life today. This is mainly due to historical ties with the United Kingdom, the traditional use of the imperial system of measurement in Canada, proximity to the United States, and strong public opposition to metrication during the transition period.

<span class="mw-page-title-main">Pricing strategies</span> Approach to selling a product or service

A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.

Gross Margin Return on Inventory Investment (GMROII) is a ratio in microeconomics that describes a seller's return on every unit of currency spent on inventory. It is one way to determine how profitable the seller's inventory is, and describes the relationship between the profit earned from total sales, and the amount invested in the inventory sold. Generally for a seller, the higher the GMROII the better. Since the inventory is a very widely ranging factor in a seller's investment in working capital, it is important for the seller to know how much he might expect to gain from it. The GMROII answers the question "for each unit of average inventory held at cost, how many units of currency of gross profit I generated in one year?" GMROII is traditionally calculated by using one year's gross profit against the average of 12 or 13 units of inventory at cost. GMROII may vary depending on which segment we are analyzing, but a rule of thumb is that a GMROII of typical retailer is above 3.0.

Upselling is a sales technique where a seller invites the customer to purchase more expensive items, upgrades, or other add-ons to generate more revenue. While it usually involves marketing more profitable services or products, it can be simply exposing the customer to other options that were perhaps not considered. In practice, large businesses usually combine upselling and cross-selling to maximize revenue.

<span class="mw-page-title-main">Market share</span> Relative market adoption

Market share is the percentage of the total revenue or sales in a market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those units would have a 10 percent share in that market.

Industrial market segmentation is a scheme for categorizing industrial and business customers to guide strategic and tactical decision-making. Government agencies and industry associations use standardized segmentation schemes for statistical surveys. Most businesses create their own segmentation scheme to meet their particular needs. Industrial market segmentation is important in sales and marketing.

The following outline is provided as an overview of and topical guide to marketing:

Marketing Mix Modeling (MMM) is statistical analysis such as multivariate regressions on sales and marketing time series data to estimate the impact of various marketing tactics on sales and then forecast the impact of future sets of tactics. It is often used to optimize advertising mix and promotional tactics with respect to sales revenue or profit.

All-commodity volume or ACV represents the total annual sales volume of retailers that can be aggregated from individual store-level up to larger geographical sets. This measure is a ratio, and so is typically measured as a percentage.

Performance-based advertising, also known as pay for performance advertising, is a form of advertising in which the purchaser pays only when there are measurable results. Its objective is to drive a specific action, and advertisers only pay when that action, such as an acquisition or sale, is completed.

Price premium, or relative price, is the percentage by which a product's selling price exceeds a benchmark price. Marketers need to monitor price premiums as early indicators of competitive pricing strategies. Changes in price premiums can also be signs of product shortages, excess inventories, or other changes in the relationships between supply and demand. In a survey of nearly 200 senior marketing managers, 54 percent responded that they found the "price premium" metric very useful.

Numeric distribution is based on the number of outlets that carry a product. It is defined as the percentage of stores that stock a given brand or SKU, within the universe of stores in the relevant market.

<span class="mw-page-title-main">Shrinkflation</span> Reduction of quantity/quality of a good without corresponding price reduction

In economics, shrinkflation, also known as package downsizing or weight-out, is the process of items shrinking in size or quantity while the prices remain the same. The word is a portmanteau of the words shrink and inflation. Skimpflation involves a reformulation or other reduction in quality.

References

  1. 1 2 3 4 5 6 7 8 9 10 11 Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN   0137058292. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language in Marketing Project.
  2. ↑ Unit Price
  3. ↑ Weeks, Clinton S.; Mortimer, Gary; Page, Lionel (September 2016). "Understanding how consumer education impacts shoppers over time: A longitudinal field study of unit price usage" (PDF). Journal of Retailing and Consumer Services. 32: 198–209. doi:10.1016/j.jretconser.2016.06.012.
  4. ↑ Guthmann, Harry G.; Archie J. Bakay (December 1965). "The Market Impact of Large Blocks of Stocks". Journal of Finance . American Finance Association. 20 (4): 617–619. doi:10.2307/2977250. JSTOR   2977250.
  5. ↑ Slate.com (oil measured by barrels)
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.