In profitability cases, what are some sample reasons why revenue per unit falls (i.e. prices)? My initial thoughts are competitive response and strategic promotional pricing. Any other ideas?
Profitability Case: Sample reasons why revenue per unit falls
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Hey,
You need be clear here: are you looking to analyse drop in Revenue overall or drop in revenue per unit which can also be interpeted as ARPU (avg. revenue per unit or user)? The approach is slightly different.
From a purely price perspective, price drop or reductions can be due to:
- Competitive pressure resulting in driving down prices
- Economies of scale from increasing production
- Reduction in costs of production
- Promotions
- Initial high pricing to capture early adoptors which then is reduced
- Decrease price to increase market share
(edited)
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Hello!
Careful here, since it´s very different to look at declines in:
- ARPU (average revenue per unit)
- Price
You can have one of them increasing and the other one decreasing, for example.
Cheers,
Clara
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Hi there,
Adi nailed it with his list.
I would just add that it's possible our client has not changed prices at all for any given unit, but rather that they are selling more cheap items than expensive items (i.e. the product mix has changed).
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Fully agree with the reasons Adi listed for falling realized prices.
On top of that, I would challenge your ingoing assumption "...reasons why revenue per unit falls (i.e. prices)":
Revenue per unit can fall even if prices remain stable, if a client aggregates data to a high level, there might be a mix shift involved: High-price SKUs are in decline and low-price SKUs are on the rise. That means that on an overall level revenue per unit drops, although prices for each SKU remain stable (or can even increase year on year). This is an often seen phenomenon in interview cases.
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