Average revenue per user/unit

What is average revenue per user/unit (ARPU)?

Average Revenue Per User (ARPU) measures the amount of revenue generated by each customer on average. By dividing the company’s total revenue by the number of users (customers), implied ARPU can be calculated.

How to calculate ARPU

It measures the typical revenue generated from each user by calculating the “average revenue per user”. A trending ARPU over time as improvements are implemented can indicate if the current monetization strategies are working as intended.

No matter what industry a company is in or how big it is, long-term profitability boils down to one single question: “How much is a single customer worth? ” The answer to this question determines the go-to-market strategies employed to achieve growth (e.g. sales and marketing, product development).

It should be prudent for a rational, well-run organization to refrain from spending significant amounts of capital if the potential return from customers is not sufficient. It is possible for the company to become more profitable if it prioritizes growing their user base over monetizing them for now.

Consequently, an organization’s ARPU sets a limit on the amount it can spend on growth and expansion.

ARPU formula

Average revenue per user (ARPU) is calculated using the following formula.

If a company has 20 thousand customers and produces $20 million in revenue, its ARPU is $100.

ARPU = $20 million / 20,000 Customers = $100
Revenue contributed by each customer was $100.

A step further, the rather basic ARPU calculation has numerous shortcomings, resulting in numerous variations.

Example of ARPU calculation

A simple formula can be used to calculate ARPU. It has been shown to us how ARPU is calculated. Using ARPU as an example, let’s look at some examples.

The first example

There are 20,000 customers and $20 million in revenue for a technology company. $100 is the ARPU.

A customer’s ARPU is calculated by dividing their revenue by the number of customers. In other words, each customer contributes $100 to revenue on average.

The second example

40,000 paying customers and $400 million in revenue make up a company’s revenue.

40,000/400 million = ARPU.

ARPU = $10,000 in this case. There is a $10,000 revenue contribution from every customer.

Calculation is fairly straightforward.

Another variant of ARPU is ARPPU, which stands for average revenue per paying user. In order to know the spending ratio better, only paying customers are counted. The only customers counted are those who are active. Active users are a useful metric for companies who calculate the number of users on a platform. A different answer can be obtained if non-paying or inactive customers are included in the ARPU calculation. Identifying different types of customers helps chart growth and understand patterns better.