Average Revenue Per Unit (ARPU): Definition and How To CalculateAverage Revenue Per Unit (ARPU): Definition and How To Calculate

What Is Average Revenue Per Unit (ARPU)?

The 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.

KEY TAKEAWAYS

• Average revenue per unit (ARPU) measures the earnings generated per user or unit.
• This figure is most often reported by telecom companies and media companies.
• Analysts and investors find it useful to compare ARPU numbers from rivals in the same industry. It indicates which is doing the best job of maximizing revenue from its subscribers or users.
• Management delves into the ARPU number to see which products or business segments are performing best and worst.
• Churn rate and subscriber growth rate are other metrics that are tracked closely in the telecom and media sectors.

Understanding Average Revenue Per Unit (ARPU)

ARPU is not a GAAP measure. That is, a company is not compelled to produce or track ARPU in order to comply with generally accepted accounting principles.

However, ARPU is useful information to 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.1

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.

ARPU In Subscription Services

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.

ARPU In Social Media

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. For example:

• Snap’s ARPU for the fourth quarter of 2021 was $4.06, compared to its $3.44 in Q4 2020.2 The company’s market capitalization is currently $57.5 billion.3
• Meta’s average revenue per user for 2021 was $40.96.4 Its market capitalization is currently $603.78 billion.5

Advantages and Disadvantages of ARPU

For the companies that publish it, a high ARPU is obviously a bragging point, to the extent that it is sometimes dismissed as a “vanity metric.”

A post on Profitwell, a publication for software-as-a-service businesses, argues that those who think so aren’t using it correctly. ARPU can be analyzed for insights into customers’ responses to the company’s various price points and premium offerings.6

It also can quite plainly indicate the company’s trajectory towards (or away from) growth.6

However, it may not be quite as useful to analysts and investors outside the company. They may have the ARPU number but lack the details. It is in that case a macro-level measure.

For instance, in the Meta example above, there may be tens or hundreds of millions of people who have signed up as users but seldom or never interact on the Facebook platform or see the advertising that is being displayed for them there.

The true ARPU figure thus could be distorted, and that distortion could be substantial.

Even as a macro-level measure, ARPU can be useful to analysts and investors,

As the Corporate Finance Institute points out. It can be used as a point of comparison among companies in a sector. It can be used to forecast a company’s growth potential. It also can yield insights into the relative success of the company’s market segments.

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 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 the 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 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.