What is Average cost per units?
Ecommerce businesses must keep abreast of multiple metrics in order to stay competitive and make informed decisions. One important area of performance to pay attention to is average cost per unit – a metric that helps measure the cost of buying or producing a single unit of a product. In this article, we will explain the basics of average cost per unit, why it’s important, how to improve it, and co-relation with other ecommerce metrics.
Formula
The formula for calculating average cost per unit is quite simple and straightforward: Total Costs / Number of units sold.
Example
For instance, if a business sells 5 units of product X at a total cost of $1000, the average cost per unit will be calculated as:
Average Cost = $1000/5
Average Cost = $200/unit
This calculation can be used to determine the cost of purchasing or producing a unit of a product.
Why is Average cost per units important?
Average cost per unit affects the total cost of production and helps with pricing. If the average cost per unit goes up, so must the price, otherwise the margin rate will drop. It is important to keep track of the average cost of producing a product in order to stay competitive and maintain healthy profit margins.
Which factors impact Average cost per units?
Reducing average cost per unit requires close attention to the purchasing, manufacturing, and distribution processes. These are some measures that can be taken to reduce the average cost per unit:
- Increase effective purchasing by negotiating for better prices and improving contracts.
- Reduce waste through improved management systems and processes.
- Increase efficiency of production processes.
- Reduce unit refurbishment and repair costs.
How can Average cost per units be improved?
The Average Cost per Unit in ecommerce is influenced by factors such as raw material costs, production volume, supply chain efficiency, and demand fluctuations. Rising raw material prices can increase costs, while higher production volume often reduces costs through economies of scale. Efficient supply chain management can also lower expenses. Fluctuations in demand may impact unit costs, as lower production runs can lead to higher costs
What is Average cost per units’s relationship with other metrics?
Average cost per unit is a product metric and is closely related to key performance indicators such as gross margin, contribution margin, and return on investment. These metrics are closely related and need to be balanced in order to ensure that you are achieving the right balance of sales and profitability.
