ARPU: What is average revenue per user, and how is it calculated?

ARPU is an important indicator of a telecom company's business health. Here is what it means

Bharti Airtel, on August 3, announced its first quarter results of the current financial year (Q1FY24), which saw its average revenue per user (ARPU) rise to Rs 200. This is the first time in at least ten years that Airtel or any other telecom company has seen an ARPU of Rs 200.

In an interview in June 2023, Sunil Mittal, chairman of Bharti Airtel, said that the rock-bottom ARPU was hurting the industry.

"I have maintained for a long number of years that we need an ARPU of Rs 300," Mittal said.

He added, "Now it is nearing Rs 200, which is the first pit stop. It has taken us much longer than I had imagined to reach this level."

Airtel, the biggest service provider by subscriber numbers, recorded an ARPU of Rs 200 for the first quarter of the current financial year, while the ARPU for Reliance Jio stood at Rs 180.5, and Vodafone Idea at Rs 139.

Airtel's ARPU has grown 9.28 per cent from Rs 183 in the first quarter of the previous financial year, much sharper than the 2.8 per cent in Jio's case. For Vodafone Idea, it is up 8.5 per cent, but from the much lower base of Rs 128, while its subscriber base continues to shrink.

What is average revenue per user or ARPU?

The average revenue per user (ARPU) refers to the revenue a telecom company generates per connection over a specific period. Airtel's ARPU of Rs 200 means it generates a revenue of Rs 200 per user per month.

It is used as a benchmark metric to project the revenue of telecom business.

It is a measure of how much money a company is making from each individual customer on average.

How do you calculate ARPU?

The ARPU is calculated by dividing the total revenue generated by a business by the total number of active users or customers.

ARPU = Total revenue / number of users or customers

The value of ARPU can vary across companies, depending on factors such as the pricing model, user base size, and the range of services offered.

The calculation of ARPU can include the following metrics:

-Upgrade monthly recurring revenue (MRR): Revenue obtained from subscriptions that have upgraded from a lower to a higher plan.

-Downgrade MRR: Revenue lost due to subscriptions moving to lower plans.

-Churned MRR: MRR lost due to customers cancelling their subscriptions or reducing the number of features used

Why is ARPU important?

-Performance measurement

The ARPU of a business helps to track and assess the financial performance over time.

-Customer segmentation

ARPU can be used to segment customers based on their spending habits or usage, such as identifying high-value customers, target marketing efforts, and developing services for a specific user.

-Benchmarking

Telecom companies can use ARPU to compare their performance against its competitors.

-Pricing strategy

An analysis of the ARPU can inform a company about its pricing strategy, which further helps to highlight areas for potential price adjustments or changes in product offerings to increase revenue.

-Retaining customers

A decline in ARPU may mean that customers are not finding value in a company's products, leading to reduced usage or customer churn. In this case, the telecom operator can take appropriate steps to increase customer retention.