Every business has its way of measuring revenue to determine whether it is performing as it should. For companies in the digital media, networking, video games or telecommunications industries, the average revenue per unit (ARPU) is an important metric. These businesses include internet service providers, internet hosts, media companies, software-as-a-service companies, etc. The average revenue per unit is sometimes referred to as the average revenue per user.
What Is The Average Revenue Per Unit?
The average revenue per unit is the amount of money that a company can generate from selling one product unit. For example, if a company sells internet services, the ARPU enables them to understand how much money each customer using their internet is spending within a specified period, which could be monthly or yearly.
1. What Is ARPU Used for?
ARPU usually measures the profitability that each subscriber or user generates for the business, thus providing a deeper insight into company growth and performance at the customer level. While it is not necessary per generally accepted accounting principles (GAAP), many companies include it to prove to their investors that they can generate revenue and grow.
As a result, it is particularly relevant for subscription-based organizations that may offer free accounts or services while using their membership to generate advertising revenue. Also, it is essential for businesses that offer value-added services through upsells. For these kinds of companies, drilling down to find the most valuable demographics using ARPU increases their chances of success significantly.
2. Post-Paid and Pre-Paid ARPU
It is worth noting that ARPU may be divided into pre-paid and post-paid versions. The former refers to revenue per unit of products that are sold in advance. Subscriptions under this category tend to be easier to cancel at any time. On the other hand, post-paid ARPU refers to the revenue generated by customers who are billed monthly for what they have already used.
3. ARPU Implications
You can compare your ARPU with that of your competitors to determine how well your business is doing within the industry. Also, you can use the metric to determine the most valuable demographic and the one that requires a more advanced form of marketing. In addition, you can use ARPU to forecast company revenue and determine whether the company’s market value is likely to rise in value or not.
A decreasing ARPU may also imply a problem with your branding strategy, the financial ability of your target market, excessive competition, etc. It shows you need to make changes in how you sell or package your products.
Average Revenue per Unit Formula
Below is the average revenue per unit formula:
ARPU = Total revenue generated within a specified period/average number of customers in a given time period
If you add up all the revenue generated within a month, you should also use the number of monthly customers for accuracy. If you use yearly revenues, your customer numbers should correlate to the entire year.
How to Calculate the Average Revenue per Unit
The following are the steps you should take to understand the average sales per unit of product your company moves.
- First, calculate the total revenue for all the company products or subscriptions sold within a specified period by adding up the revenue for each product on offer. You can obtain the revenue for each product or service by multiplying the quantity of the various products by their sales prices.
- Determine what a user means to you. Is it an account owner, a website visitor or someone who purchased goods in a given transaction? Depending on what a user is to your business, add up all users who have generated sales when purchasing or using your product or service.
- If the number of users tends to fluctuate in any given month, you should add the number of users on the start and final date and average it to get a much better idea of the average number of units in that period.
- Divide the total revenue you have generated by the average number of users or units within the specified period. What you get is the average sales per unit.
ARPU Calculation Example
Suppose a company known as XSocial Ltd generated $1.7 million in January selling an educational course. On the first day of the year, they had 40,000 users, while on the last day of the month they had 28,000 users.
In that case, their ARPU will be $1.7 million/ ((40,000+28,000)/2)), which is the same as $1.7 million/34,000. Therefore, their ARPU for the month of January equals $50.
If their ARPU increases in February, it means the company’s marketing efforts are paying off and customers are paying more for the same course or buying the additional associated products on offer.
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.