Average Revenue Formula

What is Average Revenue?

Average revenue is defined as the measurement of the revenue that is generated per unit. ARPU abbreviated as Average Revenue Per Unit is also known as the average revenue per user. This is a non- GAAP measure that allows the management of a company, helps the investors to refine their analysis with a company's revenue generation capability and the growth rate is also traced at the per-unit level. This is usually calculated as the total revenue that is divided by the number of units, number of users, or number of subscribers.

Average Revenue Formula

The formula for Average revenue is pretty simple, this is the revenue that is earned per unit of the output. In simpler words, this is the price of one unit of the output. Average revenue can be expressed as follows:

AR = TR/Q 

where AR – Average Revenue

TR – Total Revenue

Q – Quantity of the commodity sold.

For example, if a firm sells 1000 units of a commodity and realizes their total revenue of Rs. 10,000. Therefore, its average revenue is

AR = 10,000/1000 = Rs.10

Thus, the firm sells the commodity at a price of Rs. 10 per unit.

Average Revenue Per Unit (ARPU)

The average revenue per unit is equal to the total revenue which is divided by average units or the users in a particular period. The period’s ending date is not the measure of the date for the denominator as the number of units is vulnerable to fluctuation in the intra-period. Instead of this, the beginning of the period and the end time of the period numbers are generally averaged.

Well, the number of units or the users will not remain constant throughout the time period. This can vary somewhat from daily, as new users appear or the old users cease to take the advantage of the goods and services. Therefore, the number of units which is for a given period is estimated, for this will give the most accurate ARPU figure possible required for that period.

Uses of Average Revenue Per Unit 

This measure of ARPU is used in the telecommunications sector by Verizon, AT & T, and others. In order to track the amount of the revenue which is generated per mobile phone user of that particular sector over a period of time. In the mobile telephone industry, ARPU is calculated not only by using the revenue billed to the customer each month for user subscriptions, but also by the revenue generated from any incoming calls that are payable under the regulatory interconnection system.

Cable companies like Comcast also disclose the ARPU figures. The values of the measures that are obtained can be used internally as well as externally as a comparison from among the subscriber-based companies and to assist in the forecasting of their future service revenues that are produced from a customer base.

Average Revenue Curve

A curve that graphically represents the relation between the average revenue that is received by a firm for selling the output and the quantity of output sold by the specific firm. As average revenue is quite essentially the price of a good, the average revenue curve is also deemed as the demand curve for a particular firm's output. The average revenue curve for a firm with no market control is a horizontal line. While the average revenue curve for a firm with market control is negatively sloped.

The curve represents the relation between the average revenue a firm receives from production and the quantity of the output which is produced. The average revenue curve reflects the degree of market control which is controlled by the firm.

For a perfectly competitive firm with no market control, the average revenue curve is only a horizontal line. For those firms with good market control, especially the monopolies, the average revenue curve is a negatively-sloped curve.

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Average Revenue Curve in a Perfectly Competitive Firm

The average revenue curve of the perfectly competitive firm is a horizontal line as it faces a perfectly elastic demand at the market which has determined its price. This is for the condition as there is a significant number of buyers and sellers trading in the market alongside with perfect information meaning that if a firm somehow wants to raise its price, the customers in the market would move to a different producer and purchase the good at their original price and the firm who raised their price would receive 0 revenue. Marginal revenue is horizontal because the increase in the revenue from producing one unit of output is equal to the price of good meaning that it remains constant, thus the curve is horizontal. 

FAQs (Frequently Asked Questions)

1. Explain Revenue.

Ans. Revenue is the type of income that is generated from normal business operations and this includes discounts and other deductions for the returned merchandise. This is the top line or gross income figure on which costs are subtracted to determine the net income. Revenue is quite vital for a start-up to get positive revenue quite in an early time period.

Revenue is the income that is generated by an organization while receiving from its normal business activities. In the case of a corporation, they are usually from the sale of goods and services to the customers. In the case of a government, the revenue generally comes from taxes.

2. What is a Demand Curve?

Ans. The demand curve, in economics, is a graphical representation of the relationship that exists between a product price and the quantity of the product which is demanded. It is drawn with the price on the vertical axis of the graph and the quantity demanded on the horizontal axis of the curve.

The curve determines how much quantity any particular commodity that the people are willing to purchase with the corresponding changes in its price. The curve is represented as the price of the commodity on the y-axis and the quantity which is demanded on the x-axis in a graph.

3. What is a Perfectly Competitive Firm?

Ans. A perfectly competitive firm is generally a price taker, this means that the firm must accept the equilibrium price at which the firm sells goods to the locals. Perfect competition occurs when there is a number of sellers, and there is easy entry as well as an exit for the firms, the products are identical from one another, and the sellers are called the price takers.