Suppliers are constantly being challenged to improve their sales performance while keeping supply chain costs low. Walmart sets up performance guidelines for its suppliers through initiatives like OTIF and SQEP to improve product flow and prevent inventory issues. Aside from just meeting a retailer’s performance standards, there are other ways suppliers can work to boost their item performance and grow sales.
One of the metrics suppliers use is calculating AUR. By determining the AUR for an item, suppliers have the ability to not only improve performance at the shelf but also to develop a better selling strategy to grow revenue and better understand shopper habits.
What Is Average Unit Retail?
AUR (Average Unit Retail) is the average selling price of an item within a specific period. It is calculated by dividing the total sales in dollars by the number of items sold and is often used to compare sales across different departments or categories.
As a supplier, having a good understanding of the AUR for your item is especially important when determining your pricing strategy for Walmart and other retail partners.
Why Is AUR Important?
It’s very important for suppliers to know an item’s AUR. It not only gives them insight into how to adjust their business, but also customer insight for planning marketing, events, and inventory throughout the year.
Some of the tools AUR gives the supplier are:
Customer Shopping Habits
Average Unit Retail is an important tool to use with other pricing metrics to better understand the shopping habits of your customer. AUR gives you insight into how many units of your item a customer is willing to buy as well as the price point they find acceptable. If the cost of your item is too high, it will be reflected in your AUR data.
At the same time, the AUR can tell you if your price point is too low. When taking into account your AUR, the cost of your item, and the profit margin, you may consider raising the AUR if the margin is too small.
When you have multiple SKUs, keeping a close watch on AUR can assist in maintaining proper inventory levels.
Why would AUR on one item compare to the AURs for other items in your inventory? This is an excellent gauge for letting you know it is time to make adjustments to your inventory.
Knowing what items (and how many) are selling and what items do not move as fast will help you make decisions for better sales. You’ll be able to see where improvements need to be made and how to build on what is already working.
As some retailers are everyday low priced whereas others play “high-low” with retail price, understanding your retailer’s strategy is vital. It helps you better understand if they’re happy with where their AUR is compared to their competition.
AUR is an important metric to understand, although the retailer is in sole control of retail price.
Monitor your AUR over time to spot trends when your product is in demand. Finding the low purchase periods will help determine if you need to run a sale or feature marketing. Finding periods of strong sales will help ensure your inventory levels can support the higher demand.
Tracing AUR trends over a 12-month period is key, but also note special events that impact the buying patterns (i.e. tragic weather, shortages, industry changes, etc.).
How to Calculate AUR
In order to calculate the AUR for an item, take time to go through the following steps:
- Select a time period – A supplier can monitor the average unit retail for an item in a set period of time. The dates in which AUR is monitored provide valuable performance data and shopper habit insight. The supplier may want to see AUR for an item in its first 90 days on the shelf, over a holiday sales timeframe, during weeks while the item is on feature, for a given quarter, or through other specific selling dates.
- Calculate net sales – The first part of the AUR equation is determining the item’s net sales. To calculate accurate net sales, take the total revenue of an item over the given time period. Total revenue does not include discounts, sales returns, or allowances for missing and damaged product.
- Determine total units sold – After picking a time period to monitor and calculating net sales, the next piece is researching how many units of the item were sold. This information is usually available on a supplier’s income statement for a given accounting timeframe. For a more custom number over a different period of weeks, suppliers may find total units sold in the retail management software used for their store selection.
- Divide net sales by units sold – Once a supplier has all the required information, it is time to run the formula. To calculate AUR, you simply take the total revenue (or net sales) divided by the number of units sold.
Example: $500 in net sales / 50 units sold = $10 AUR (each unit sold averaged $10 per sale).
Some businesses make a common error in calculating their AUR. Miscalculating AUR can really throw off your data, especially if you are not sure what the numbers are supposed to represent. By miscalculating the AUR, your data will incorrectly show your sales are actually greater than they are in the store.
When trying to determine their Average Unit Retail, some suppliers mistakenly factor in their on-hand inventory. This calculation can be incorrect because of markdowns. For example, a shirt in your existing inventory may be priced at $30. However, the actual price of the shirt on the sales floor may be discounted because of a sale. This will impact the AUR.
Ensure your AUR calculation is using the Net Sales after markdowns divided by your total units sold.
The Bottom Line
As a Walmart supplier, understanding Average Unit Retail will be a huge benefit to your business and relationship with your buyer. Your AUR can help guide discussions on how a price is impacting sales volume and how it can influence your customers’ behavior.
Remember this tool when approaching your buyer about raising or lowering a price, adjusting inventory, or suggesting sales and feature placement.
New to AUR or how to use it to meet Walmart’s expectations? Our team of advisors can help! 8th & Walton works with Walmart suppliers each week to improve supply chain, decrease monthly fines and penalties, work better in Walmart systems, and much more. You can speak with our advisors absolutely free!
To learn more about AUR and its impact on your business, or for other Walmart questions, contact 8th & Walton for a free consultation.