Ecommerce businesses track performance metrics to measure how successful their business is. From cost per order and average order value, these key performance indicators (KPIs) offer insight into how a company functions and which areas might need improvement.
While many KPIs are valuable across businesses, some offer additional value to specific types of ecommerce brands. For example, the average revenue per unit is commonly tracked in subscription-based models to gauge the total number earned from each unit sold. This metric is also referred to as average revenue per user.
What Is ARPU?
The average revenue per unit measures how much a brand earns on average from selling one unit of inventory, or how much subscription revenue each user generates. ARPU is commonly used for media and streaming, internet service providers, phone carriers, and software-as-a-service companies.
For ecommerce, the monthly recurring revenue or ARPU metric is most useful for brands that sell subscription box services or membership-based services. The metric can be used for inventory management, but it’s also helpful in tracking sales when individual SKUs can’t be tracked as easily. With the shift to supply chain digitization, it is now easier than ever to have access to these key metrics.
What Is the Difference between ARPU and ARPPU?
Another metric, average revenue per paying user, measures only active, paying customers. This can be helpful for brands to calculate the number of active subscriptions or memberships but will result in a different result than ARPU. Separating the customers base into active user and total existing customers can help brands understand other things about the business.
What Is the ARPU Calculation?
To calculate ARPU, divide total revenue by the total units sold. The following is the formula for ARPU:
Average Revenue Per Unit = Total Revenue / Total Units Sold
Let’s look at an example. A brand made $50,000 in revenue by selling 1,000 units. The ARPU calculationformula would be:
Average Revenue Per Unit = $60,000 / 1,000 = $60
When thinking about subscriptions or memberships, the units sold is the number of subscriptions or memberships sold. Let’s say a brand sold 5,000 subscriptions for a total of $40,000 in revenue. The ARPU formula would be:
Average Revenue Per Unit = $40,000 / 5000 = $80
Why Is ARPU Important?
While it’s crucial for ecommerce brands that sell memberships or subscriptions to track ARPU from the paying users, it benefits for all brands looking to increase revenue and profitability. The following are some of the benefits of monitoring ARPU.
Improve Inventory Management
Tracking ARPU is one of the inventory KPIs that can reveal if brands are maintaining optimal inventory levels. Holding on to too much inventory can mean lower ARPU because brands are spending more on procurement and storage costs for products that are not selling quickly or are obsolete inventory. Having too much inventory is also a risk. Inventory takes up warehouse space. Warehouse space costs money. Therefore, holding too much inventory increases costs related to storage and warehousing, obsolescence losses, shrinkage, revenue churn, and product deterioration.
By tracking ARPU, brands can more easily identify slow-moving products that should be discontinued and identify products with higher turnover and higher profitability. That allows brands to better determine a pricing model that factors the minimum order quantity to maintain optimal inventory levels.
Optimize Pricing Strategy
One of the ways an ARPU calculation can benefit brands is to help optimize their pricing strategy and product pricing to increase profitability, resulting in new MRR (monthly recurring revenue). This might involve adjusting product bundles or items in subscription boxes to increase average order value, which can help result in a higher ARPU.
Reevaluating pricing strategy and product pricing is crucial to execute over a constant time period, whether that is on a monthly basis, quarterly, or annually. As brands grow, they will need to be reevaluated consistently to ensure the most optimal structure.
Reevaluating pricing strategy and product pricing is crucial to execute over a consistent time period, whether that is on a monthly basis, quarterly, or annually. As brands grow, they will need to be reevaluated consistently to ensure the most optimal structure. Tracking and analyzing average revenue per unit over time can inform those reevaluation efforts.
It’s also important to note that today’s customers are savvier than ever and can be sensitive to price increases. To achieve customer success and decrease the churn rate, it’s crucial for brands to plan out pricing increases so they can remain competitive and profitable. That’s why brands should keep a close eye on what their competition is doing.
Manage SKUs Accurately
When brands use ARPU in conjunction with SKU tracking, brands can improve their SKU management process. Brands can closely track which products are selling quickly, which are selling slowly, which are more profitable, and which are less profitable. This helps brands determine when to reorder products and products to focus on.
The insights from ARPU can also help brands determine which products to phase out based on how quickly they sell and how profitable they are. Ensuring an efficient process of doing this means less time selling slow-moving products that aren’t profitable and, more importantly, less spent on procurement and storage. These positive results can be seen through monthly revenue growth and minimal customer churn.
Identify Opportunities to Reduce Cost
Brands are always looking for ways to lessen costs, and tracking ARPU allows brands to reduce their inventory costs by identifying products that are slower-moving or have lower profit. For example, if a brand notices that they’re spending too much on storage or procurement costs for a specific product and impacting the average revenue per unit, the brand should look for ways to reduce those costs. Some solutions include improving demand forecasting and inventory tracking, which can even be done through mobile analytics.
Identify Opportunities to Increase Revenue
Just like brands are always looking for ways to cut costs, they’re also always looking for ways to increase revenue. Tracking ARPU can help brands understand which products generate higher revenue and which products sell quickly so that they can optimize their offerings to capitalize on that and increase revenue with their active customers.
When considering subscription boxes, brands might want to bundle highly profitable and fast-moving products with slower-moving products to generate more revenue and prevent obsolete stock.
Project Future Revenue Growth
Accurately predicting future growth allows brands to plan and strategize more effectively and better manage cash flow. ARPU can help brands predict future development by combining this metric with project customer acquisition, conversion rate, and retention figures. Forecasting demand can also help brands predict future product demand, allowing for better inventory management.
What Is a Good ARPU?
There’s no set range for ARPU, unlike for some KPIs like fill rate or days sales in inventory. ARPU is best considered with other KPIs from the same brand, and using historical benchmarks can help a brand determine if its current ARPU is good or not.
How Can You Improve ARPU?
Increasing the average revenue per unit instantly increases revenues, which ecommerce brands are always looking to do. The following are some ways brands can boost ARPU.
Optimize Pricing Strategy
Ensuring a solid pricing structure—and making sure to reevaluate it frequently —can help brands increase their ARPU. This could mean bundling less popular and less profitable products with more popular and more profitable products in the same subscription box or changing the price of the subscription box itself.
Effectively Manage Inventory
ARPU can help brands identify products that aren’t as profitable or popular. This means brands can more effectively maintain inventory levels to ensure appropriate stock without having overstock and having to pay excess storage costs on that overstock.
Improve Your ARPU with OmniFlow by Flowspace
If a brand can improve its ARPU, it can improve revenue and, ultimately, profit. Flowspace pairs powerful software with a flexible nationwide fulfillment network to support growing ecommerce brands.
Flowspace’s fulfillment software powers the entire post-purchase experience and provides brands seamless integration with online stores and every other sales channel.
Teams can manage orders and reporting and monitor fulfillment and delivery activity in one dashboard. Real-time visibility allows brands to stay ahead of low inventory and provide visibility from order fulfillment through shipment with platform-level transparency.
Flowspace improves product inventory management by providing complete inventory visibility of inbound, outbound, and in-progress stock. Brands can ensure an optimal stock level with real-time inventory tracking, low inventory level alerts, and a predictive view of the remaining product. With accurate customer analytics like demand insight, brands can better manage inventory by having safety stock to avoid low inventory count situations while avoiding excess inventory costs. This can help brands increase ARPU by reducing inventory costs.
Flowspace is the best way to optimize your order–filling process, minimize shipping times, and increase customer satisfaction. Contact us today to get more information.