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Snap’s strategy when it comes to growing its business is more about quality than quantity.
That is, Snap believes it can grow its business by generating substantially more revenue from each of its existing users — a strategy that would mean sales go up even if its user base doesn’t grow at the same rate.
The best way to measure if that strategy is actually working is a metric called ARPU, or the average revenue [generated] per user. When Snap filed for an IPO earlier this year, it specifically mentioned ARPU as a key way to measure its revenue growth, and the company explained that it was primarily focused on adding new users in developed advertising markets to help bolster this number.
The thinking: Snap can make a lot more money from a new user in the United States than it can from a new user in Vietnam. So that’s where it’s focused on growing.
When the company reports its second-quarter results this Thursday, Aug. 10, ARPU will be a key number to look for to see if this strategy is working.
So how is Snap’s ARPU doing? And what would constitute a positive report?
RBC Capital’s Mark Mahaney believes Snap will report ARPU of $1.19 per user in Q2, growth of 138 percent year over year. That’s a big jump, but actually slower growth than Snap has reported the past two quarters. In Q1, ARPU almost tripled year over year. It more than tripled in the fourth quarter of 2016, to $1.05.
For some perspective, let’s compare Snap’s ARPU to the company that Snap would love to emulate: Facebook. Leading up to Snap’s IPO, those close to the messaging company even argued that Snap’s users could one day be as valuable as Facebook’s users.
It’s a little tough to match the two, though, because of missing data. When Facebook was the same size as Snap, back in late 2009, it was still a private company — and those quarterly revenue figures weren’t broken out when Facebook eventually filed to go public.
The earliest ARPU we can calculate for Facebook is for Q4 2010, when it generated $2.24 per daily user. But Facebook was more than twice Snap’s size by then, as measured by daily users, and scale really matters in the ad industry, so it’s not a particularly valid comparison.
In the quarter that Facebook went public, its ARPU was $2.14, or more than double what Snap’s was in the quarter it went public — 90 cents. You could argue that this is a sign that Snap rushed its IPO, but that’s a conversation for later.
The good news here: If all goes according to plan, ARPU for Snap can go much higher. Facebook’s most recent quarterly ARPU in the U.S. and Canada as calculated with DAUs: $24.90. Snap’s ARPU for the same region: $1.81. So there is a lot of room for growth, and unlike Facebook, Snap’s ARPU was steadily increasing in the year leading up to its IPO.
Join us for live coverage of Snap’s earnings on Thursday.
This article originally appeared on Recode.net.
