Average Revenue Per User (ARPU): Examples and Calculations

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.

Average Revenue per User Definition: 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.

Metrics like Average Revenue Per User (ARPU) have become increasingly important as every company scrambles to introduce subscriptions.

ARPU is not just about gauging a company’s earnings against its user base; understanding ARPU is also important in mergers and acquisitions (M&A) and valuation analysis.

The Average Revenue per User Formula

You can calculate the Average Revenue per User with the following formula:

Average Revenue per User Formula

ARPU = Total Revenue / Average Number of Users

ARPU tells you how much revenue, on average, a company generates from each user – but it may be measured over different periods, such as one year, one quarter, or one month.

In practice, though, when most companies quote their ARPU, they’re referring to the annual figure for comparability with other companies in the market.

One hitch with this formula is that not all users are created equal, and there’s a huge difference between paid and free users for many digital services.

For instance, a streaming platform may have millions enjoying a “freemium” 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.

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.

Average Revenue per User: A Real-Life Example

Netflix reported a staggering 260 million paid memberships at the end of 2023, generating a total revenue of $34 billion (see: the Netflix 10-K with key sections highlighted):

Netflix Average Revenue per User

We could take this $34 billion and divide by 260 million to calculate the Average Revenue per User, but since this Revenue is earned over the course of the year, it is more accurate to use the “Average Paying Memberships” figure below the end-of-period numbers:

Average Revenue per User = $33.7 billion / 240.889 million =$144.05

This means that, on average, each paid member contributed roughly $144.05 to Netflix’s revenue in 2023.

The company indicates that its “Average Monthly Revenue per Paying Membership” is $11.64, so we can use this to check our work:

$11.64 * 12 = $139.68, which is fairly close to our ARPU estimate above.

It’s off by ~3% due to timing issues, such as when specific members joined or cancelled.

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:

Netflix ARPU Trend

While Netflix’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.

These changes could be due to many factors, ranging from pricing plans and price increases to regional pricing differences to new content offerings.

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.

A declining ARPU might signal increased competition, saturation, a recession, or wage stagnation, making people less willing to pay for the service.

What Does Average Revenue per User Mean in Financial Models and Valuation?

For streaming services, such as Netflix or Hulu, ARPU provides a snapshot of how effectively a company monetizes its user base.

In this context, the ARPU is often a key top-line driver in financial models and SaaS accounting, whether it’s framed on a monthly or annual basis:

Netflix ARPU in a Financial Model

You can also use the Average Revenue per User to evaluate business strategies and their potential effects.

For example, suppose that Netflix expanded its ad tier-supported plans in an attempt to grow its membership.

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.

In this context, a lower ARPU does not necessarily denote a faltering business strategy; instead, it signals a shift in monetization techniques.

In an M&A context, you need to consider the ARPU in relation to the company’s subscriber base and customer acquisition costs.

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, EBIT, EBITDA, and Unlevered Free Cash Flow figures.

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.

In a valuation context, the ARPU is typically a key driver for subscription companies, and a higher ARPU tends to produce higher implied values in a DCF and comparable company analysis – though it also depends on the trade-off between user growth and ARPU discussed above.

Also, any assumptions for a higher ARPU should be accompanied by higher customer acquisition costs because, all else being equal, it costs more to acquire higher-paying customers.

It also costs money to expand the user base, so any financial model based on metrics like annual recurring revenue (ARR) should account for this and demonstrate the trade-offs of user growth vs. ARPU growth.

Average Revenue per User: Final Thoughts

Average Revenue per User (ARPU) is a key metric for SaaS and other subscription companies, as it tells you a lot about a company’s monetization strategy and subscriber base.

Generally, investors want to see the ARPU increase substantially over time, but there are exceptions – 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).

Ultimately, it depends heavily on the company’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.

About Brian DeChesare

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.