Two Ways to Measure Revenue Per User

SaaS). It’s calculated as follows:

ARPU = Total revenue/Average units or subscribers

ARPU = $10,000,000/100,000 = $100

Interpreting ARPU

This is a snapshot of a company’s profitability. It’s a way for companies to track revenue generation over a short or long period. With this information, a company or investor can analyze the business’s past and present performance. It can help determine whether or not the business needs to re-evaluate its operations and product models or if an investor should invest in a company.

When it comes to evaluating an investment, if one company in a specific industry is generating an ARPU of $5 and another company is generating an ARPU of $3, the first company could be a more attractive investment. Similarly, if the trend of a company’s ARPU is increasing, it’s worth looking at how the company’s stock has performed. Additional investment research can determine how the company’s stock price is appreciated.

Average Revenue Per Paying User (ARPPU)

ARPPU is used to determine the average revenue from a company’s paying customers only. To contrast this measurement type, ARPU factors in all users.

Assume the following: A business had revenue of $2 million, an average user base of 1 million, and an ARPU of $2.

If, however, we’re looking at the ARPPU, we need to take out the non-paying user base. If the non-paying user base is determined to be 425,000, the remaining paying base is 575,000. Use the following formula to calculate ARPPU:

ARPPU = Period of Recurring Revenue/Active Paying Users during the same measurement period

ARPPU = $2 million/575,000 = $3.48 per active paying user

Interpreting ARPPU

When the ARPPU is low, this indicates the business’ products or services aren’t well received by customers and those to whom it is marketing. A higher ARPPU indicates a company’s marketing efforts, products, and services are received well by customers. Similar to ARPU, results from ARPPU can be analyzed for trends to see when products or services are well received; and then investigated to determine whether it is influenced by the sales and marketing, customer service, product quality, etc.

Whichever way a business analyzes its sales and revenue generation processes, taking multiple approaches can provide different perspectives to help owners and employees determine when and where to make improvements to its operations.

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Understanding the Weighted Average Cost (WAC) Method for Inventory Valuation

tranche contributes to the overall valuation of its cost of goods sold (COGS) and inventory. Recognized by both GAAP and IFRS, it’s determined by taking the cost of goods available for sale and dividing it by the quantity of inventory ready to be sold. It’s important to note that while WAC is a generally accepted accounting principle, it’s not as precise as FIFO or LIFO; however, it is effective at assigning average cost of production to a given product.

It’s done primarily for types of inventories where parts are so intertwined that it makes it problematic to attribute clear-cut expenditures to a particular part. This often happens when stockpiles of parts are indistinguishable from each other. It also accounts for businesses offering their inventory for sale all at once. Here’s a visual representation of the formula: 

Weighted Average Cost (WAC) Method Formula

WAC per unit = Cost of goods available for sale / Units available for sale

Costs of goods available for sale is determined by adding new purchases of inventory to the value of what the business already had in its existing stock. Units available for sale is how many saleable items the company possesses. Its value is assessed per item and encompasses starting inventory and additional purchases.

When it comes to calculating WAC, there are two different types of inventory analysis systems: periodic and perpetual.

Periodic Inventory System

In this system, the business tallies its inventory at the end of the accounting period – be it a quarter, half or fiscal year – and analyzes how much the inventory costs. This then determines the value of the remaining inventory. The COGS is then calculated by adding how much starting, final, and additional inventory within the accounting period cost.

Perpetual Inventory System

This system puts a bigger emphasis on more real-time management of its stock levels. The trade-off for such real-time tracking of inventory requires more company financial resources. Looking at an example of how a company began its fiscal year with the following inventory can illustrate how it works.

At the beginning of the year, a company had 1,000 units, costing $50 per unit. It also made three additional inventory purchases going forward.

Jan 20: 75 units costing $100 = $7,500

Feb 17: 150 units costing $150 = $22,500

March 18: 300 units costing $200 = $60,000

During the fiscal year, the business sold:

235 units sold during the last week of February

325 units sold during the last week of March

Looking at the Periodic Inventory System, for the first three months of its fiscal year, the company can determine its COGS and the number of items ready to be sold over the first three months of its fiscal year.

WAC per item – ($50,000 + $7,500 + $22,500 + $60,000) / 1,525 = $91.80

Based on this method, the WAC per unit would be multiplied by the number of units sold during the accounting period, therefore:

560 units x $91.80 = $51,408 (inventory sold)

To calculate the final inventory value, we take the entire purchase cost and subtract the remaining inventory to arrive at the valuation:

$140,000 – $51,408 = $88,592

Perpetual Inventory System

Unlike the periodic inventory system, this looks at determining the mean prior to the transaction of items:

This would calculate the average before the 235 units were sold during the last week of February:

WAC for each item: ($50,000 + $7,500 + $22,500) / 1,225 = $65.31

Looking at the 235 units sold during the last week of February, it’s calculated as follows:

235 x $65.31 = $15,347.85 (inventory sold)

$80,000 – $15,347.85 = $64,652.15 (remaining inventory value)

Before calculating for the 325 units sold the last week of March, the unit valuation per WAC is: ($64,652.15 + $60,000) / (1225 – 235 + 300) = 1290 = $96.63

Looking at the 325 units sold during the last week of March is calculated as follows:

325 x $96.63 = $31,404.75 (inventory sold)

$124,652.15 – $31,404.75 = $93,247.40 (remaining inventory)

Based on these options, businesses have the choice, along with LIFO and FIFO, to decide how they want to vary it based on their own business needs.