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What is ARPU?
Average revenue per user (ARPU) is a term used especially in the telecommunications industry to indicate how well a company is accessing its customers’ revenue potential. ARPU is commonly calculated by dividing the aggregate amount of revenue by the total number of users who provide that revenue. Other measurements are tracked as well, including the revenue generated by new customers as compared with the revenue generated by existing customers and the revenue generated by new services as compared with the revenue generated by existing services.
A company that tracks its average revenue per user will most likely want to know its profit potential in broad terms. Mobile phone companies, however, also track ARPU by examining revenues brought in by customers’ incoming calls as compared with revenues generated by monthly or annual fees. In this way, ARPU can be both general and specific.
It’s not just telecom companies that calculate their average revenue per user, however. Internet companies track ARPU as well. So do other electronic service providers. Although it does have some imperfections, ARPU has been found to be a useful method of tracking data, service use and revenue potential.
Many companies — telecom companies especially — find average revenue per user to be a prime indicator of profit potential. ARPU, however, has dangers as well. For instance, with the prevalence of telecom users and the overwhelming variety of services available, the “average” user is thought by many analysts to be a myth. The total number of people who use basic services might not at all equate to the total number of people who use a whole host of services. Using ARPU, however, many of the users in both categories are considered to be in the same avenue of revenue potential.
Another related danger of using average revenue per user exclusively is that it tends to skew toward users of more services. For example, one customer might pay $60 US Dollars (USD) a month for a few services, and another customer might pay $140 USD a month for many more services. Taken together, the ARPU of each of these customers is $100 USD a month. Evaluating solely by average revenue per user, a company might think that both of these customers are subscribing to the same number of services. Decisions made on this incorrect reasoning might have serious consequences when company executives are deciding which services to maintain or discontinue.
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Discussion Comments
very simple and informative article.
If penetration rate is more than 100 percent, what is the denominator in calculating ARPU; the number of users or the number of connections (number of connections > number of users)?
I have been having a discussion with a telco exec. He tells me that it is costlier to maintain pre-paid accounts than post paid accounts from their end.
We were having discussion on why load credits have been lost, spam sms, and more expensive per minute charges on prepaid accounts than post paid.
I hope you can enlighten me on this. Thanks!
It makes me a little bit sick how much ARPU these companies actually do take in! They seem to be ripping us all off to make more and more money. I wish they would think more about customers and less about the bottom line.
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