Why Average Revenue Per User Can Be Misleading
from the not-this-again dept
In the telco world, there’s an ongoing infatuation with “ARPU” (Average Revenue Per User, for those just joining us). It’s a stat that execs obsess over. Wall Street talks about which operators have the highest or lowest ARPUs and which direction the ARPU moves every quarter or year. ARPU can be useful in some ways, but the level to which it’s relied on as an indicator of how successful an operator is can be quite problematic. Take, for example, a new study that is warning that while voice ARPU is declining and data ARPU is increasing for mobile operators, the increase in data ARPU isn’t closing the gap created by the losses in voice ARPU. This leads to execs thinking that they need to figure out ways to quickly increase data ARPU or slow the decline in voice ARPU — which could be a strategic mistake. First of all, as markets get more mature, operators are increasingly looking towards the margins to pick up new customers who have never had service before. In most cases, those subscribers are going to want cheap intro plans to see why it’s worthwhile. In other words, those customers drive down ARPU, but increase incremental revenue. That should be good, but is seen as bad. Meanwhile, when it comes to data ARPU, the industry still hasn’t done a great job convincing many users why or how they should use mobile data offerings. Keeping the barriers low helps to get more people experimenting and seeing the benefits of mobile data usage — even if it keeps data ARPU low. Pushing up the rates too quickly means that you cut off a large segment of the potential market — or open them up to a competitor who isn’t as infatuated with meeting certain ARPU standards.
Comments on “Why Average Revenue Per User Can Be Misleading”
Dog Sushi Economics
A Tokyo Sushi chef left 30 rotting dog heads in a ditch next to a prison, because he couldn’t find enough customers for dog brain sushi.
If the chef had online delivery services, he might not have had to dump 30 heads next to a prison.
Why it's important
One of the reasons that this is more important than your post implies is that there are two pieces to the equation: ARPU and the cost to acquire that user.
The marginal users that telecoms are acquiring today are also more expensive to acquire (they need more convincing, greater incentive, etc). So they end up with increasing costs to acquire the marginal user but lower ARPU.
Obviously, this game runs out somewhere, where the marginal users are no longer profitable. One way that companies use to mask/delay the fact that their new users aren’t profitable anymore is by emphasizing the new services for their existing users. Slow data uptake means that this game has far less impact than is touted by management, and is enormously important.
Re: Why it's important
I don’t deny that it’s a useful stat, but you have to admit that execs, Wall St. and analysts put WAY too much weight on it, without thinking about why it doesn’t always make sense.