What it means
A business with a customer base can grow revenue in two ways: more customers, or more revenue from each. ARPU isolates the second.
A mobile operator with 10 million subscribers and $3 billion of annual revenue has ARPU of $300 a year, or $25 a month. If ARPU rises to $27 with the same subscriber count, revenue rises 8% without a single new customer.
If ARPU falls while subscribers grow, the business may be buying growth with discounts, or its new customers may be lower-value than its existing ones. The measure is only as clear as its definition of a user.
Businesses choose between all registered users, active users (those who used the service in the period), and paying users, and the choice changes the figure dramatically. A free-to-play game with 10 million monthly active users and $5 million of monthly revenue has ARPU of $0.50; if only 300,000 of them pay, average revenue per paying user is $16.67.
Both numbers are useful, but they answer different questions, and comparing one company's ARPU with another's requires the same definition. ARPU is a diagnostic rather than a target.
Rising ARPU may come from price increases, from customers migrating to premium tiers, from add-on sales, or from losing low-value customers, and each has different implications. Falling ARPU may come from discounting, from a shift to a cheaper plan, or from successful expansion into a mass-market segment, which may be exactly what the business intended.
Segmenting ARPU by plan, by acquisition cohort, by region and by channel turns the average into a map. ARPU also feeds directly into customer lifetime value: multiplying ARPU by gross margin and by expected customer lifetime gives the gross profit a customer will generate, which sets the ceiling on what the business can afford to spend to acquire one.
In practice
Real-world examples.
Example
A mobile network reports ARPU of $42 a month for contract customers and $11 for prepaid customers, and focuses its retention spending on the contract base.
Example
A social media platform reports ARPU of $12 a quarter in North America and $1.20 in emerging markets, reflecting advertising rates rather than user behaviour.
Example
A software company raises prices 8% across its plans and sees ARPU rise 6%, the difference being customers who downgraded rather than pay more.
Think of it
“ARPU shows how much money each user brings in on average-your per-customer revenue.
Formula
Calculation
ARPU = Total Revenue in the period / Average Number of Users in the period
Average Revenue Per Paying User (ARPPU) = Total Revenue / Average Number of Paying Users
Customer Lifetime Value (simplified) = ARPU x Gross Margin x Average Customer Lifetime
Worked example. A streaming service reports for a quarter:
- Revenue: $36,000,000
- Subscribers at start of quarter: 1,150,000; at end: 1,250,000
- Average subscribers = 1,200,000
- Quarterly ARPU = $36,000,000 / 1,200,000 = $30.00
- Monthly ARPU = $10.00
The service has two tiers: a basic plan at $8 a month with 900,000 subscribers on average and a premium plan at $15 with 300,000. Blended monthly ARPU = (900,000 x $8 + 300,000 x $15) / 1,200,000 = ($7,200,000 + $4,500,000) / 1,200,000 = $9.75, slightly below the reported $10.00 because add-on purchases contribute the remaining $0.25.
Strategy test: if a marketing push moves 100,000 basic subscribers to premium, monthly revenue rises by 100,000 x $7 = $700,000 and ARPU rises to $10.58 with no change in subscriber numbers. If instead the service adds 200,000 new subscribers on a $5 introductory offer, subscribers rise to 1,400,000 and monthly ARPU falls to about $9.29, while revenue rises by $1,000,000. Both are growth; the first is more profitable per subscriber and the second builds a base to upsell later.
Lifetime value: with monthly churn of 2.5% (an average lifetime of 40 months) and a gross margin of 60%, lifetime value per subscriber is $10.00 x 60% x 40 = $240. The service can justify spending up to about $80 to acquire a subscriber if it wants a three-to-one return.Case study
Seen in the real world.
A meal-kit subscription company grew its subscriber base 60% in a year through discount-led marketing and celebrated the milestone. Its finance team's cohort analysis told a less comfortable story. ARPU for subscribers acquired that year was $48 a month against $71 for earlier cohorts, because the new customers chose the smallest box, used the introductory discount and then churned at twice the rate.
Blended ARPU had fallen 18%, and the marketing cost per subscriber had risen. Lifetime value for the new cohorts was below acquisition cost. The company changed its acquisition strategy to target households with children (historically the highest-ARPU segment), cut the introductory discount in half, and introduced an upsell to a larger box at week four.
Subscriber growth slowed to 25%, but ARPU recovered to $65 within two quarters and the company reached profitability a year ahead of its plan. The finance director's point to the board was that subscribers are not all worth the same, and ARPU is how you tell.
Watch out
Common mistakes.
- Comparing ARPU figures that define "user" differently. Registered, active and paying users give very different numbers.
- Reading falling ARPU as failure without checking whether it reflects deliberate expansion into a lower-value segment.
- Tracking only the blended average. Segment and cohort ARPU show what is actually happening.
Questions
People also ask.
What is a good ARPU?
It depends entirely on the business. The useful comparisons are with the company's own history, its segments and direct competitors using the same definition.
How is ARPU different from average order value?
ARPU measures revenue per customer over a period, across all their purchases. Average order value measures revenue per transaction.
How does ARPU relate to lifetime value?
Lifetime value is roughly ARPU times gross margin times the number of periods a customer stays. Raising ARPU or reducing churn both increase it.
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