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 helpful measurement for companies in the telecommunications and media industries, which depend on subscribers or users.

ARPU is usually calculated as total revenue partitioned by the number of units, users, or subscribers.

It is frequently alluded to as average revenue per client. Mobile telephone service suppliers may even allude to it as average revenue per SIM card.

Understanding Average Revenue Per Unit (ARPU)

ARPU isn't a GAAP measure. That is, a company isn't constrained to deliver or track ARPU to consent to generally accepted accounting principles.

Nonetheless, ARPU is valuable 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 distributed by many companies hence.

It is particularly relevant to telecom and media companies because their businesses are based on subscribers or active users, not on purchasers of physical products.

The most effective method to Calculate ARPU

To accurately calculate ARPU, one must first characterize 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 separated by the number of units or users.

The end date for the period isn't utilized for the denominator since it could fail to capture fluctuations all through the period. Instead, the start date and the end date of the period are typically averaged.

Notably, the number of users also fluctuates all through any given time period, especially in industries like media and telecommunications. Thusly, the number of units for a given period must be estimated to reach the most dependable ARPU figure conceivable.

The world's top three social media locales in terms of ARPU are, all together, TikTok, Facebook, and LinkedIn.

Who Uses Average Revenue Per Unit (ARPU)?

ARPU is utilized in the telecommunications sector by Verizon, AT&T, and others to track the average amount of revenue that is generated per mobile telephone subscriber.

In the mobile telephone industry, the revenue remembered for ARPU incorporates the monthly billings to subscribers as well as the revenue generated by approaching calls which are payable under the regulatory interconnection system.

ARPU In Subscription Services

Cable companies like Comcast Corp. also uncover ARPU figures.

The values of the measures obtained can be utilized internally and externally as a comparison among subscriber-based companies and to assist in the forecasting of future service revenues created 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. The company's market capitalization is right now $57.5 billion.
• Meta's average revenue per client for 2021 was $40.96. Its market capitalization is right now $603.78 billion.

Advantages and Disadvantages of ARPU

For the companies that distribute it, a high ARPU is clearly a bragging point, to the degree that it is sometimes excused as a "vanity metric."

A post on Profitwell, a publication for software-as-a-service businesses, argues that the people who think so aren't utilizing it accurately. ARPU can be analyzed for experiences into customers' reactions to the company's various price points and premium offerings.

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

In any case, it may not be very as helpful to analysts and investors outside the company. They may have the ARPU number yet lack the details. It is in that case a macro-level measure.

For instance, in the Meta example above, there may be tens or countless individuals who have joined as users yet sometimes or never interact on the Facebook platform or see the advertising that is being displayed for them there.

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

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

As the Corporate Finance Institute points out. It very well may be utilized as a point of comparison among companies in a sector. Estimating a company's growth potential can be utilized. It also can yield bits of knowledge into the relative progress of the company's market portions.

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 great deal of dissatisfied customers. Either its customer base is contracting 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 achievement.

These can be equally important in evaluating media companies. In any case, the media landscape is very complex and segmented, with competitors in social media, news media, entertainment, business, and more. Each of these has its own metrics for progress.

The Bottom Line

In the event that you're thinking about investing in a telecom or a media company, you may track down ARPU a decent number to watch after some time. It's also a valuable point of comparison among competitors in the same space.

Which company is doing the best job adapting its customer base? A decent wagered it's the company with the highest ARPU.

Highlights

• Average revenue per unit (ARPU) measures the earnings generated per client or unit.
• Management digs into the ARPU number to see which products or business fragments are performing best and most horrendously awful.
• Analysts and investors find it valuable 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.
• This figure is most frequently reported by telecom companies and media companies.
• Churn rate and subscriber growth rate are different metrics that are tracked closely in the telecom and media sectors.

FAQ

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, what break down to either prepaid or postpaid forms. - Prepaid service requires the client to pay a flat fee monthly, in advance of utilizing it. This is the "pay-as-you-go" option that can be canceled at any time.- Postpaid service is charged monthly. This is the type of plan that may accompany a "free" or discounted telephone and a contractual obligation to proceed with the service for a set number of months. Apparently the trend favors the prepaid option. At T-Mobile, for example, prepaid ARPU rose steadily among 2013 and mid-2021, from 28.25% to 37.53%. During the same period, postpaid ARPU declined from 54.5% to 47.61%.

How Could a Company Increase ARPU?

Many companies, notably including the telecoms, try to increase their ARPU by selling their existing customers higher tiers or heaps of services. Others, for example, media companies, center around increasing advertising revenue. The two telecoms and media companies analyze their internal numbers to distinguish the demographic groups that are of greatest value to them. Assuming 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 Included in an ARPU Calculation?

At its core, ARPU is just total revenue separated by the total number of users. The inquiry is what to remember for revenue. The number typically will include: - First-time purchasers or subscribers who pay an upfront fee-Recurring revenue, for example, monthly payments-Upsells, through purchases of premium products-Cross-sells, or purchases of products from others in revenue-sharing deals This works for certain companies, for example, Comcast, which makes its money through basic subscriptions, premium subscriptions, and streaming purchases. Many media companies, be that as it may, have altogether different revenue streams. The bulk of their revenue is derived from advertising. They may have insignificant or no basic subscription fees, however they may make money from premium levels of service or revenue-sharing deals. All of these would be remembered for their ARPU figures.