The application and interpretation of metrics that clarify the commercial behavior of an organization is a common concern for entrepreneurs and managers in general.
If you want your brand to thrive, one of the most important performance indicators you need to know and track is ARPU , also known as average revenue per user.
Knowing the average revenue per user is helpful. It can be considered an introspective measurement that reveals the growth patterns of a business organization.
Let’s look at the Facebook example:
According to Statista , during the fourth quarter of 2020, the average revenue per Facebook user in Europe amounted to $ 16.87. While in the United States and Canada market it was $ 53.56.
When comparing these data with those of the same period of the previous year, it is observed that the average income per user of Facebook has experienced a sustained increasing trend throughout the period in all geographical areas.
It is not just Facebook that makes these accounts. In the environment of an accelerated digital transformation , with an increase in subscriptions to digital products and services, knowing how to calculate ARPU is crucial.
If you are interested in learning how to calculate the average revenue per user and discover the benefits of applying this metric in your organization, you have come to the right text. Join us!
Average Revenue: What is ARPU?
Definition of ARPU
ARPU comes from the English Average Revenue Per Use . It is an acronym, whose translation into Spanish is average revenue per user . It is a relatively new term, closely linked to digital marketing.
According to Wikipedia , the concept of average revenue per user is defined as “a key indicator, used mainly by telecommunications, services and digital media companies .”
Although it is a widely used indicator by landline and digital telephone companies, as well as by Internet providers, the average revenue per user is a useful metric for any service company.
By revealing the average income for each user in a given period of time, it is a very useful metric within the performance indicators of the commercial organization.
Relationship between ARPU and CLTV
Do not confuse Average Revenue Per User (ARPU) with Customer Lifetime Value (CLTV). Both metrics measure the customer’s contribution to the company, but from different perspectives.
From the English customer lifetime value, CLTV is a metric that seeks to establish the profitability of the organization, beyond the gross economic contribution of the consumer.
This is why CLTV introduces cost-related variables into its formula, such as technological support , the amount spent for bank transfers and reimbursements, among others.
For its part, the average revenue per user is a more general performance indicator, the purpose of which is to offer a more comprehensive view of the business operation of the company.
How to calculate ARPU?
Variables that make up the ARPU formula
ARPU is obtained by dividing the total revenue of an organization by the total of active customers in the same period. Like any formula, the first step is the correct determination of the variables that comprise it.
Despite not constituting a variable within the ARPU formula, the definition of the period is crucial. Once selected, it should not undergo variations, in order to better verify the evolution of the company.
Generally, the month or year is used as the primary period to calculate the ARPU. Some brands use bimesters, quarters, or other time frames. The choice depends on the particularities of your company.
Next, we show you the two variables that you must identify precisely, before applying the ARPU formula and calculating the average revenue per user in your organization.
Variable 1. Total income
Total income in a period is determined by multiplying the quantity of goods and services sold or contracted in the stage by the price of these goods or services.
Take for example the case of Netflix . The platform’s total revenue in 2020 reached $ 25 billion, up from $ 20 billion in 2019.
To calculate these figures, it was necessary to multiply the number of subscribers in each region by the price of the contracted service. The same service does not have the same value in the USA as in Colombia, for example.
The example above illustrates the levels of complexity that calculating total revenue can have in a global organization. In SMEs, in general, this calculation is easier.
Variable 2. Number of consumers
The establishment of this variable is directly related to the definition of consumer assumed by the brand. In some they can be the active subscribers and in another the buyers of the month.
For this number to be accurate and reliable, careful recording of customer interactions with the organization is crucial . A sales CRM is very useful in this regard.
But let’s move on with the Netflix example. A report revealed that by 2020 the platform reached the 200 million user mark globally.
With these two variables already defined, let’s see the Nextflix ARPU calculation for 2020 below.
Example of calculating the average revenue per user
As we had already anticipated, the formula to calculate the average revenue per user is very simple. In the Netflix example for 2020 it would look like this:
ARPU = Total revenue / Number of consumers
ARPU = 25,000,000,000 / 200,000,000
ARPU = 125
Based on these data, Netflix’s average revenue per user during 2020 was $ 125.
5 advantages of knowing the average revenue per user
- It allows an objective comparison with the performance of the competition;
- Contributes to customer segmentation ;
- Facilitates the choice of customer acquisition channels;
- It allows to make forecasts of income in the short and medium term;
- Facilitates decision making about products and services.
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