Average Revenue Per Unit (ARPU)

What Is Average Revenue Per Unit (ARPU)?

Average revenue per unit is the measure of the revenue generated per unit or user. ARPU is also known as average revenue per user or ARPU. It is a non-GAAP measure that allows management of a company as well as investors to refine their analysis of a company's revenue generation capability and growth at the per-unit level. It is usually calculated as total revenue divided by the number of units, users, or subscribers.

Understanding Average Revenue Per Unit (ARPU)

Average revenue per unit is equivalent to total revenue divided by average units (or users) during a period. The period-end date is not the measure date for the denominator because the number of units can fluctuate intra-period. Instead, the beginning of the period and the end of the period numbers are typically averaged.

However, the number of units or users may not remain constant throughout the standard time period. It can vary somewhat from day to day, as new users appear or old users cease to take advantage of a service. Therefore, the number of units for a given period must be estimated in order to give the most accurate ARPU figure possible for that period.

Calculating ARPU

In order to accurately calculate ARPU, one must first define 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 should then be divided by the number of units or users.

Who Uses Average Revenue Per Unit?

This measure is used in the telecommunications sector by Verizon, AT&T, and others, for example, to track the amount of revenue generated per mobile phone user. In the mobile telephone industry, ARPU is calculated using not just revenue billed to the customer each month for user subscriptions, but also the revenue generated by any incoming calls which are payable under the regulatory interconnection system.

Cable companies such as Comcast also disclose ARPU figures. The values of the measures obtained can be used internally and externally as a comparison among subscriber-based companies and to assist in the forecasting of future service revenues produced from a customer base.

Relatively new on the scene, social media companies like Facebook and Snap, though not subscriber-based, report ARPU numbers to investors. The difference in these measures between the two companies has some explanatory power for the large gap in valuations. Facebook's average revenue per user in the third quarter of 2017 was $5.07, while Snap's ARPU was $1.17. ARPU measures allow social media companies to track sources of revenue, typically generated by advertising.

ARPU Critique

ARPU is a long-standing measure that is useful to management and analysts. However, one common critique is that it does not provide detailed information about a user base. It is only a macro-level measure. For instance, in the Facebook example above, there may be tens or hundreds of millions who have signed up as users but only seldom engage on the platform or perhaps not at all. The true ARPU figure could be distorted, and that distortion could potentially be substantial, depending on how many users are not engaging regularly, or at all, on the platform.