Wall Street Prep

Average Revenue Per User (ARPU)

Learn the Steps to Calculate the Average Revenue Per User (ARPU)

Learn Online Now

Average Revenue Per User (ARPU)

Key Learning Objectives
  • What is the definition of the average revenue per user (ARPU) metric?
  • How can the average revenue per user (ARPU) be calculated?
  • What are examples of customer insights that can be obtained from assessing ARPU trends?
  • How can ARPU be increased (and vice versa)?

Average Revenue Per User (ARPU) Definition

For all companies, regardless of industry or size, long-term profit generation boils down to one single question: “How much is a single customer worth to your business?”

The go-to-market strategies employed to achieve growth (e.g. sales & marketing, product development) are all dependent on the answer to the question stated above.

A rational, well-run company is NOT going to spend significant amounts of capital if the potential return from customers is insufficient.

Therefore, a company’s ARPU essentially sets a ceiling on the amount that can be spent to fund growth and expansion plans.

ARPU Simple Calculation Example

For example, if a company has produced $10 million in revenue with 10,000 customers, the ARPU is $100.

  • ARPU = $10 million / 10,000 Customers = $100

Each of the company’s customers contributed $100 in revenue.

Taking it a step further, there are numerous variations of the rather basic ARPU calculation, which has many shortcomings.

A common variation of the ARPU metric is the average revenue per paying user, or “ARPPU”, which is predicated on the notion that only paying customers should be included to better understand the true amount of spending per customer.

ARPPU Formula

The premise of the ARPPU is similar to that of popular metrics for internet companies such as daily active users (DAU) per month. The objective is to count only those users that are “active” on the platform.

If “inactive” users (or non-paying customers) are included, the average payment value can easily become skewed, so splitting up customer types allows companies to better grasp spending patterns and amounts.

However, note that many companies use the “ARPU” and “ARPPU” interchangeably, so it is crucial to confirm how the company calculates each metric.

How to Increase Average Revenue Per User (ARPU)

It should go without saying that a higher ARPU (and year-over-year growth) is clearly going to be beneficial for a company over the long run.

  • Increasing ARPU → Improvement in Monetization of User Base
  • Decreasing ARPU → Deterioration in Monetization of User Base
Increasing ARPU Decreasing ARPU
  • Increased Average Selling Price (ASP) Per Unit – i.e. Significant Market Share with Pricing Power
  • Forced Reduction in Pricing to Increase Customer Demand – e.g. Threat of New Market Entrants
  • Strategic Customer Targeting – e.g. Low Churn, Affluent Customer Base
  • Difficult to Monetize Customer Base – e.g. B2C, Younger Demographic with Minimal Discretionary Income
  • Extensive Upselling/Cross-Selling Opportunities
  • Standalone Product with Few Upselling/Cross-Selling Opportunities
  • Differentiated Product/Service Offering with Strong Branding Leading to Premium Pricing
  • Weak Branding Strategies (i.e. Forced to Offer Discounts)
  • Lack of Market Competition and/or Threat of Undercutting by New Entrants
  • Overcrowded Market with Low Differentiation

Average Revenue Per User (ARPU) Excel Template

Now that we’ve defined the average revenue per user (ARPU) metric, we can move on to an example Excel modeling exercise. For access to the template, fill out the form below:

dl
Submitting ...

Average Revenue Per User (ARPU) Example Calculation

In our hypothetical scenario, we have a subscription streaming service company with the following product and customer data points.

Model Assumptions
  • Average Monthly Subscription Price = $12.50
  • Total Paying Customers = 400
  • Total Non-Paying Customers = 600

From the assumptions listed above, we can see that of the total customer base, 40% are on paid subscription plans whereas 60% are on the “freemium” plan (or are inactive accounts – i.e. a customer created an account but is not actively using it).

If we multiply the average monthly subscription price, we can calculate a monthly revenue of $5m.

Since we are calculating ARPU (and ARPPU) on an annual basis, the next step is to annualize the monthly revenue by multiplying by 12 months.

• Total Annual Revenue = $12.50 x 400 x 12 = $60m

Once we have the annual revenue amount, we can calculate the average revenue per user by dividing the total annual revenue by the total number of users, inclusive of both paying and non-paying users.

• Average Revenue Per User (ARPU) = $60m / 1,000 = $60

ARPU Formula

In the subsequent step, we’ll calculate the average revenue per paying user, which only includes customers that are on paid monthly subscription plans.

The formula consists of dividing the total annual revenue by the total number of paying users, as shown below.

  • Average Revenue Per Paying Customer (ARPPU) = $60m / 400 = $150

ARPPU Formula

We can now compare the two values:

  • ARPU = $60
  • ARPPU = $150

The difference between the two metrics is $90, indicating that the company may want to ask itself how it can convert more non-paying users into paying users. In addition, the company should consider how it can derive further revenue from its existing paying customer base.

ARPU

Comments
guest
0 Comments
Inline Feedbacks
View all comments
Learn Financial Modeling Online

Everything you need to master financial and valuation modeling: 3-Statement Modeling, DCF, Comps, M&A and LBO.

Learn More
X

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.