How much value does your average customer bring in?
That’s the cardinal question that your Average Revenue Per User (ARPU) answers.
Optimizing ARPU entails finding strategic ways to boost your revenue per customer.
This underrated metric can reveal more than you think about your sales and marketing strategies.
Want to know more?
In this article, we’ll explain what ARPU is, how to calculate it, and why it matters. We’ll also provide five simple (yet effective) ways to boost your ARPU and additional metrics to track.
This Article Contains
- What is ARPU?
- Who Should Track ARPU?
- How to Calculate ARPU
- 6 Key Reasons to Track ARPU
- 5 Ways to Optimize ARPU for Your SaaS Company
- What’s a Good ARPU?
- 5 Related Metrics to Track
What Is ARPU?
Average revenue per user (ARPU) measures the average amount of money each subscriber generates over a specific time period.
It’s a vital measure of a product’s profitability.
But remember:
When measuring ARPU, knowing what data to include and exclude is important to get a reliable figure.
While this may seem obvious, you shouldn’t include free or inactive users in your calculation since they don’t contribute to revenue.
That’s why ARPU is often referred to interchangeably as Average Revenue Per Paying User (ARPPU).
Another common synonymous metric is average revenue per account (ARPA), which B2B SaaS companies often use. For example, a company may have 10 monthly active users as teammates on one paid business account.
When calculating your monthly ARPU, you should account for:
- Upgrades and downgrades.
- Customer churn.
- MRR lost due to downgrades.
- MRR lost due to customer churn.
So, what types of companies should track ARPU?
Who Should Track ARPU?
ARPU was traditionally tracked by telecommunications and media companies.
However, the metric also works brilliantly for any and all SaaS companies.
Why?
For SaaS, like in the telecoms and media space, the revenue per user can vary – there’s rarely just one standard price to pay.
The revenue you receive per customer depends on:
- Which pricing plans are popular
- What add-ons you offer
- Whether customers pay monthly or annually
So, how do you calculate ARPU?
How to Calculate ARPU
The ARPU formula divides the revenue made in a time period by the average number of active paying users.
Businesses commonly perform an ARPU calculation on a monthly basis using MRR (monthly recurring revenue) as an input. MRR measures the predictable monthly revenue you earn from subscriptions, which makes it perfect for the ARPU calculation.
The ARPU formula is as follows:
ARPU = Monthly recurring revenue / Total number of paying monthly active users
Let’s explore how this looks in practice:
ARPU Calculation Example
Company A wants to calculate their ARPU in January.
They currently have an MRR of $10,000 and 1,000 paying customers.
This means, on average, each customer contributes an ARPU of $10.
Now, imagine that company A has three pricing tiers: $5, $20, and $50. Their current ARPU implies that the majority of customers are subscribed to the lower plans.
If they optimized their marketing and sales strategies to attract more customers to the $50 plan would significantly increase their ARPU and overall revenue.
When to Measure ARPU
Typically, ARPU is measured monthly. This helps you regularly monitor the efficacy of your business model and any new strategies you implement.
However, you can also measure it quarterly and annually to monitor your growth over time.
Next, let’s explore what makes this SaaS metric beneficial to track.
6 Key Reasons to Track ARPU
Here are six reasons to track and optimize your ARPU:
1. Getting Insight into Revenue Targets
Do you have time-based revenue goals for your SaaS company?
Tracking ARPU can help you understand how many new users you need to attract to hit your goals.
On the other hand, not optimizing your ARPU can put you in hot water. If your average active user contributes a relatively low amount, you’ll need more users to hit your targets.
Additionally, you won’t have much wiggle room to use resources for customer acquisition or support.
2. Understanding Your High and Low-Value Buyer Personas
Most SaaS companies have multiple pricing plans and may cross-sell products and add-ons. So, some customers will contribute significantly more or less than others.
Your ARPU might be low because of an abundance of low-value customers. However, low-paying customers still have support needs.
Customer service and support costs can quickly burn through all the revenue these low-value customers bring in.
So, a low ARPU lets you know that you might need to shift your focus to acquiring more high-value customers.
3. Evaluating Marketing Efficacy and ROI
Are you attracting the right customers to your product?
ARPU can help you figure out how effective your marketing is. If you continue to attract low-paying customers and maintain a low ARPU, you may need to switch up your marketing tactics.
You can use ARPU to monitor marketing efficacy. Additionally, as you improve your ARPU, you create more resources for marketing, customer support, and other vital processes.
4. Informing Pricing Experiments
Looking at your ARPU can let you know if you’ve priced your product correctly. A low ARPU may indicate you’re not charging enough and presents an opportunity to experiment with price increases.
5. Optimizing Your Upselling and Cross-Selling Strategy
A low ARPU lets you know that you may need to up your game regarding upselling and cross-selling.
Consider how you can interest your new and existing customers to purchase higher plans and add-ons.
This will effectively increase the amount of monthly revenue from each new user.
6. Unlocking Revenue Growth
ARPU directly affects your MRR, ARR (annual recurring revenue), and LTV (customer lifetime value). The more money each active user contributes, the higher your recurring revenue and total revenue growth will be.
Additionally, you don’t need as many existing customers if your customer base spends more on average. If you can attract more high-paying customers, then all the better for your total revenue.
You may be wondering, “How do I improve my ARPU metric?”
Let’s look into that.
5 Ways to Optimize ARPU for Your SaaS Company
Here’s the ultimate guide to becoming an ARPU success story, using five key strategies:
1. Target Higher-Paying Customers
It’s better to make a million dollars from 1000 customers than from 10,000.
Think about it this way: If you can successfully gain 10 new customers in a $100 subscription plan, you’ve just added $1,000 to your MRR. In turn, your ARPU goes way up.
You’d have to do 10 times more customer acquisition for a $10 plan to have the same effect.
There’s a kind of Pareto Principle at play – the notion that 80% of outcomes (e.g., app revenue) comes from 20% of inputs (e.g., customers).
If you have 100 customers, your ARPU breakdown could look something like this:
- 80 users who spend $20/month.
- 15 users who spend $50/month.
- 5 users who spend $150/month.
This equates to an ARPU of $32.50/month. However, your top 20 users are contributing 48% of your revenue.
This example reveals why it’s crucial to target the user experience to a high-impact active audience.
Sure, the stakes are high to retain high-paying active customers. But providing great service to a smaller crowd is also much more manageable, which can help your churn rate.
So, do some brainstorming and market research to find out the following:
- Who is the target demographic for your highest paid plans?
- What are their needs and pain points?
- How can you market to them and target them effectively?
- How can you adapt your product to fully meet their needs?
2. Tweak Your Free Plans
We love a good freemium strategy. And you don’t have to throw it out to achieve a higher ARPU.
However, a few minor tweaks can make a big difference to your premium conversion rate.
Be sure to inform your users before making changes and go with a give-and-take approach. Otherwise, you could lose potential loyal customers.
See if there are features that could attract users to try a paid plan, but also consider what features you can add to the free plan in exchange.
3. Emphasize Your Add-On Offerings
Add-ons are a great way to get paying users to contribute more to your ARPU. It also makes your product feel more customizable and flexible. So, it’s a win-win!
Consider what features would work as add-ons for lower-priced plans.
4. Prioritize Your High-Paying Customers
A new user will feel more inclined to pay for higher plans if the upgrade positively affects their customer experience.
That’s not to say you should neglect the active customers in your more affordable plans. It just means making your higher-paying customers feel extra special.
VIP customer service is a great way to do so. For example, you can flag their support tickets for priority service. This is likely to make for more loyal customers.
5. Consider Raising your Prices
Raising your prices shouldn’t be your only go-to solution. Fewer people will be willing to pay if your pricing is unreasonable. That’s bad news for your ARPU and total revenue.
However, remember that your highest-paying active audience also gains the most value from your product.
For example, your product may be crucial to a company’s revenue, allowing them to bring in $100,000 on a monthly basis. You shouldn’t then charge $100/month for the enterprise plan; it should be closer to $1,000/month.
Evaluate your pricing model to see if there’s room to increase prices incrementally. Done right, this will have a positive impact on your ARPU metric.
Now, tracking ARPU alone won’t give you all the insight you need. Let’s look at some examples of other important metrics.
What’s a Good ARPU?
It’s difficult to benchmark ARPU since the averages vary greatly depending on industry, geographical location, size, and pricing model.
When assessing your company’s ARPU, you should aim for consistent growth. You can also look at the ARPU of companies that are similar to yours.
Fortunately, there are many SaaS metrics you can use to monitor the health of your business, which may also have clearer benchmarks.
5 Related Metrics to Track
These are the most important metrics to track alongside ARPU:
- Conversion rate: % total number of potential customers who become paying customers
- Churn rate: % of users lost in a period
- Subscriber growth: % growth of your paid customer base in a period
- Average revenue per daily active user (ARPDAU): Amount of revenue the average daily active user provides.
- Lifetime Value to Customer Acquisition Cost Ratio (LTV:CAC): The relationship between the lifetime value of a customer and the customer acquisition cost.
Tip: It’s difficult to benchmark ARPU since it differs greatly by industry. However, ARPU is closely linked with LTV. Customer lifetime value is essentially ARPU over the entire average customer lifecycle.
The benchmark for LTV:CAC is around 3:1.
So, if your LTV:CAC ratio isn’t where you want it, optimizing ARPU is a good place to start. When you achieve a 3:1 ratio, you’ll know your ARPU is in the sweet spot.
Leverage ARPU to Gain High-Value Customers
If you’re trying to achieve a higher ARPU, this guide can help you nail it.
You can optimize this metric by perfecting your pricing, targeting the right prospects, and capitalizing on expansion revenue.
Tracking ARPU helps you understand the value of your product and how to market it to high-value customers. Ultimately, it equips you to hit your app revenue targets more effectively.
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