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Average Revenue Per User (ARPU)

A non-GAAP metric commonly used to assess a company's revenue-generating capabilities at the per-customer level

What is Average Revenue Per User (ARPU)?

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.

 

Average Revenue Per User

 

Formula for Average Revenue Per User

The formula for average revenue per user is as follows:

 

Average Revenue Per User - Formula


Where:

  • 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 Average Revenue Per User

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:

 

Average Revenue Per User - Sample Financial Data

 

Average Revenue Per User - Sample Subscriber Data

 

Calculating the company’s ARPU for each year:

 

ARPU (2016)

ARPU (2017)

ARPU (2018)

 

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:

 

1. Comparisons

Average revenue per user is commonly compared upon 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 greater chance that the company generating an ARPU of $3 is more profitable than the company generating the lower ARPU.

 

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 a different tier of customers. In doing so, the metric offers more insight into which customer group is generating more revenue and how to drive further value in low ARPU groups.

For example, Facebook reports ARPU user 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.

 

Key Takeaways

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.

 

More Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Customer Acquisition Cost (CAC)
  • Industry Analysis
  • Return on Ad Spend (ROAS)
  • Revenue Streams

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