Average Revenue Per User (ARPU) - What is ARPU?
Average Revenue Per User (ARPU) is a metric that allows a business to measure how much revenue their customers provide
Save your customer details all in one place and add them to a new invoice with a click using online invoicing & accounting software like Debitoor. Try it free for 7 days.
The use of ARPU is commonly found in businesses that offer a subscription-based product or service. The use of this metric is quite straightforward: how much the business can expect to make in revenue from their customers.
It’s widely used by businesses in the digital sector and is generally easy to calculate based on some simple data gathered over time.
Why ARPU is a useful metric
For businesses that can calculate an ARPU, there are a number of reasons why this metric can be particularly useful.
- Profit generation capability: when applied regularly, it can be used to determine trends in the ability of the business to generate revenue from users. In other words, an increasing ARPU indicates a growth in revenue.
- Comparisons with competitors: companies in the same industry will use the ARPU calculation to examine how well they are doing compared to their competitors.
- Financial forecasting: while it shouldn’t be relied upon solely, ARPU can be very useful in financial modelling for a business, for example in forecasting future revenue.
- Understanding customers: with ARPU, customer segments can be examined separately, based for example on location or customer tier to determine which are performing best and which might need a boost.
It can clearly provide some useful insights into the current and potentially future profitability of a business (when applied to financial modelling/forecasting).
How to calculate ARPU
The equation for calculating ARPU for a given time period is dividing the revenue for that period by the number of users.
ARPU = Total revenue for period / Number of subscribers for period
It is likely clear that when looking to calculate ARPU, the first step is to select a time period and gather the necessary information: the total revenue from that period and the number of customers from the same period.
The time period that is most often selected for calculating ARPU is monthly - this is because many businesses that use the metric have customers paying for monthly subscriptions. So in this case, the total revenue for the month would be divided by the total number of (active) customers for that month.
Because some of the figures can fluctuate from the beginning of a period to the end of that same period (especially for longer timeframes, such as a full year), businesses will average the totals from the beginning and end of the period in order to come to a clearer number.
Downsides of ARPU metric
The main complaint about the ARPU calculation is that it is generally quite broad. It provides a measurement of the larger picture but doesn’t offer any detail into a company’s users. For example, it gives no indication of how engaged the active users are.
It is used mainly by management and in analysis. Because it is so broad, it can also easily provide distorted results. It is considered non-GAAP, which means there’s no standard to how it should be calculated.