how to find average cost per unit

Greg's Apothecary produces scented candles for an average of $x per unit of measurement. It costs Greg'due south biggest competitor $8 on average to create a similar candle.

While Greg tin can mark upward the price of his candles (charging customers more than his competitor), he knows he should identify ways to reduce his costs to take a healthier margin.

For Greg and many other retail businesses, success is heavily reliant on having a profitable price per unit of measurement — and half of that boxing is keeping your costs low.

But when you know how much it costs to produce or procure a single unit of any SKU tin can you make more informed decisions on how much to sell it for. This is why ecommerce companies that sell their own goods must summate and monitor their toll per unit over time.

By keeping the price per unit low, you lot can pass on the savings to the customer and entice more than customers to buy (or take home more money if yous're able to sell it at a premium).

In this commodity, we will define cost per unit, explain why information technology is important, bear witness how to calculate it, and offer actionable tips to reduce your cost per unit.

What is cost per unit?

Cost per unit refers to both the variable costs and fixed costs associated with producing and delivering a single unit of any product to an finish consumer. Monitoring your price of goods sold helps create context to set pricing and ensure profit is generated.

The importance of toll per unit

Cost per unit identifies the human relationship betwixt production costs, logistics costs, and gross profits. For ecommerce businesses especially, it is used to to set a pricing strategy after evaluating the toll of:

• Manufacturing and supplier costs
• Marketing and sales
• Warehousing and storage
• Fulfillment and shipping

Additionally, a lower cost per unit tin can also identify gaps in internal efficiencies.

Reflects efficiency of your business

Cost per unit offers insight into how much it costs to produce a unmarried particular, receive new inventory, store it, and fulfill and ship information technology. By breaking downwards the cost per unit, y'all can identify inefficiencies that are driving up costs, therefore reducing profit margins.

A low per-unit cost is an indicator of efficient production and logistics, which ensures profit is being made per auction. Of course, quality plays a role, equally higher quality or premium appurtenances typically toll more to produce than less durable or cheaper materials.

Helps correctly price your SKUs

Computing cost per unit is also important, because it gives ecommerce companies an idea of how much they should charge for each of their products to exist profitable.

It's important to keep a couple things in mind:

• Consistently evaluate cost per unit, peculiarly since variable costs fluctuate — costs such as raw materials, packaging, and shipping can increase at whatsoever time.
• Empathise the role volume plays — economies of calibration and higher volumes (of units purchased from a manufacturer, shipments shipped with a carrier) often come with discounts, which tin can ultimately help reduce the cost per unit.

It is best to have a relatively depression price per unit, as long as the quality and sustainability standards are maintained. This way, you can price your goods competitively, and withal secure decent sales margins.

How to calculate cost per unit?

Wondering how to calculate cost per unit of measurement? Fortunately, there's a unproblematic formula that is easy to utilise. Calculating cost per unit includes four master components. Here is a breakdown.

Cost per unit of measurement formula

The price per unit formula involves the sum of fixed and variable costs, which is then divided by the total number of units manufactured during a catamenia of time. Here is how to discover the cost per unit:

Cost per unit of measurement = (Total fixed costs + Full variable costs) / Total units produced

Just to accurately calculate price per unit of measurement, information technology's important to understand what is considered stock-still costs versus variable costs. Here is an overview.

1. Total fixed costs

Total fixed costs remain the same, no affair how many units are produced in a time catamenia. Examples of stock-still costs include rent, salaries, and overhead. These fixed costs are easy to forecast and upkeep for.

Total fixed cost =  Building rent + Direct labor costs + Other fixed costs

2. Total variable costs

Variable costs tin can change at any time. The number of units sold within a specific period of time can as well touch these costs. Examples are production costs, customer acquisition, packaging, and shipping costs.

Total variable cost =  Production costs + Customer acquisition costs + Packaging costs + Shipping costs + Other variable costs

Cost per unit example

Take the case of a small ecommerce business organization called PetsCo, which produced 100 units of an 80 lb purse of premium dog nutrient in February 2022.

In terms of salaries, rent, and other overhead, their monthly fixed cost of production is $5,000.

In February 2022, the variable cost incurred was $three,000, which includes raw materials, electricity, and labor.

Cost per unit = (Total stock-still costs + Total variable costs) / Total units produced

Cost per unit of measurement = ($v,000 + $3,000) / 100 = $80

Therefore, the price to produce one unit of their very large domestic dog food in February 2022 was $80.

Now, if PetsCo wishes to brand a 10% profit margin on the merchandise, it needs to mark upwardly the selling price accordingly.

Cost per unit of measurement + Profit percentage = Selling price

$fourscore + (10% of $eighty) = $88

$fourscore + $eight = $88

And so, the business needs to sell the goods at $88 to exist profitable at their desired margin. Note: Many business concern oftentimes want a much higher profit margin than ten%.

Price per unit vs. price per unit of measurement

While the toll per unit refers to how much you spend to evangelize one unit, the price per unit refers to how much you charge customers for each particular sold.

Beneath is how the relationship between these 2 metrics affects profitability:

• Break-even bespeak is attained when toll per unit of measurement = price per unit of measurement
• Profit is secured when toll per unit of measurement < cost per unit
• Loss is incurred when cost per unit > toll per unit of measurement

To calculate the profit or loss per unit, you will demand to find the difference betwixt the toll and unit cost.

Continuing with the PetsCo example, here is how you arrive at the profit per unit, where:

• The cost per unit = $lxxx
• The cost per unit = $88

Profit per unit = Cost per unit – Cost per unit

$88 – $lxxx = $8

v means to reduce your toll per unit of measurement

A high cost per unit means that your product pricing must be higher to accommodate desired company profits. Keeping average order value in mind, many businesses try to find ways to entice customers to spend more money in a single purchase (through bundles, discounts, and other incentives).

While you can e'er endeavor to get customers to spend more (or you can charge them more money), the root crusade of low margins is often high costs for the business.

Depending on the diverse factors that affect the cost per unit, there are different ways of reducing fixed and variable costs in your ecommerce operations . Beneath are a few ways to accost the upshot of a high cost per unit of measurement.

ane. Optimize your logistics strategy

I of the most efficient means to reduce costs is to focus on reducing logistics costs . Improving supply concatenation efficiency can aid you significantly reduce:

• First-mile delivery costs (by shortening the altitude between supplier and distribution centers)
• Storage costs (by optimizing warehousing efficiency and but storing what yous need to meet need)
• Fulfillment costs (past automating processes or partnering with a 3PL like ShipBob)

In plough, this tin can aid you lot deliver orders to customers more affordably while keeping product prices competitive.

"We love that ShipBob allows united states to keep low overhead by not having to practise shipping ourselves.

Having the ability to outsource that to a third political party logistics company that could provide us affordable pricing, customer service, and a software platform that was really intuitive that was linked to our website and all the rest of our platforms, giving us all those real time insights — it was a game changer."

Nathan Garrison, Co-Founder and CEO of Sharkbanz

ii. Reduce material costs

Spending less money on material costs, which tend to business relationship for a majority of production costs, can obviously reduce cost per unit. You can do and so by optimizing production sourcing, finding lower-cost manufacturers, and/or finding suppliers located closer to you.

Procurement logistics and freight shipping costs also need to be evaluated to ensure finished goods are being received at the lowest costs.

For instance, working with a wholesale distributor will probable offer y'all amend rates for inventory replenishment.

Cheers to greater volume discounts, or economies of scale (as your unit of measurement volumes increment), the average unit price likewise reduces. Many times, suppliers and wholesalers require a minimum order quantity per inventory run, simply if you're able to invest in more than inventory upfront, you may get further discounts (this of course requires more than working majuscule and a loftier degree of conviction you won't have obsolete inventory that expires too apace).

3. Reduce holding costs

Whatever expense incurred in the storage of unsold inventory is referred to as holding costs. These costs can range from warehousing to labor costs, to depreciation and opportunity costs.

Businesses often overpay for storage they don't need, unnecessarily inflating their inventory holding costs.

To bring down holding costs, it might be worth implementing a warehouse direction system, using methods like warehouse slotting to optimize infinite, or partnering with a 3PL (even for just your highest-selling items if y'all have a large product catalog or SKU count) that can significantly bulldoze down storage costs instead of leasing your ain warehouse.

"Overall, there is more transparency with ShipBob that even helps our squad manage customer service better. I tin see the granular phase the order is in — if it'due south beingness picked, packed, in transit, etc. That enhanced visibility is cracking.

No other 3PLs offer that in my experience. Tracking our costs and how much we're spending on storage is a lot easier to empathise. Off the bat, I liked that I would be able to command multiple warehouses through one page with ShipBob."

Wes Chocolate-brown, Caput of Operations at Black Claw LLC

4. Reduce dead stock, reshipments, and returns

I-fourth of online customers return v-xv% of what they purchase, and  the retail manufacture loses about $50 billion in the class of deadstock per year.

Dealing with these common inventory challenges can hike upward logistics costs, from higher storage costs to returns management (e.g., shipping labels, processing and restocking).

To reduce these costs, there are a few things to consider:

1. It's e'er of import to use inventory forecasting tools to ensure you don't overstock on product that you may non be able to sell through.
2. Make sure your fulfillment process is efficient and is optimized to evangelize a loftier order accurateness charge per unit (to prevent mis-picks that result in returns or packing errors that lead to damages that need to become reshipped).

Equally far equally returns go, 92% of shoppers say they will purchase over again if the returns process was like shooting fish in a barrel and overall positive. To offset the costs of a return, focus on increasing exchanges. Having a clear returns policy and making the process fast and piece of cake for the customer is essential.

"For reverse logistics, we have also been leveraging ShipBob's Returns API to automate and streamline our routine RMA processes.

Having ShipBob handle our returns has been a huge help in reducing our daily workload, and the ability to drive this process via API is wonderful."

Waveform Lighting Team

v. Go rid of unprofitable products

Whether it's a boring-selling item or obsolete inventory, having an inventory management organisation in place tin heighten visibility and then you can make wise decisions nearly your product catalog sooner than later.

Having a process for SKU rationalization also helps yous understand if a production is profitable or not. If the costs (and subsequent sales) don't justify supporting a particular production, then it'south time to discontinue it. Afterward all, deadstock will only block capital and hike holding fees.

I of the best means to increase inventory visibility is to outsource fulfillment . A 3PL similar ShipBob can help you reduce your overhead costs by offer an all-inclusive and affordable rate for access to a large and fully-managed warehousing network

For example, with ShipBob's omnichannel fulfillment solutions, you tin rails inventory performance across sales channels and fulfillment centre locations, and go analytics to view fast-moving vs. slow-moving items, your average storage cost per unit, and much more.

How ShipBob can aid reduce costs

Partnering with ShipBob is one of the best ways for ecommerce businesses to reduce costs past taking reward of an international fulfillment presence and storing inventory closer to your customers.

Instead of having to handle all SKU direction and logistics on your own, you tin outsource it to ShipBob and save time, energy, and money.

ShipBob also helps your online business concern with tracking distribution metrics and inventory management KPIs then you tin hands make toll-witting supply chain decisions.

Here is how ShipBob tin turn your logistics operations into a revenue driver.

Only pay for storage used

ShipBob's fast-growing fulfillment network helps y'all salvage on costs when storing inventory in our fulfillment centers by only paying for the space you need.

Rather than renting a warehouse and hiring/managing a staff, yous can store inventory in multiple fulfillment center locations within our network and track storage costs through the ShipBob dashboard.

Each storage unit is prorated on a monthly basis, and so if, for case, y'all just had inventory in a storage location for one-half of the month, you will be charged 50% of the cost.

Our end-to-end supply chain solutions likewise better inbound and outbound logistics , including warehouse receiving , to establish a more efficient, cost-constructive supply chain.

Forecast for lower supply chain costs

If you know what sales volumes to anticipate, yous tin manage your inventory appropriately to reduce costs.

Forecasting enables brands to make better decisions based on both information and research, from conducting a competitive analysis to predicting hereafter demand based on historical order information, trends, and patterns.

To easily track inventory in existent time, ShipBob's avant-garde analytics and reporting tool automatically analyzes historical data to predict future demand levels and make meliorate decisions. You tin get access to data such every bit:

• Average toll per unit stored
• Average units on mitt
• Fulfillment toll per unit

ShipBob too partners with leading inventory direction solutions to increment visibility and offer more insight into demand forecasting.

"ShipBob's Inventory Planner integration allows the states to have all of our warehouse forecasting and inventory numbers in one platform.

We can create ShipBob WROs directly in Inventory Planner and have the inventory levels be reflected in our local shipping warehouse and ShipBob immediately.

It also provides forecasting for each individual ShipBob warehouse, so nosotros know how many units we need to ship each week to cover a certain period and also to not run out of stock."

Marc Fontanetta, Director of Operations at BAKblade

Secure bulk carrier discounts

Since ShipBob partners endless businesses from beyond the world, we are able to secure majority discounts from shipping carriers similar UPS, USPS, FedEx, and DHL on expedited shipping, two-day aircraft, international aircraft, other methods.

For US shipments, for example, ShipBob offers faster, affordable 2-day shipping options for qualified customers to meet customer expectations around fast shipping while also reducing aircraft costs .

"ShipBob'due south advanced software helps us quickly understand shipping costs and how to improve aircraft times and costs by existence closer to where our customers are."

Andrea Lisbona, Founder & CEO of Touchland

To learn more most how ShipBob can help yous reduce logistics costs, request a quote today.

Cost per unit of measurement FAQs

Here are answers to the pinnacle questions most cost per unit.

What is the cost per unit of measurement?

Cost per unit offers insight into how much it costs to produce a single item, receive new inventory, store it, and fulfill and ship information technology. By breaking down the cost per unit, y'all can identify inefficiencies that are driving up costs, therefore reducing turn a profit margins.

How much does it price to produce one unit of measurement?

This volition depend on each unique business, simply there is a simple formula. Let's walk through an example: Assume that a business'southward monthly spending to produce 100 units of a specialty electronic includes $1,000 on electricity, $5,000 on factory rent, $iii,000 on labor, and $4,000 on raw materials. Hither is the formula broken down:

• Price per unit of measurement = (Electricity + Rent + Labor + Raw materials) / Number of units
• Price per unit of measurement = ($1,000 + $5,000 + $3,000 + $4,000) / 100
• Cost per unit = $13,000 / 100 = $130

What is the cost per unit if the price of the product is $1,000?

It would depend on what the fixed and variable costs are. Many ecommerce businesses aim to have a profit margin of 20-twoscore% (though this tin be difficult to achieve), so if nosotros assume the turn a profit margin is 30% (or $300), so the cost per unit of measurement may be effectually $700 (seventy% of $i,000).

Source: https://www.shipbob.com/blog/cost-per-unit/

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