Average Revenue Per Unit (User)Explained, Advantages & Disadvantages, and Examples

Written By:
Lisa Borga

What is Average Revenue Per Unit (ARPU)?

Average revenue per unit (ARPU) measures the amount of revenue a business is generating for each of its active customers.

This metric can help a business to determine the profitability of a product when it is calculated for a particular product.

ARPU is commonly used by businesses that are a part of the media or telecommunications sector because they often obtain much of their revenue from users and subscribers.

ARPU can be computed by dividing the total revenue for a given period by the total number of users for the given period.

ARPU is often referred to as average revenue per user.

Explaining ARPU

Companies are not required to generate ARPU numbers.

They are not a necessary part of complying with GAAP ( Generally Accepted Accounting Principles).

Nonetheless, this metric does provide investors and executives with information about a company’s ability to generate revenue as well as their ability to grow their revenue on a per-unit basis.

This is why a number of companies publish the ARPU number.

ARPU is especially useful for media and telecommunications businesses since these companies do not make most of their money from selling products but instead obtain most of their revenue from selling subscriptions.

Calculating ARPU

The first thing that needs to be done in order to accurately compute ARPU is to define what a standard time period will be.

Typically for telecommunications and media companies, the time period used when calculating the ARPU is a month.

After the standard time period is determined, the total revenue produced during this period is divided by the total number of users in this time period.

The standard time period used in the denominator is generally an average of the date the period started and ended.

This time period is used rather than simply the end date in order to reflect any fluctuations that occur during the period.

There can also be fluctuations in the number of people that use a service during the standard time period.

This is especially true in the telecommunication or media industries. 

Because of this, calculations must use an estimate of the number of units that exist in the standard period of time in an effort to achieve an accurate ARPU number.

Use of ARPU by Telecommunication Companies

Companies in the telecommunications sector, such as AT&T, T-Mobile, and Verizon, use ARPU to monitor the average revenue generated by each mobile phone subscriber.

When determining the ARPU of a company in the mobile phone industry, the revenue used to calculate ARPU consists of any revenue produced by incoming calls which are required to be paid as part of the regulatory interconnection system, as well as the monthly bills paid by the subscribers.

ARPU Use in Social Media Companies

Some companies in the social media sector, such as Snap or Meta Platforms Inc., will report their ARPU numbers to their investors.

These numbers can vary considerably between companies and may help explain the large difference in valuations between some of these companies.

ARPU In Subscription Services

Cable companies will sometimes report their ARPU numbers as well. These numbers can be used both externally as well as internally to compare different subscriber-based companies. They can also be helpful in predicting what the future service revenues will be from a company’s customer base.

Pros and Cons of Average Revenue Per Unit

When a company publishes its ARPU, and it is very high, this can make a company look good.

Because of this, average revenue per unit is sometimes thought of as a vanity metric.

Although not everyone thinks this, some analysts believe that this is only the case if the metric is used incorrectly.

ARPU is a useful way to see how customers are responding to a business’s prices and premium packages.

This metric can also be used to see if a company is trending in the direction of growth or decline.

But, people outside of the business, such as investors or analysts, might not find average revenue per unit to be as useful.

This is because although investors and analysts may have access to the number, they might not be able to access the details necessary to make it useful.

This would be a macro level measure in this case.

An example of this would be a service that makes a lot of its money from advertising and has many users that sign up but never access the service.

In this case, many of the users would never see the advertising.

This situation would cause the ARPU to give an inaccurate impression of the business’s situation to those without access to further information.

Although, ARPU can still be useful to investors or analysts as it can be used to compare companies to other companies in the same sector.

It can also be used to predict a company’s potential for growth or to see how successful a company’s market segments are.

Advantages

• A very high ARPU can make a company look good.
• ARPU is a good metric for comparing a company to its competitors.
• This is a useful metric for beginning to analyze a company’s weaknesses or strengths.

Disadvantages

• Sometimes ARPU can be given without enough information to make it useful.
• For investors that are interested in a business’s direction, user churn or user growth may be better metrics.

Important Considerations

Investors can use many different metrics when evaluating the financials of telecommunications companies, and average revenue per unit is only one of these.

Some other metrics that can be used are:

• Subscriber Growth: This metric is sometimes called net additions as well. It can be a good indicator of whether or not a company is having continued success.
• Churn Rate: The churn rate shows how many subscribers are discontinuing a company service and probably signing up with one of their competitors. Therefore, if a company has a churn rate that is particularly high, they probably have a large number of unhappy customers. When this happens, a company will either have fewer customers or need to spend a considerable amount of money in gaining customers to make up for the ones that they have lost.

Both of these metrics can be just as important as the ARPU when analyzing media companies. However, there are many different types of competitors in the media sector, such as entertainment, social media, business, and many others. Therefore, the type of business needs to be considered when choosing which metric will work best.

Uses of ARPU

For those thinking of investing in media or telecommunications companies, it is useful to consider ARPU.

This number can also be used to compare companies in the same sector.

It can allow investors to see which companies are doing a better job of monetizing their customer base.

What Factors Are Part of the ARPU Calculation?

Basically, average revenue per unit is the total revenue of a company during a specific period divided by the company’s total number of users during the same period.

However, it is also important to consider what should be a part of revenue.

Revenue will generally consist of:

• Upfront fees from customers
• Recurring revenue
• Upsells
• Product purchases that are part of revenue sharing deals

This type of system works well for companies that make most of their money through subscriptions and purchases of streaming content.

However, there are a lot of media companies that make much of their money from advertising.

These businesses may make very little of their revenue from subscriptions, although they could make some of their revenue from premium levels of service or deals they make with other businesses for sharing revenue.

These sources of revenue would all be included in ARPU.

How Can Companies Increase Their ARPU?

A lot of companies, such as telecommunications companies, attempt to improve their ARPU by selling bundles or higher levels of services to their current customers.

In contrast, media companies tend to try to increase their advertising revenues.

Both of these types of companies look at their internal numbers to find which demographic groups are most valuable to them.

Then, once the company determines the group that is most valuable, they emphasize promoting growth within that group.

What Is Prepaid and Postpaid Average Revenue Per User?

This measurement is commonly used by telecommunication companies.

These companies generally give their customers several choices which involve either post-paid or pre-paid service.

If a customer chooses pre-paid service, they will be required to pay a set monthly fee in advance.

This type of service is frequently marketed as a “pay as you go” service with the advantage of being able to cancel at any time. 

Whereas, with post-paid service, the customer will be billed on a monthly basis.

Additionally, the customer will sometimes receive a phone that is either stated to be free or discounted as part of a plan with a contractual obligation of service for a specific number of months.

Key Takeaways

• The average revenue per unit is a ratio that is computed by dividing the total revenue a company generates in a given period by the total number of users in that period.
• There are some metrics that are commonly used in the media and telecommunications sectors in addition to ARPU, such as the subscriber growth rate and churn rate.
• Average revenue per unit is useful for investors or analysts who want to compare companies in the same industry. This metric shows which companies are doing a better job of getting the most revenue from their customers.
• Management uses ARPU to determine how well their business segments or products are doing.
• Telecommunication and media companies are the most likely companies to report this number.