What is Average Revenue?
Definition: Average Revenue is defined as the revenue per unit of output. It is the same as the average price at which you have sold your commodity in the market. It would be equal to the selling price if all the commodities have been sold at a price in the market.
However, if they are sold at different prices, then it is different from the selling price and should be calculated by dividing total revenue by the total number of products sold.
Average revenue is referred to the revenue earned per unit of the output generated. It is the return or the receipts you get by selling your product in the market.
Total Revenue vs Marginal Revenue vs Average Revenue
Total revenue can be understood as the total income that a business makes by selling goods or services to its customers while marginal revenue (MR) is defined as additional revenue made by a business gained from the additional unit of output.
Ferguson defines marginal as the change in total revenue that results from the sale of one more or one less unit of the total output. While McConnell defines it as “per unit revenue received from the sale of a commodity.”
How to calculate Average Revenue per Unit ARPU?
Average revenue is usually calculated over a fixed period of time. But, it mostly happens that the number of users or buyers is not the same for even the same time. It keeps fluctuating depending on the day, the season, the time, or other parameters.
Therefore, for calculating the average, one must account for the total number of users in the given period and the total revenue earned in that brief time. These quantities should then be used to find the average revenue and not any estimated values.
The mathematical formula for calculating it:
AR = TR / Q
AR = Average Revenue
TR = Total revenue
Q = Output
What is the calculated Average Revenue per Customer used for?
It can be used for various purposes. The company selling its goods gets an idea of the good’s present value in the market. This can help them decide the future course of action if required to boost its sales or the price.
The telecommunications industry uses the concept to find the revenue generated per user per mobile phone. And it is calculated, including not only the bills but the revenue of the incoming calls as well.
Social Media companies also use the figures to report to the investors.
The Behavior of Average Revenue in Different Kinds of Markets
The economic theory divides markets into different types depending on the number of firms, knowledge, mobility, etc. Accordingly, the behavior of avg revenue is different in different types of markets. These are listed below-
1. Perfect Competition
A market structure with many firms selling identical goods, perfect mobility, and perfect knowledge in and out of the market, perfect competition is the ideal market scenario. The firms do not have control because of the perfect knowledge that all the competitors and buyers have. Thus, the average revenue is equal irrespective of any number of users or units sold.
2. Monopolistic, Oligopoly, and Monopoly
The average revenue has the same trend for all the other types of markets that we may talk about. It decreases with an increase in the quantity of the goods sold.
Monopolistic competition is the market structure with many firms, all selling slightly different products. The knowledge and mobility are imperfect too. The AR thus has to decrease if you want the demand to increase. The average revenue v/s quantity curve is also downward sloping.
Oligopolistic competition is a market structure with only a few firms, and thus every firm’s decision is usually dependent on the others’. Here too, the curve is downward sloping.
Monopoly is the market structure with only one firm selling a product in the market. This leads to the firm being the deciding entity. But if the firm wants to increase the sales, it will have to decrease the price, thus making the curve slope downwards.
The average revenue per user of a firm is the average price at which it sells its products. Contrarily, It is the revenue it earns per unit product. It is a major deciding factor regarding the steps that the firm should take in the future.
For example, a lesser value than expected would mean that the firm needs to either upgrade its quality or provide the customers with some offers or schemes to attract the customers or even reduce their selling price a bit. Thus, it decides what course of action a firm would take for its product in the future.
Now, after understanding everything, what will your definition of average revenue? Share with us in the comment section below.