ARPU: What It Is, How to Calculate It, and Why It's Important
In this article
Below, we'll take a closer look at what ARPU is and why businesses should calculate it.
This is a crucial metric for subscription-based companies, such as telecom operators or SaaS services, because their business relies on subscribers or active users rather than buyers of physical products. However, some online stores also use this metric.
The ARPU metric shows how valuable your service is to a customer or user. The ARPU value reflects the average amount that customers are willing to spend on your product or service per month. For example, an ARPU of 5,000 dollars means that, on average, people pay five thousand dollars monthly.
An increase in ARPU usually indicates that customers are moving to more expensive plans or service packages.
Why ARPU is Important
This metric helps:
- Attract investors. A high ARPU makes a company more attractive in the market.
- Understand pricing changes. An increase in ARPU after adjusting rates confirms the validity of the chosen direction.
- Analyze advertising. A decrease in ARPU from acquired users often indicates poor traffic quality.
- Track revenue trends. The dynamics of ARPU, combined with other factors (such as new products or pricing plans), help marketers understand the reasons for revenue growth or decline.
ARPU Calculation
The following formula is used for this indicator:
ARPU can be calculated for any time period: daily, monthly, or yearly.
Most businesses analyze monthly ARPU, less frequently yearly, and very rarely daily. The choice of period depends on the specifics of your industry:
If you run an online store, analyzing ARPU every thirty days is sufficient.
For brands with a large number of transactions per day (e.g., taxi services or online games), daily calculation is more relevant.
To calculate revenue, multiply the number of products sold by the price.
Customers are those who interacted with you during the selected period. It doesn't matter whether they made a purchase, just visited the website or store, or signed up for a trial subscription. For example, if you have an online candy store, customers would include those who visited your platform.
10,000 people subscribed to the paid service.
20,000 people used the free trial period.
20,000 people simply registered on the website.
The service’s revenue for the month was one million dollars. The ARPU in this case is calculated as follows:
ARPU = 1,000,000 dollars / 50,000 users = 20 dollars/user
On average, each user brings the service 20 dollars per month.
You can use an ARPU calculator to compute this metric.
ARPU, ARPPU, LTV, or AOV?
All four metrics are related to user profitability and value, but they are used in different contexts and for different purposes.
- How it works: Calculated as the total revenue over a period divided by the number of active users during that same period.
- Why it matters: It shows how much money a company earns on average from one active customer per month, day, or year.
- Example: If the company earned one million dollars from ten thousand active users over thirty days, then the ARPU is 100 dollars/user.
- How it works: Calculated as the total revenue from paying customers divided by the number of such users over the same period.
- Why it matters: This metric shows how much a company earns on average from one paying customer over a specific period.
- Example: If the organization earned one million dollars from five thousand paying users in a month, then the ARPPU is 200 dollars/user.
- How it works: It shows the projected amount a brand will earn from a single customer over the entire period of their relationship.
- Why it matters: This metric indicates how profitable it is for a company to work with a customer over a long time.
- Example: If the LTV of an online store customer is 2,000 dollars, it means that the company will earn this amount from them over the entire time they continue to make purchases.
- How it works: Calculated as the total revenue divided by the number of orders over a period.
- Why it matters: This indicator shows how much a customer spends on average per order.
- Example: If an online store earned 1,000,000 dollars from 10,000 orders in a month, the AOV is 100 dollars/order.
The choice of metric depends on the goals of the analysis.
It's essential to consider the specifics of the business when interpreting the data obtained.
Types of ARPU
There are two types of ARPU that mobile operators usually track: prepaid ARPU and postpaid ARPU. Customers choose what suits them best: paying in advance (prepaid) or after the service is provided (postpaid).
With prepaid, the user pays a fixed amount for the month in advance. This is convenient because it allows for expense control and the ability to cancel the plan at any time.
In the case of mobile operators, postpaid plans often offer a free phone but require a contract for a certain period (e.g., several months). This is a less flexible option.
It seems that more and more people are choosing prepaid. For example, in the German company T-Mobile, revenue from prepaid users is growing, while revenue from postpaid users is declining.
How to Increase Average ARPU
If your ARPU is declining (or simply not growing), there are several ways to boost it. Below, we'll explore some of the most popular methods.
Pros and Cons of ARPU
ARPU can be analyzed to gain valuable insights into how customers respond to price fluctuations and premium offerings of a company. Additionally, it often clearly indicates the growth trajectory of an organization (or the lack thereof).
However, for analysts and investors outside the company, ARPU is not always useful. They may know the metric, but they lack the details.
For example, hundreds of millions of people might register on a social network, but they rarely or never interact with the platform and don't see the ads displayed there. As a result, the real numbers can be significantly distorted.
Below, we'll explore the advantages and disadvantages of the ARPU metric.
Pros
Investors can use ARPU as a basis for evaluating companies.
For brands, ARPU is a starting point for analyzing the strengths and weaknesses of the business.
If the metric is impressively high, some organizations publish it to enhance the brand's prestige in the eyes of investors.
Cons
Instead of showing business details, ARPU provides a general picture, which can be inaccurate.
Sometimes, it’s better to track user growth and churn to understand where the company is headed.
It’s important to remember that ARPU is often distorted.
What Else to Pay Attention to
ARPU is just one of several metrics used to assess a company’s financial health. Other key metrics include:
- Churn rate. This metric shows the number of users who stop using the company's services and likely switch to a competitor. A high churn rate means the brand has many dissatisfied customers. As a result, either its customer base shrinks, or it has to spend significant resources on attracting new users to replace those who leave.
- Subscriber growth. Also referred to as "net additions" in a company’s financial reports. This is a crucial indicator of the company’s ongoing success.
Conclusion
ARPU (Average Revenue Per User) is an important, but not the only tool for evaluating a company’s financial health, especially in industries like telecommunications. It provides insight into the average revenue generated from a single user over a specific period. However, relying solely on ARPU won't give you the full picture.
For a deeper analysis and understanding of a company's prospects, ARPU should be considered alongside other metrics. The churn rate will indicate how effectively the company retains customers, while subscriber growth will reveal how successfully it attracts them. Metrics like Lifetime Value (LTV) and Customer Acquisition Cost (CAC) will provide insight into the long-term value of a customer and the costs of acquiring them.
Analyzing these metrics together uncovers weaknesses in the company’s business model, highlights the effectiveness of its pricing strategy, and determines its growth potential.