What it means
A unit is whatever measure the buyer and seller agree to count, and the unit price is the total price divided by the number of those units. Shops display it on shelf labels so that shoppers can compare a large pack with a small one, and the same idea runs through quotes, contracts and invoices.
For a business, unit price works from both directions. As a buyer, it tells you whether a bulk discount really saves money after you account for storage and waste.
As a seller, it is one of the three levers of revenue, alongside the number of units and the mix of products sold. Unit price is different from unit cost, which is what it costs the business to make or buy one unit.
The gap between the two is the unit margin, and watching them separately stops a company from celebrating a price rise that is smaller than a cost rise. Care is needed when the units are not the same.
A price per kilogram and a price per litre cannot be compared directly, and a subscription priced per user per month is a different unit from one priced per company per year. Finance teams standardise the unit before comparing anything.
Unit price also varies with volume, timing and customer. Tiered pricing lowers the unit price as quantities increase, and discounts or rebates reduce the net unit price below the list price.
The average selling price across all sales is therefore usually different from the headline price.
In practice
Real-world examples
Example 1
A restaurant manager compares two suppliers of chicken. One quotes $46 for a 5 kilogram box and the other quotes $88 for a 10 kilogram box. The unit prices are $9.20 and $8.80 per kilogram, so the larger box is cheaper if the kitchen can use it before it spoils.
Example 2
A consulting firm bills a client $18,000 for 120 hours of work. The effective unit price is $150 per hour, which the firm compares with its target rate of $175. The partner uses the gap to justify a higher rate on the next proposal.
Example 3
A software company sells licences at $40 per user per month for the first 50 users and $32 per user per month after that. A customer with 80 users pays 50 x 40 + 30 x 32 = $2,960 a month, so the average unit price is 2,960 / 80 = $37 per user.
Think of it
Think of unit price like buying loose fruit at the greengrocer versus a pre-packed bag. The unit price tells you the exact cost of a single apple, allowing you to compare value instantly, regardless of how many apples are in the bag.
Formula
Calculation
Unit price = Total price / Number of units
Revenue = Unit price x Units sold
A kitchen supplier sells two sizes of the same cooking oil. The small tin is 800 grams for $9.60 and the large tin is 1,250 grams for $13.50. Unit price of the small tin = 9.60 / 800 = $0.012 per gram, which is $1.20 per 100 grams. Unit price of the large tin = 13.50 / 1,250 = $0.0108 per gram, which is $1.08 per 100 grams. The large tin is cheaper by 1.20 - 1.08 = $0.12 per 100 grams, a saving of 0.12 / 1.20 = 10%. On the revenue side, if the supplier sells 4,000 large tins in a month, revenue = 13.50 x 4,000 = $54,000.Case study
Seen in the real world
Brightfield Packaging is an illustrative, fictional company that sells cardboard boxes to online retailers. Its list price was $1.50 per box, and the sales team routinely gave discounts to win large orders without anyone tracking the effect.
The finance manager calculated the net unit price by dividing total invoiced revenue of $1,140,000 by the 800,000 boxes shipped. The result was $1.425 per box, which was 7.5 cents below the list price and well below the figure in the budget.
In the illustrative follow-up, the company introduced a discount approval step for orders that pushed the net price below $1.45. Within two quarters the net unit price rose to $1.46 without losing major customers, adding about $28,000 of annual margin on the same volume.
Watch out
Common mistakes
- Comparing unit prices across different units, such as price per kilogram against price per litre, without converting them first.
- Assuming the cheapest unit price is always the best deal, when a large pack can lead to waste, storage costs or tied-up cash.
- Using the list price in revenue forecasts, when discounts and rebates mean the net unit price actually achieved is lower.
Questions
People also ask
Is unit price the same as unit cost?
No, unit price is what a customer pays for one unit, while unit cost is what the business spends to make or buy it, and the difference is the unit margin.
How do I work out the average unit price when I sell at different prices?
Divide total revenue by total units sold, which gives the weighted average rather than a simple average of the prices.
Why do shops show unit prices on labels?
They let shoppers compare products sold in different sizes on the same basis, such as price per 100 grams.