March 13, 2009

Mega-Metrics: Price Per Item

Price Per Item is one of those mega-metrics that we simply don't track as often as we should.

We frequently track average order value, in fact, we obsess about average order value.

But average order value is the combination of two metrics ... items per order ... and price per item.

Price per item is where we see inflation happening. During the bubble years of 2003 - 2006, it was not uncommon to see price per item increasing by between five percent and ten percent per month.

And during the fourth quarter of 2008, with folks taking 20% - 60% off of the price of every item, the metric exposed us to deflation.

This metric is interesting, because it can provide hints to changes in the economy. When I worked at Nordstrom, I got stomach cramps as the average price per item rose in 2004, 2005, and 2006, while other important metrics like retention rate and purchase frequency did not rise much. Now you listen to a Nordstrom investor conference call, and you'll hear management talk about reducing prices by 20% across the store to reflect the new reality of the economy. The warning signs were there.

Price per item is not a sign of customer loyalty. Price per item is a measure of the interaction between the economy, competitive pressures, and the ability of the merchant to optimally price merchandise at a profitable level. In that sense, it is maybe one of the two or three most important metrics leaders track.

Pay close attention to this metric. If sales growth is only coming from price per item, then the business is not truly growing. Growth happens when customers are retained at increasing rates, and when new customers are profitably added at rates greater than in prior years.