ARPPU: Understanding Average Revenue Per Paying User

Average revenue per paying user (ARPPU) is a non-GAAP metric used to assess the average revenue generated from a paying customer. Although similar to average revenue per user (ARPU), the fundamental difference with ARPPU is that the calculation of the metric only involves active paying customers and not the company’s entire customer base. This metric is used to assess the profitability garnered from each paying customer and the company’s revenue-generating capabilities.

Formula for Average Revenue Per Paying User

The formula for average revenue per paying user is as follows:

Where:

• Total revenue is the total revenue generated over the desired measurement period.
• Average number of paying users is the average number of users that pay for the service and/or good over the desired measurement period.

Note:

• If the measurement period is just one day, it is called average revenue per paying daily active user (ARPPDAU).
• If the measurement period is a period of one month, it is called average revenue per paying monthly active user (ARPPMAU).

Example of ARPPU

Marie is an equity research analystEquity Research Interview QuestionsEquity research interview questions and answers. This list includes the most common interview questions used to hire an equity research looking to perform an analysis of ABC Company. The company offers both free and paid services to customers. It reports ARPU but does not disclose ARPPU.

The company’s ARPU was reported to be $1.30 from an average total user base of 769,231, and revenue generated was $1,000,000. In ABC Company’s latest earnings callEarnings GuidanceAn earnings guidance is the information provided by the management of a publicly traded company regarding its expected future results, including estimates, Marie recalls the CFO mentioning that paying customers make up 70% of the total customer base. The following information was compiled by Maria:

Marie could then determine the company’s  ARPPU as follows:

The ARPPU for ABC Company is $1.86 versus its average revenue per user of $1.30.

Usefulness of Average Revenue Per Paying User

ARRPU is seen as an extension to average revenue per user (ARPU)Average Revenue Per User (ARPU)Average revenue per user (ARPU), also known as average revenue per unit, is a non-GAAP metric commonly used by digital media companies,. It is sometimes favored by analysts because the figure takes into consideration paying customers only. With that said, ARPPU is seldom reported by companies and is less commonly used, as opposed to ARPU. The ARPPU can be:

1. Used to compare among peer companies – a higher ARPPU is desirable;
2. Used in financial modeling and forecasting to generate revenue forecasts; or
3. Used to determine the profitability and revenue generation capacity of a company if analyzed on a trended basis.

Key Takeaways

Average revenue per paying user (ARRPU) is a non-GAAP metric used as an alternative to average revenue per user (ARPU). The fundamental difference between ARPPU and ARPU is the fact that the former only takes into consideration paying customers.

Calculated as total revenue divided by the average number of paying users, the ARPPU metric’s usefulness includes being used to compare among peer companies in financial modeling, forecasting, and profitability analysis. It may be a key metric for an internet firm that has a substantial number of both free and paying users.

Additional Resources

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