Average Revenue Per User

By Markets Fool.com

Average revenue per user, or ARPU, is a financial metric that helps a company track the strength of its customer relationships. It's useful for a business that offers multiple tiers of subscription services (like TV providers), but it also comes in handy for those that indirectly generate profits from their user bases, as is the case with many social networking giants.

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Let's look at an example of each of these uses of ARPU.

ARPU in subscriptions

Comcast is one the nation's biggest cable operators, offering broadcast TV, along with high-speed data and phone services. Each of those options is available at multiple tiers, for example through wider selections of programming or ultra-high speed Internet access. And, adding another moving piece to the puzzle, user base trends differ across each segment. Comcast has been losing video subscribers for years but gaining many more customers in the data and phone divisions.

ARPU cuts through those shifts to provide a big-picture look at the cable giant's membership trends. Over the last three years, the metric has improved from $131 per month to $143 per month even as the total user base ticked higher, which means that Comcast's average subscriber pays 9% more each month now than in 2013. That's a good sign for the business because it shows the company is succeeding at upgrading its service while passing along rising costs to its user base.

ARPU in social networks

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In its 10-K annual report, social networking titan Facebook lists ARPU as one of its most important operating metrics. The company generates revenue mostly through selling advertising access to its huge user base, and so a rising ARPU indicates that it is effectively monetizing the service. In other words, advertisers are finding more reasons to ramp their spending up on Facebook, presumably because that spending is providing a strong return on investment.

ARPU rose to $3.73 last year from $2.81 in 2014, for a 32% increase. That happy trend combined with a large spike in users to produce 55% higher revenue, year over year. If Facebook had just managed to boost its user base, its business growth wouldn't be nearly as strong. However, steady user gains in the context of a rising ARPU suggests the company is delivering plenty of value both to its army of users and to its growing pool of advertisers.

ARPU has its weaknesses. For example, it doesn't tell us anything about profitability. And without the context of user base figures, it can imply that operations are healthy even if subscribers are fleeing the service. (If user losses are concentrated in the lower revenue segments, then ARPU will grow even as overall sales drop.)

Yet if used as a complement to metrics like profit margins and sales growth, average revenue per user can be a useful tool in an investor's arsenal.

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The article Average Revenue Per User originally appeared on Fool.com.

Demitrios Kalogeropoulos owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.