ARPU, or Average Revenue Per Unit, is a crucial metric in the business world, particularly for companies that operate in the subscription-based or user-centric sectors. It provides insights into the revenue generated per user or unit, helping businesses understand their profitability and growth potential.
What Is Average Revenue Per Unit (ARPU)?
Average Revenue Per Unit (ARPU) is a measure used primarily by companies that offer subscription-based services or products. It represents the average revenue generated per user or unit over a specific period. This metric is particularly useful for businesses in the telecommunications, SaaS (Software as a Service), and media industries.
Why ARPU is Important
ARPU is a vital metric because it helps businesses understand how much revenue they are generating from each user or unit. This understanding can help companies make informed decisions about pricing, marketing strategies, and product development. It can also provide insights into customer behavior and profitability.
How to Calculate ARPU
The formula to calculate ARPU is straightforward:
ARPU = Total Revenue / Number of Users
Total revenue is the total amount of money generated by the business over a specific period, while the number of users is the total number of customers or subscribers during the same period.
What is a Good ARPU?
A “good” ARPU varies significantly depending on the industry and the specific business model. Generally, a higher ARPU is better as it indicates that a company is generating more revenue per user. However, it’s crucial to compare the ARPU with companies in the same sector to get a meaningful benchmark.
ARPU Revenue Formula
As mentioned earlier, the ARPU revenue formula is:
ARPU = Total Revenue / Number of Users
This formula provides the average revenue generated per user or unit.
How to Calculate Total Revenue
Total revenue is calculated by multiplying the price of a product or service by the quantity sold. For subscription-based businesses, it’s the sum of all subscription fees collected within a specific period.
Examples of companies with high ARPU
Numerous businesses have managed to attain a high ARPU as a result of their distinctive product offerings or pricing strategies. For instance, Netflix and Spotify have successfully garnered high ARPU through their subscription-based services that deliver considerable value to their clientele. Additionally, businesses such as Apple and Samsung have realized high ARPU by marketing premium products at elevated price points. Conversely, companies like Groupon have found it challenging to reach high ARPU due to their business model, which revolves around providing customers with discounts and deals. Similarly, Uber has faced difficulties in achieving high ARPU due to its pricing strategies, which are centered around offering economical rides to its customers.
What does ARPU tell you about a business?
ARPU, when viewed in isolation, can be deceptive. It might increase, which appears to be a positive sign, even if your customer base is shrinking and total revenue is declining. To get a comprehensive understanding, it’s crucial to consider ARPU in conjunction with other SaaS metrics, particularly actual customer and revenue figures.
The significance of ARPU varies among SaaS businesses. For instance, a startup that uses discounting to draw in customers might be comfortable with a declining ARPU if it’s due to an influx of new signups (meaning more customers paying less). However, at some stage, they’ll need to shift their focus from subscriber growth to revenue growth. In this scenario, ARPU becomes more critical, and if they fail to increase it (or at least maintain it), the business’s sustainability could be jeopardized.
Growth of your MRR and LTV
In the short run, ARPU has a direct impact on MRR. The higher the revenue each customer contributes monthly, the greater your company’s monthly revenue. ARPU also influences the long-term growth of your customer’s lifetime values. The revenue a single customer contributes monthly accumulates over their entire tenure with the company to constitute their lifetime value—thus, an increase in ARPU leads to an increase in LTV.
The viability of the busines
If your ARPU is low, you require a large customer base to meet MRR targets each month. Conversely, with a high ARPU, you don’t need as many customers to achieve your goals and expedite growth. A low ARPU in a small market could be a red flag indicating that your company may not be poised for long-term success, while a high ARPU in a large market signifies excellent opportunities for revenue growth.
Alignment of Pricing and Product Validation
If your business continues to attract new subscribers and revenue is growing, but ARPU remains stable, it could suggest that your product is underpriced. A low ARPU might indicate that you’re not effectively capitalizing on the value certain buyer personas derive from your service. For instance, enterprise clients are likely extracting significant value from your product, which you should monetize by pricing according to the value they’re receiving.
Efficiency of Your Sales and Marketing
ARPU should be on an upward trajectory over time as sales pitches become more refined and value propositions become more precise and targeted. An increasing ARPU indicates that you’re attracting more of the right customers and effectively selling them on the value they’re seeking. This aids in establishing a more efficient sales and marketing system.
Segmented ARPU can also provide tangible information about popular plans and trends in cross-selling and up-selling. Suppose you offer four plans: a $15/month plan, a $45/month plan, a $75/month plan, and a $150/month enterprise plan. By calculating the ARPU for each group of customers on each plan and comparing the number of customers at each ARPU level, you can identify the most popular plan.
Suppose your $45/month plan is the most popular, with 500 customers paying $45 in ARPU each month. You can examine the value included in that plan to understand its popularity among customers.
This analysis also reveals that while 300 customers on your $75 plan are indeed paying $75 each month, 75 customers on the $75 plan are actually paying $90 due to being cross-sold an additional feature. This insight could lead you to introduce another tier between your $75 tier and your $150 tier to better monetize these mid- to upper-market customers.
What you should include in ARPU
To determine your company’s ARPU, you need to divide the total revenue obtained from active users by the overall number of customers from whom the revenue was received.
Here’s a detailed breakdown of what should be included in your ARPU calculation:
Monthly Recurring Revenue (MRR): This is the total amount of recurring revenue your business generates in a single month.
Account Upgrades and Downgrades: For a precise ARPU measurement, calculate the total dollar amount gained from customers who have upgraded their accounts, as well as the total dollar amount lost from customers who have downgraded their accounts.
Lost MRR due to Customer Churn: In addition to account downgrades, you should also compute the monthly recurring revenue lost due to customers who have churned.
Total Number of Paying Customers: Your ARPU calculation should only include customers who contribute to your revenue.
What you should NOT include in ARPU
The usefulness of calculating your company’s ARPU hinges on the accuracy of your calculations.
Therefore, it’s important to remember that your ARPU should only reflect your current active customer base and the revenue they’ve generated for your business within the month.
Consequently, the following elements should not be incorporated into your ARPU calculation:
- Users who use your service for free
- Users who are inactive
- Free subscription plans
- Complimentary items
By excluding these elements, you can ensure that your ARPU calculation provides a transparent and precise depiction of your business’s financial health and growth.
Including any of the above-listed items, on the other hand, could result in a lower average revenue figure in your ARPU calculations. This could distort the true picture of your business’s financial status and potentially lead to misleading conclusions.
Key Differences between ARPU and LTV
ARPU and Lifetime Value (LTV) are both important metrics, but they measure different things. ARPU measures the average revenue generated per user over a specific period, while LTV estimates the total revenue a business can reasonably expect from a single customer throughout their relationship.
Who Uses Average Revenue Per Unit (ARPU)?
ARPU is used by businesses in various sectors, particularly those offering subscription-based services or products. This includes telecommunications companies, SaaS providers, media companies, and more.
Advantages and Disadvantages of ARPU
ARPU has several advantages. It’s a simple and straightforward metric that provides valuable insights into revenue generation and customer behavior. It can also help identify trends and inform strategic decisions.
However, ARPU also has some limitations. It doesn’t account for the cost of acquiring or servicing customers, and it may not accurately reflect profitability if there’s a wide disparity in revenue generation among users.
What Is Included in an ARPU Calculation?
An ARPU calculation includes all revenue generated by the business, divided by the total number of users. This includes subscription fees, in-app purchases, advertising revenue, and any other sources of income.
How Can a Company Increase ARPU?
Companies can increase ARPU in several ways, including upselling and cross-selling, introducing premium pricing tiers, improving product or service quality, and enhancing user engagement.
Adjust Your Pricing to Attract High-Paying, Long-Term Clients
SaaS pricing models can be incredibly diverse, but successful businesses don’t solely rely on bargain pricing to build their customer bases.
Offering a range of subscription plans ensures you don’t exclude potential customers with lower budgets. Highlighting a “recommended” or “popular” pricing tier can create a bandwagon effect that customers find appealing.
Avoid Free (or Freemium) Models
Many SaaS providers are drawn to forever-free plans. However, these free plans don’t contribute to your average monthly revenue.
If you’re aiming to increase your ARPU, consider whether your free services are offering too much without cost. You don’t necessarily need to eliminate or drastically reduce your free tools, but small adjustments can make them more valuable.
If you plan to alter features, inform your users in advance and explain the changes. It’s a good idea to have a list of features you can add to your free plans as a form of give-and-take.
Provide Add-Ons or “A La Carte” Features
By providing more opportunities for users to spend money on your service, you’re more likely to increase your LTV (and ARPU). This is why many SaaS companies are offering optional add-ons alongside their subscription plans.
This strategy not only gives customers a sense of flexibility but also creates additional revenue streams from existing customers.
Prioritize Your Most Valuable Accounts
While all your customers are important, some may warrant more attention than others.
Consider prioritizing tickets and queries from your largest accounts to ensure their longevity. Providing swift, personalized service to these accounts can positively impact ARPU, rather than dedicating all your resources to free offers. This kind of VIP service can also be incorporated into your pricing plans.
Refine Your Ideal Personas to Attract Higher-Paying Clients
Your company’s customer personas largely dictate your targeting and success. If you’re looking to upsell and increase your ARPU, it might be time to target prospects with larger budgets.
Understanding your customers well, pricing correctly, and selling effectively can increase ARPU. Engaging with prospects and customers about their challenges will help you understand the needs that your product best meets.
Monitor Your ARPU to Identify Trends and Opportunities
Finally, you can’t improve your ARPU if you don’t track it. Whether it’s trending upwards or downwards, you need to stay informed.
What Is Prepaid and Postpaid ARPU?
Prepaid and postpaid ARPU refer to the average revenue per user for prepaid and postpaid services, respectively. These terms are commonly used in the telecommunications industry. Prepaid services are paid for in advance, while postpaid services are billed after use.
What does ARPU stand for?
ARPU represents Average Revenue Per User, which quantifies the average revenue generated by each user of a product or service.
Why is ARPU utilized?
ARPU is employed to gauge the performance of a product or service, offering insights into the average revenue generated per user.
What information is required to compute ARPU?
To calculate ARPU, you need the total revenue produced by a product or service and the total count of users for that product or service.
How does ARPU serve as a performance metric?
ARPU serves as a performance metric by allowing the comparison of the average revenue generated per user over varying timeframes.
What are the potential pitfalls of using ARPU?
The potential pitfalls of using ARPU include the possibility of inaccurate data or flawed assumptions, which could yield incorrect outcomes.
How does ARPU contribute to decision-making?
ARPU contributes to decision-making by offering insights into the average revenue per user and its evolution over time.
What are the potential advantages of employing ARPU?
The potential advantages of employing ARPU include its capacity to gauge performance and guide decision-making.
How can ARPU be used to compare performance over different time periods?
ARPU allows for performance comparison over different time periods by examining the average revenue per user across these periods.
How can ARPU be used to compare performance across various markets?
ARPU enables the comparison of performance across various markets by examining the average revenue per user in each market.
How can ARPU be used to compare performance across different products or services?
ARPU can facilitate the comparison of performance across various products or services by examining the average revenue generated per user for each product or service.