What is Average Revenue Per Unit (ARPU)? Definition, Calculation, and Real-World Examples
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Summary:
Average revenue per unit (ARPU) is a crucial metric for companies, especially in telecommunications and media. It measures the earnings generated per user or unit and provides insights into revenue generation and growth. this article explores what ARPU is, how to calculate it, who uses it, and its advantages and disadvantages. we’ll also delve into special considerations and how companies can increase their ARPU. prepaid and postpaid ARPU in telecoms are explained, along with the bottom line on why ARPU matters. let’s dive deeper into this critical financial indicator.
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What is average revenue per unit (ARPU)?
What is average revenue per unit (ARPU)? Average revenue per unit (ARPU) is an indicator of the profitability of a product based on the amount of money that is generated from each of its users or subscribers. It is a particularly useful measurement for companies in the telecommunications and media industries, which rely on subscribers or users.
ARPU is usually calculated as total revenue divided by the number of units, users, or subscribers.
It is often referred to as average revenue per user. Mobile phone service providers may even refer to it as average revenue per SIM card.
Understanding average revenue per unit (ARPU)
ARPU is not a GAAP measure. That is, a company is not compelled to produce or track ARPU to comply with generally accepted accounting principles. However, ARPU is useful information for company executives and investors who want to understand and track a company’s revenue generation capability and growth at the per-unit level. The number is published by many companies for that reason.
It is particularly relevant to telecom and media companies because their businesses are based on subscribers or active users, not on buyers of physical products.
How to calculate ARPU
In order to accurately calculate ARPU, one must first define a standard time period. Most telephone and communications carriers, for example, calculate ARPU on a month-to-month basis.
The total revenue generated during the standard time period is then divided by the number of units or users. The end date for the period is not used for the denominator since it could fail to capture fluctuations throughout the period. Instead, the start date and the end date of the period are typically averaged.
Notably, the number of users also fluctuates throughout any given time period, especially in industries such as media and telecommunications. Therefore, the number of units for a given period must be estimated in order to reach the most accurate ARPU figure possible.
The world’s top three social media sites in terms of ARPU are, in order, TikTok, Facebook, and LinkedIn.
Who uses average revenue per unit (ARPU)?
ARPU is used in the telecommunications sector by Verizon, AT&T, and others to track the average amount of revenue that is generated per mobile phone subscriber. In the mobile phone industry, the revenue included in ARPU includes not only the monthly billings to subscribers but the revenue generated by incoming calls, which are payable under the regulatory interconnection system.
Cable companies such as Comcast Corp. also disclose ARPU figures. The values of the measures obtained can be used internally and externally as a comparison among subscriber-based companies and to assist in the forecasting of future service revenues produced from a customer base.
Social media companies like Meta Platforms Inc. (formerly Facebook) and Snap report ARPU numbers to investors. The difference in these measures between the two companies goes some way towards explaining the large gap in the valuations of the two companies.
Special considerations
ARPU is one of several metrics used to evaluate the financials of a telecommunications company. Other key figures include:
Churn rate: This indicates the number of subscribers who are dropping the company’s service and presumably switching to a competitor. A high churn rate indicates that the company has a lot of dissatisfied customers. Either its customer base is shrinking or it is being forced to spend a great deal of money acquiring new customers to replace the departing ones.
Subscriber growth: Also called “net additions” in company financial statements, this is a strong indicator of the company’s level of continuing success. These can be equally important in evaluating media companies. But the media landscape is extremely complex and segmented, with competitors in social media, news media, entertainment, business, and more. Each of these has its own metrics for success.
What is included in an ARPU calculation?
At its core,
ARPU is simply total revenue divided by the total number of users. The question is what to include in revenue. The number typically will include:
- First-time buyers or subscribers who pay an upfront fee
- Recurring revenue such as monthly payments
- Upsells, through purchases of premium products
- Cross-sells, or purchases of products from others in revenue-sharing deals
This works for some companies such as Comcast, which makes its money through basic subscriptions, premium subscriptions, and streaming purchases.
Many media companies, however, have very different revenue streams. The bulk of their revenue is derived from advertising. They may have insignificant or no basic subscription fees, though they may make money from premium levels of service or revenue-sharing deals. All of these would be included in their ARPU figures.
How can a company increase ARPU?
Many companies, notably including the telecoms, try to increase their ARPU by selling their existing customers higher tiers or bundles of services. Others, such as media companies, focus on increasing advertising revenue. Both telecoms and media companies analyze their internal numbers to identify the demographic groups that are of greatest value to them. If Gen X consumers or families with children appear to be their most valuable customers, in terms of their contribution to ARPU, that’s the group that the company will target for growth.
What is prepaid and postpaid ARPU?
Prepaid and postpaid ARPU is peculiar to the telecom service companies. They offer their customers a variety of options, which break down to either prepaid or postpaid versions. Prepaid service requires the user to pay a flat fee monthly, in advance of using it. This is the “pay-as-you-go” option that can be canceled at any time. Postpaid service is billed monthly. This is the type of plan that may come with a “free” or discounted phone and a contractual obligation to continue the service for a set number of months.
It appears that the trend favors the prepaid option. At T-Mobile, for example, prepaid ARPU rose steadily between 2013 and mid-2021, from 28.25% to 37.53%. During the same period, postpaid ARPU declined from 54.5% to 47.61%.
The bottom line
If you’re considering investing in a telecom or a media company, you may find ARPU a good number to watch over time. It’s also a useful point of comparison among competitors in the same space. Which company is doing the best job monetizing its customer base? It’s a good bet that it’s the company with the highest ARPU.
Frequently asked questions
What is the significance of ARPU?
ARPU is significant as it measures the earnings generated per user or unit, especially in subscriber-based industries like telecom and media.
Is ARPU a GAAP measure?
No, ARPU is not a GAAP measure. Companies are not required to produce or track ARPU to comply with generally accepted accounting principles.
What are the pros of using ARPU?
For investors, ARPU is an easy point of comparison among competitors. It provides a starting point for analyzing a company’s strengths and weaknesses and can serve as a bragging point if the number is impressively high.
What are the cons of using ARPU?
ARPU is a macro-level measure and may lack the details necessary for external analysis. User growth and churn rate may be more indicative of a company’s direction, and the number can be distorted.
Key takeaways
- ARPU measures earnings generated per user or unit, primarily in telecom and media companies.
- It’s a valuable tool for internal analysis, helping companies evaluate the performance of various products or business segments.
- For investors, ARPU offers an easy way to compare companies within the same industry and can be a bragging point for companies with high ARPU.
- However, ARPU may lack the necessary details for external analysis, and other metrics like user growth and churn rate can provide a clearer picture of a company’s direction.
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