{"id":27996,"date":"2024-02-03T20:36:03","date_gmt":"2024-02-04T01:36:03","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=27996"},"modified":"2024-09-25T18:02:54","modified_gmt":"2024-09-25T23:02:54","slug":"average-revenue-per-user","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/average-revenue-per-user\/","title":{"rendered":"Average Revenue Per User (ARPU): Examples and Calculations"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Average Revenue Per User (ARPU): Examples and Calculations<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/average-revenue-per-user\/#The_Average_Revenue_per_User_Formula\">The Average Revenue per User Formula<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/average-revenue-per-user\/#Average_Revenue_per_User_A_Real-Life_Example\">Average Revenue per User: A Real-Life Example<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/average-revenue-per-user\/#What_Does_Average_Revenue_per_User_Mean_in_Financial_Models_and_Valuation\">What Does Average Revenue per User Mean in Financial Models and Valuation?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/average-revenue-per-user\/#Average_Revenue_per_User_Final_Thoughts\">Average Revenue per User: Final Thoughts<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Average Revenue per User Definition:<\/strong> The Average Revenue per User (ARPU) indicates, for subscription companies, the annual revenue generated by an average user based on their subscription fees and service usage.<\/p><\/blockquote>\n<p>Metrics like Average Revenue Per User (ARPU) have become increasingly important as every company scrambles to introduce subscriptions.<\/p>\n<p>ARPU is not just about gauging a company&#8217;s earnings against its user base; understanding ARPU is also important in mergers and acquisitions (M&amp;A) and valuation analysis.<\/p>\n<div class='code-block code-block-9' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22172829\/vc-tile.png\" alt=\"Venture Capital & Growth Equity Modeling\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Model and Value Startups, Understand Cap Tables, and Prepare for VC Interviews<\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Evaluate companies and deals like a pro<\/h4>\n              <p>You\u2019ll understand cap tables, startup\/growth valuations, and exits<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Master financial modeling<\/h4>\n            <p>You\u2019ll build forecasts and analyze metrics for tech and biotech startups<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 9 case studies<\/h4>\n            <p>You\u2019ll learn the numbers and how to make investment recommendations\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/venture-capital-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Venture-Capital-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"The_Average_Revenue_per_User_Formula\"><\/span>The Average Revenue per User Formula<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You can calculate the Average Revenue per User with the following formula:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27997 size-full\" title=\"Average Revenue per User Formula\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203421\/01-Average-Revenue-per-User-Formula.jpg\" alt=\"Average Revenue per User Formula\" width=\"1126\" height=\"244\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203421\/01-Average-Revenue-per-User-Formula.jpg 1126w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203421\/01-Average-Revenue-per-User-Formula-300x65.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203421\/01-Average-Revenue-per-User-Formula-1024x222.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203421\/01-Average-Revenue-per-User-Formula-768x166.jpg 768w\" sizes=\"(max-width: 1126px) 100vw, 1126px\" \/><\/p>\n<p>ARPU = Total Revenue \/ Average Number of Users<\/p>\n<p>ARPU tells you how much revenue, on average, a company generates from each user &#8211; but it may be measured over different periods, such as one year, one quarter, or one month.<\/p>\n<p>In practice, though, when most companies quote their ARPU, they&#8217;re referring to the\u00a0<strong>annual figure<\/strong> for comparability with other companies in the market.<\/p>\n<p>One hitch with this formula is that\u00a0<strong>not all users are created equal<\/strong>, and there&#8217;s a huge difference between <strong>paid and free users<\/strong> for many digital services.<\/p>\n<p>For instance, a streaming platform may have millions enjoying a \u201cfreemium\u201d version, but a smaller fraction might be premium, paying members. In such a case, you may need to segment the ARPU calculation to gain better insights.<\/p>\n<p>Segment analysis breaks down ARPU by user type or region, and it provides a more granular view that can help companies and potential investors identify growth areas or divisions that might be underperforming.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Average_Revenue_per_User_A_Real-Life_Example\"><\/span>Average Revenue per User: A Real-Life Example<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Netflix reported a staggering 260 million paid memberships at the end of 2023, generating a total revenue of $34 billion (see: <a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Startups-VC\/NFLX-10-K.pdf\" target=\"_blank\" rel=\"noopener\">the Netflix 10-K with key sections highlighted<\/a>):<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27998 size-full\" title=\"Netflix Average Revenue per User\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203452\/02-Netflix-Average-Revenue-per-User.jpg\" alt=\"Netflix Average Revenue per User\" width=\"1680\" height=\"879\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203452\/02-Netflix-Average-Revenue-per-User.jpg 1680w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203452\/02-Netflix-Average-Revenue-per-User-300x157.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203452\/02-Netflix-Average-Revenue-per-User-1024x536.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203452\/02-Netflix-Average-Revenue-per-User-768x402.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203452\/02-Netflix-Average-Revenue-per-User-1536x804.jpg 1536w\" sizes=\"(max-width: 1680px) 100vw, 1680px\" \/><\/p>\n<p>We could take this $34 billion and divide by 260 million to calculate the Average Revenue per User, but since this Revenue is earned\u00a0<em>over the course of the year<\/em>, it is more accurate to use the &#8220;Average Paying Memberships&#8221; figure below the end-of-period numbers:<\/p>\n<p><strong>Average Revenue per User<\/strong> = $33.7 billion \/ 240.889 million =<strong>$144.05<\/strong><\/p>\n<p>This means that, on average, each paid member contributed roughly $144.05 to Netflix&#8217;s revenue in 2023.<\/p>\n<p>The company indicates that its &#8220;Average Monthly Revenue per Paying Membership&#8221; is $11.64, so we can use this to check our work:<\/p>\n<p>$11.64 * 12 = $139.68, which is fairly close to our ARPU estimate above.<\/p>\n<p>It&#8217;s off by ~3% due to timing issues, such as when specific members joined or cancelled.<\/p>\n<p>We can compare this ARPU with the numbers in previous years to draw a trendline and understand whether the company is extracting more or less value from each user:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27999 size-full\" title=\"Netflix ARPU Trend\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203517\/03-Netflix-ARPU-Trend.jpg\" alt=\"Netflix ARPU Trend\" width=\"870\" height=\"512\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203517\/03-Netflix-ARPU-Trend.jpg 870w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203517\/03-Netflix-ARPU-Trend-300x177.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203517\/03-Netflix-ARPU-Trend-768x452.jpg 768w\" sizes=\"(max-width: 870px) 100vw, 870px\" \/><\/p>\n<p>While Netflix&#8217;s ARPU has increased, most of the increases occurred in much earlier years; in the past few years, this metric has stagnated, even as its membership base has grown.<\/p>\n<p>These changes could be due to many factors, ranging from pricing plans and price increases to regional pricing differences to new content offerings.<\/p>\n<p>If ARPU is rising, users may see enhanced value in the platform or may be more willing to pay due to increases in real wages.<\/p>\n<p>A declining ARPU might signal increased competition, saturation, a recession, or wage stagnation, making people less willing to pay for the service.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_Does_Average_Revenue_per_User_Mean_in_Financial_Models_and_Valuation\"><\/span>What Does Average Revenue per User Mean in Financial Models and Valuation?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>For streaming services, such as Netflix or Hulu, ARPU provides a snapshot of how effectively a company monetizes its user base.<\/p>\n<p>In this context, the ARPU is often a\u00a0<strong>key top-line driver<\/strong> in <a href=\"https:\/\/mergersandinquisitions.com\/financial-modeling\/\" target=\"_blank\" rel=\"noopener\">financial models<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/\" target=\"_blank\" rel=\"noopener\">SaaS accounting<\/a>, whether it&#8217;s framed on a monthly or annual basis:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-28000\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203542\/04-Netflix-ARPU-Drivers.jpg\" alt=\"Netflix ARPU in a Financial Model\" width=\"1784\" height=\"306\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203542\/04-Netflix-ARPU-Drivers.jpg 1784w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203542\/04-Netflix-ARPU-Drivers-300x51.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203542\/04-Netflix-ARPU-Drivers-1024x176.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203542\/04-Netflix-ARPU-Drivers-768x132.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/03203542\/04-Netflix-ARPU-Drivers-1536x263.jpg 1536w\" sizes=\"(max-width: 1784px) 100vw, 1784px\" \/><\/p>\n<p>You can also use the Average Revenue per User to evaluate business strategies and their potential effects.<\/p>\n<p>For example, suppose that Netflix expanded its ad tier-supported plans in an attempt to grow its membership.<\/p>\n<p>While this could attract a larger audience reluctant to pay the full subscription cost, it might bring down the ARPU since ad-supported tiers often generate less revenue than premium subscriptions.<\/p>\n<p>In this context, a lower ARPU does not necessarily denote a faltering business strategy; instead, it signals a shift in monetization techniques.<\/p>\n<p>In an M&amp;A context, you need to consider the ARPU in relation to the company&#8217;s\u00a0<strong>subscriber base<\/strong> and\u00a0<strong>customer acquisition costs<\/strong>.<\/p>\n<p>For example, suppose that Company A has a lower ARPU but a massive user base, while Company B boasts a higher ARPU but fewer subscribers. Both have similar Revenue, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebit-operating-income\/\" target=\"_blank\" rel=\"noopener\">EBIT<\/a>, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/ebit-vs-ebitda\/\" target=\"_blank\" rel=\"noopener\">EBITDA<\/a>, and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow<\/a> figures.<\/p>\n<p>The more attractive acquisition candidate depends on whether the acquirer prefers a larger user base or a high willingness to pay; the scalability, market potential, and competitive landscape also factor in.<\/p>\n<p>In a valuation context, the ARPU is typically a <strong>key driver<\/strong> for subscription companies, and a higher ARPU tends to produce higher implied values in a <a href=\"https:\/\/mergersandinquisitions.com\/dcf-model\/\" target=\"_blank\" rel=\"noopener\">DCF<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/comparable-company-analysis-cca\/\" target=\"_blank\" rel=\"noopener\">comparable company analysis<\/a> \u2013 though it also depends on the trade-off between user growth and ARPU discussed above.<\/p>\n<p>Also, any assumptions for a higher ARPU should be accompanied by <strong>higher customer acquisition costs<\/strong> because, all else being equal, it costs more to acquire higher-paying customers.<\/p>\n<p>It also costs money to expand the user base, so any financial model based on metrics like <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/annual-recurring-revenue-arr\/\" target=\"_blank\" rel=\"noopener\">annual recurring revenue (ARR)<\/a> should account for this and demonstrate the trade-offs of user growth vs. ARPU growth.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Average_Revenue_per_User_Final_Thoughts\"><\/span>Average Revenue per User: Final Thoughts<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Average Revenue per User (ARPU) is a\u00a0<strong>key metric<\/strong> for SaaS and other subscription companies, as it tells you a lot about a company&#8217;s monetization strategy and subscriber base.<\/p>\n<p>Generally, investors want to see the ARPU increase substantially over time, but there are exceptions &#8211; and it might be worthwhile for a company to grow its membership even if it means a falling or stagnant ARPU (as in the Netflix example).<\/p>\n<p>Ultimately, it depends heavily on the company&#8217;s market, maturity stage, and growth potential: More mature companies with limited user growth potential often try to optimize their ARPUs, while younger companies often focus on user growth and worry about the ideal monetization later.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Average Revenue per User (ARPU) indicates, for subscription companies, the annual revenue generated by an average user based on their subscription fees and service usage.<\/p>\n","protected":false},"featured_media":29331,"template":"","class_list":["post-27996","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-venture-capital"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/27996","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/29331"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=27996"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}