Average revenue per unit (ARPU) is a metric used by companies that offer subscription-based products and services, such as mobile phone carriers and Internet service providers. This can be useful for several reasons, so if you follow any companies that rely on subscribers, here's what you should know about ARPU and how to calculate it.
How to calculate ARPU
The formula for calculating ARPU is pretty straightforward. Simply divide the total revenue by the number of subscribers. Usually ARPU is calculated for either a monthly or annual time period, but it could be done for any interval.
ARPU = Total revenue / Average subscribers
Notice that in the formula, we use the term average subscribers, as the actual number of subscribers can change constantly. So to come up with an accurate calculation, companies need to calculate (or at least estimate) the average number of subscribers during the time period.
For example, let's say that a cable company generated $1 million in revenue last month, and that the average number of subscribers during the month was 50,000. Then, the ARPU could be calculated as:
ARPU = $1,000,000 / 50,000 = $20 per subscriber
Why ARPU is useful
There are a few reasons calculating ARPU can be useful. For starters, it can be used when comparing similar companies in order to determine which does the better job of generating revenue from its subscribers. If one Internet service provider produces a higher ARPU than another with comparable expenses, it's a good bet that the one with the higher ARPU is more profitable.
Or, it can show investors which products, services, and promotions are good at increasing revenue on a per-customer basis. In other words, if a certain telecom company gains 50,000 new customers, of course its revenue is going to increase, which may or may not translate to more profits. However, if a company can produce more revenue from its existing customers, it can be a much easier way to boost profitability.
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For example, if a cable company generates $50 in monthly ARPU, and after implementing a promotional deal where customers can get two movie channels for the price of one, ARPU jumps to $60, the promotion might be considered a success.
