Average Revenue Per User (ARPU)
The Average Revenue Per Unit, or ARPU, measures how profitable a product is by taking into account the total amount of money made by each user or subscriber.
What Is Average Revenue Per User (ARPU)?
The Average Revenue Per User is commonly used in industries like consumer communications, digital media, and networking. It calculates the average revenue generated by a company by dividing the total revenue by the number of subscribers or users.
This measurement is particularly significant for businesses offering subscription services, such as telephone carriers, internet service providers, and hosts.
Average Revenue per user encompasses the revenue obtained from customer usage and incoming calls in mobile telephony.
For digital media and social media companies, Average Revenue per user holds great importance as it reflects their ability to generate revenue, especially through advertising from users with free accounts.
Fluctuations in Average Revenue per user can substantially impact stock prices, making it crucial for these companies to monitor closely. Companies gain insight into revenue sources and growth by examining ARPU on a per-user or per-unit basis.
Many companies that provide internet and telecommunications services and their suppliers are adding more services for their users. They advertise these services by highlighting how they can boost the Average Revenue per user for the operators.
Key Takeaways
- Average Revenue Per User (ARPU) stands for average revenue per user, a common measure of how much money a company makes from each of its customers or users.
- ARPU is calculated by dividing the total amount of money the company earns by the number of customers or users it has.
- ARPU measure is especially important for companies that offer services that customers or users pay for regularly, such as phone companies and internet providers.
- Average Revenue Per User also shows how well a company can make money from other sources, such as advertising, especially for companies operating in the digital and social media sectors.
Computation of Average Revenue Per User
Average Revenue per user is calculated by determining the total revenue generated by all paying subscribers or communications devices over a defined time period, typically a month for most telecommunications carriers.
This total revenue is then divided by the number of units to obtain the average revenue per user. To ensure accuracy, the average number of units must be calculated or estimated for the given month, as the number of units can vary daily.
Note
Units here refer to the number of users taken into account to compute the ARPU.
A related metric is ARPPU (Average Revenue Per Paying User), which calculates the revenue divided among users who made any payment. ARPPU tends to be higher than ARPU, especially in subscription-based games with a free-to-play version.
In these instances, ARPPU is determined based on accounts and reflects the subscription price, slightly diluted by free trials.
The formula for calculating the average revenue per user is:
Average Revenue Per User = Total Revenue ÷ Total Number of Customers
Another measure is ARPDAU (Average Revenue Per Daily Active User), which calculates each user's daily revenue.
Additionally, ARPC (Average Revenue Per Customer) is a common metric considering that certain customers generate higher revenue due to contracting more services or utilizing them more extensively.
Another criterion for evaluating the success of telecom companies is Average Margin Per User (AMPU). AMPU focuses on the margin generated per unit sold rather than the total cash revenue from each customer.
Telecom analysts often emphasize Average Revenue per user due to the substantial infrastructure costs typically associated with telecom companies.
Differences Between ARPU and ARPPU
Average Revenue Per User (ARPU) and Average Revenue Per Paying User (ARPPU are two important metrics used in analyzing businesses, especially in the digital and subscription-based industries.
While they provide insights into revenue generation, there is a key distinction between them in terms of the user segment they consider.
As the name indicates, ARPU calculates the average revenue generated per user across the entire user base, regardless of whether they are paying customers.
ARPU helps businesses assess the overall monetization of their user base and can be used to track trends over time or compare revenue performance across different customer segments.
On the other hand, ARPPU focuses specifically on the average revenue generated per paying user. ARPPU narrows its scope to paying customers only and provides insights into the average value derived from each customer willing to spend money on products or services.
This metric is particularly relevant for businesses that rely on a subscription model, freemium model, or in-app purchases, as it helps understand the revenue potential and engagement levels of their paying user base.
The main advantage of using ARPPU is that it provides a more accurate reflection of the revenue-generating potential of paying users.
By focusing solely on this segment, businesses can evaluate the effectiveness of their monetization strategies, pricing models, and upselling opportunities.
ARPPU is useful for identifying opportunities to increase revenue from existing customers, such as through cross-selling, up-selling, or offering premium features or content.
While ARPU considers all users, including paying and non-paying, it may need to understand revenue generation from the paying segment comprehensively.
Businesses with a significant portion of non-paying users or a freemium model might find ARPU less informative in terms of the revenue potential of their paying customer base.
The key difference between ARPU and ARPPU lies in the user segment they consider. ARPU provides an overall view of revenue generation across all users, while ARPPU specifically focuses on the average revenue generated per paying user.
By analyzing both metrics, businesses can gain insights into the overall revenue potential and the value derived from their paying customers, enabling them to make informed decisions regarding monetization strategies and customer engagement.
The Famous Case of Jio and Airtel
The battle for average revenue per user between Jio and Airtel is a significant competition in the Indian telecommunications industry.
Both companies strive to attract and retain customers who generate higher revenues, positioning themselves as the preferred choice for premium customers.
Airtel has established itself as a leader in ARPU, with its Q1 FY23 ARPU at Rs 183, considered industry-leading. Airtel justifies its higher tariff rates by focusing on retaining premium and high-paying customers on its network.
The company aims to offer quality services and value-added features that attract customers willing to pay a premium for enhanced connectivity and benefits.
On the other hand, Jio's Q1 FY23 ARPU was slightly lower than Airtel's at Rs 175.7. However, Jio's overall revenues and net profit remain significantly higher due to its massive customer base.
Jio has brought disruptive technologies to the Indian telecom market, offering competitive pricing and innovative plans attracting many users.
Despite having a slightly lower ARPU, Jio's ability to scale and generate substantial revenue has solidified its position as the market leader.
The battle for ARPU between Jio and Airtel involves a strategic balancing act. Airtel focuses on catering to premium customers by offering higher-priced tariffs, while Jio aims to capture a broader market share by providing affordable and value-for-money plans.
Both companies employ different approaches to maximize their revenue potential and profitability, with Airtel emphasizing ARPU and Jio prioritizing overall revenues and customer base.
The competition between these two telecom giants continues to drive innovation, pricing strategies, and service quality in the Indian telecom industry.
Importance of ARPU
The average amount of money a business makes from each user in a certain period is important for any business. This data can help improve the business’s performance in the following ways exlpained below.
Enhanced Marketing
You can differentiate between higher and lower-value users by understanding your average revenue.
Firstly, it helps identify the most valuable customer segments, allowing the business to prioritize resources and tailor marketing efforts to those segments.
Secondly, it enables the business to optimize pricing strategies by identifying opportunities to upsell or cross-sell to higher-value users.
Thirdly, it aids in evaluating the effectiveness of customer retention initiatives and identifying areas for improvement. It provides insights into overall revenue potential and can inform product development, customer experience, and profitability decision-making.
This knowledge allows you to analyze your marketing channels, networks, and campaigns to identify the most effective sources of revenue. This enables you to allocate resources towards activities that generate the most revenue while eliminating underperforming ones.
Increases Return on Ad spend (ROAS)
Comparing Average Revenue per user with acquisition costs such as cost per install (CPI) or cost per action (CPA) helps determine your marketing's bottom line or ROAS.
Note
This analysis lets you evaluate if your marketing expenditures yield a favorable return. It also helps identify areas where marketing efforts can be optimized and refined.
Looks for revenue opportunities
Analyzing your highest-value users allows you to explore ways to bring more users into that bracket.
For example, highlighting the benefits of a higher subscription tier or offering bundled services could entice users to upgrade. Additionally, assessing whether price increases are feasible and if users perceive value in your offerings can lead to revenue growth.
Realigning your strategy
ARPU provides insights into how effectively your business meets customers' needs. A decline in ARPU may indicate user dissatisfaction and potential churn, prompting the need to introduce new products or services.
Note
If acquisition remains strong, but ARPU remains stagnant, it could suggest undercharging. This calls for evaluating competitive pricing and effectively communicating the value proposition to users.
Business health check
Business leaders appreciate ARPU as it provides a quick overview of performance. It helps them gauge the company's revenue generation, compare it with competitors, and gain insights into future performance.
Disadvantages of ARPU
The ARPU calculation has been criticized for its broad nature, as it provides an overall measure without offering specific insights into a company's user base. It needs to indicate the level of engagement among active users, which limits its usefulness.
ARPU is primarily used by management and analysts, but its broadness can sometimes lead to distorted results. Also, there is no standardized method for calculating ARPU, so it is considered a metric or measure that may vary between companies.
While ARPU provides an average value, it may mask variations within the customer base and does not provide information about sales distribution or specific customer behaviors.
It also needs to consider the profitability or costs associated with acquiring and serving customers, focusing solely on revenue and neglecting other important costs for a comprehensive financial analysis.
Comparing ARPU across regions or industries can be challenging due to differences in client demographics, purchasing power, or cultural factors.
Additionally, external factors like changes in the competitive landscape, economic conditions, or regulations can influence ARPU by affecting customer behavior, pricing dynamics, and revenue trends.
ARPU can be influenced by changes in the number of users, which may not necessarily reflect the company's financial performance accurately.
ARPU only considers revenue and does not account for customer acquisition, product development, or operational expenses. Therefore, a high ARPU does not necessarily translate to high profitability.
Note
ARPU is most relevant for subscription-based or usage-based business firms, such as tele networks, streaming or OTT platforms, and SaaS companies. It may be less useful for business firms with one-time sales or those that don't have a recurring revenue model.
Summary
One way to measure a product's profit from each user or subscriber is to use the average revenue per user or ARPU. This is a common metric in industries like telecommunications and media, where the number of users or subscribers is significant.
To calculate the ARPU, we need to:
Average Revenue Per User = Total Revenue ÷ Total Number of Customers
This metric is valuable for telecom and media companies as it helps analysts and investors compare revenue maximization strategies across industry rivals.
Management can also analyze Average Revenue per user to identify the best and worst-performing products or business segments.
While ARPU is not a mandatory requirement under accounting principles, it provides useful information to company executives and investors seeking insights into a company's revenue generation and per-unit growth.
ARPU is particularly relevant in the telecom and media sectors due to their reliance on subscribers or active users rather than physical product sales.
To calculate ARPU accurately, a standard time period needs to be defined. Most carriers calculate Average Revenue per user monthly. The total revenue generated during this period is divided by the estimated number of units or users.
The start and end dates of the period are typically averaged to account for fluctuations throughout the period.
Since the number of users can vary, especially in media and telecom industries, estimating the number of units for a given period is essential for obtaining the most accurate ARPU figure.
Monitoring the Average Revenue Per User can provide valuable insights if you are contemplating an investment in a telecommunications or media company. It's also a valuable metric for comparing companies within the same industry.
Determining which company excels in monetizing its customer base can be assessed by looking at Average Revenue per user. The company with the highest ARPU is likely the one that effectively maximizes revenue from its customers, making it a promising choice for investment.
Researched and authored by Neeraj Pandey | Linkedin
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