Average revenue per user (ARPU), also known as average revenue per unit, is a non-GAAP metric commonly used by digital media companies, social media companies, and telecommunications companies to assess their revenue-generating capabilities at the per-customer level.
Formula for Average Revenue Per User
The formula for average revenue per user is as follows:
Total revenue is the total revenue generated over the desired measurement period.
Average subscribers is the average number of subscribers over the desired measurement period.
Example of ARPU
John is an equity research analyst looking to conduct trend analysis on ABC Company. To measure the revenue-generating capabilities on a per-customer level of the company, John decides to measure the company’s average revenue per unit on a trended basis from 2016 to 2018. The following information was collected by John:
Calculating the company’s ARPU for each year:
On a trended basis from 2016 to 2018, John is able to see that ABC Company is driving revenue creation – the company is acquiring more users while also generating higher revenue per user year-over-year. John concludes that it may be an attractive company and decides to conduct further analysis.
Usefulness of Average Revenue Per User
There are several reasons why the average revenue per user metric is useful:
ARPU is commonly compared between similar companies operating in the same industry to assess how well the company is doing in comparison to its peers.
For example, if one telecommunications company is generating an ARPU of $3 compared to a similar telecommunications company generating an ARPU of $2, there is a high probability that the company generating an ARPU of $3 is more profitable.
2. Forecasting/Financial modeling
Average revenue per user is useful in financial modeling, as it can make revenue assumptions easier to determine. For example, an analyst building a financial model for Facebook Inc. may choose first to determine user growth and then multiply it by a forward ARPU to forecast revenue.
3. Segmentation analysis
Users can be segmented based on geographical region or on different tiers of customers. In doing so, the metric offers insight into which customer group is generating more revenue and how to drive further value in low ARPU groups.
For example, Facebook reports ARPU in four geographical segments: (1) US & Canada, (2) Europe, (3) Asia-Pacific, and (4) Rest of the World.
4. Profitability and revenue generation capability
Average revenue per user can be used on a trended basis to examine profitability and revenue generation capability. A rising ARPU on a trended basis indicates greater profitability and revenue generation capability. Recall from the example above – ABC’s revenue growth is reflected in its increasing ARPU.
Consider Facebook, whose 2017 Q4 ARPU was $6.18 compared to its 2014 Q4 ARPU of $2.81 – the company’s ARPU more than doubled over the three-year period. It’s no coincidence that shares of Facebook saw an impressive run up over the same timeframe.
Average revenue per user is a non-GAAP metric that is most commonly reported by digital media companies, social media companies, and telecommunications companies to determine revenue generated per user. Calculated as total revenue divided by average subscribers
ARPU offers significant insights into profitability and revenue-generation capability.
In addition, ARPU is commonly used for segmentation analysis, as a comparison tool among peers, and in financial modeling.
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