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A measure that assesses the company’s revenue per customer account or per user
Published August 22, 2023
Updated June 27, 2023What is Average Revenue Per Account (ARPA)?
Average revenue per account (ARPA) is a measure that assesses a company’s revenue per customer account. ARPA is generally measured on a monthly or annual basis.What is Average Revenue Per User (ARPU)?
A similar, but alternative calculation to ARPA is average revenue per user (ARPU), also known as average revenue per unit. An extension of ARPU is average revenue per paying user (ARPPU). Although similar to average revenue per user (ARPU), the fundamental difference with ARPPU is that the calculation of the metric only involves active-paying customers and not the company’s entire customer base.
Although the terms average revenue per account (ARPA) and average revenue per user (ARPU) are frequently used as synonyms, this is not always correct because one customer may have several accounts with a company.
The ARPA/ARPU metrics are mostly used by companies operating on a subscription-based business model or those providing some type of services. For example, ARPA/ARPU is widely employed by telecommunication companies, social media companies and digital media companies.
ARPA/ARPU are not metrics that are recognized by accounting standards such as GAAP or IFRS. However, companies in relevant industries typically disclose the metric and devote a significant amount of time to discussing their ARPA/ARPU results.
These metrics are extremely valuable in providing an overview of a company’s revenue-generating capabilities at the per-customer or per-account level. In addition, it reveals which company’s products or services generate the most and the least revenue.Summary
Average revenue per account (ARPA) or per user (ARPU) is a key measure that assesses a company’s revenue per customer account or user.
ARPA is calculated by dividing the company’s revenue for a period by the number of accounts for the same period. ARPU is calculated by dividing company revenue by the average number of users.
Average revenue per account (ARPA) and average revenue per user (ARPU) cannot always be used interchangeably because one user (customer) can have multiple accounts with a company.ARPA Formula
The calculation of ARPA is quite simple. Just divide the company’s total revenue for a period (month or year) by the total number of accounts for the same period. Mathematically, the ARPA formula can be expressed in the following way:
Note that the number of accounts can fluctuate significantly within one time period. Due to this reason, companies tend to prefer to calculate the average number of accounts for a given period.ARPU Formula
The formula for average revenue per user is as follows:ARPPU Formula
The formula for average revenue per paying user is as follows:
If the measurement period is just one day, it is called average revenue per paying daily active user (ARPPDAU).
If the measurement period is a period of one month, it is called average revenue per paying monthly active user (ARPPMAU).Example
To measure the revenue-generating capabilities on a per-customer level of the company, a research analyst decides to measure the company’s average revenue per unit on a trended basis from Year 1 to Year 3.
On a trended basis, the analyst is able to see that this company is driving revenue creation – the company is acquiring more users while also generating higher revenue per user year-over-year. The analyst concludes that it may be an attractive company and decides to conduct further analysis.
Note that ARPPU is even higher since it is calculated on paying users, which is typically less than total users.New Accounts or Users vs. Existing Accounts or Users
Revenue segmentation can be essential to understanding a company’s revenue-generation dynamics. In addition to revenue analysis by a product or service, the company can evaluate its revenue generation by comparing new and existing accounts or users.
The revenue generation comparison between new and existing accounts allows a company to analyze the behavior of its customers. By understanding revenue trends associated with each group of accounts, a company may adjust its business strategy, as well as make better-informed decisions regarding its core operations.Why is ARPA/ARPU Important?
Average revenue per account or user remains one of the most important metrics for service providers and companies operating on a subscription-based business model. The key applications of the ARPA metric include the following:1. Comparison
ARPA/ARPU is commonly utilized to compare a company’s performance with that of its competitors, as well as compare its performance across time.
For example, if one telecommunications company is generating an ARPA/ARPU of $3 compared to a similar telecommunications company generating an ARPA/ARPU of $2, there is a high probability that the company generating an ARPA/ARPU of $3 is more profitable.2. Customer segmentation
ARPA/ARPU can also be used to indicate the segments of the company’s revenue. The metric can help identify which service or product generates the most/least revenue or which customers (new vs. existing) produce the most revenue.
As an example, Facebook reports ARPU in four geographical segments: (1) US & Canada, (2) Europe, (3) Asia-Pacific, and (4) Rest of the World.3. Revenue forecasting
Revenue forecasting is another important application of ARPA/ARPU. Note that the metric is commonly used as an input for calculating a company’s recurring revenue (MRR or ARR). At the same time, recurring revenue metrics that are distinguished by their predictability and stability are generally utilized as a baseline for revenue forecasting.Additional Resources
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