What is Average Revenue Per User (ARPU)?
The term refers to the average amount of income one customer generates. Calculating ARPU is most common amongst businesses that operate a subscription model. Both direct-to-consumer and business-to-business models can benefit from knowing their ARPU.
Why measure your ARPU?
Your ARPU is a helpful metric to analyze the state of your business and make improvements accordingly. It can help inform your growth strategies and determine whether your current monetization model is adequate.
ARPU can inform both your short-term and long-term plans. Tracking ARPU can also give insights into your customer’s responses to your pricing architecture.
The higher your ARPU, the easier you’ll be able to scale your business. If your ARPU is too low, finding the resources to invest in growth can be difficult. A low ARPU is ok if you have hundreds of thousands of customers, but you first need to spend money to acquire them.
ARPU is a helpful way to analyze your return on investment as you can compare it with your CAC.
How do you calculate ARPU?
To find out your average revenue per user, you can use this formula:
You could calculate your ARPU monthly, quarterly, or yearly. For an accurate result, you must ensure both variables are for the same period.
For example, if you have annual revenue of $50,000 and 5,000 users, your ARPU is $10.
Many companies calculate their ARPU monthly, so they have a regular overview of how much each customer is worth.
Things to consider when calculating your ARPU
When calculating your ARPU, take into account the following:
- Do you have customers on a free plan? You shouldn’t include them in the calculation.
- Do you have customers who upgraded or downgraded this month? Do you know why? Are you including the correct value for their current plan?
- Customer churn. Did you lose any high-value customers this month that could significantly affect your ARPU number?
Considering these points when calculating ARPU can help you analyze your pricing plans and ensure they stay in line with customer expectations. You don’t want to increase your prices so much that you lose your highest-value customers.
How to increase your ARPU
You want to attract high-value customers to increase your ARPU, so build price plans that attract customers who will stay with you long term. Try to avoid attracting too many free plan or low-paying customers because they are the most likely to churn.
Another method for increasing ARPU is to encourage existing customers to upgrade their plans. Offer them a choice of features they want access to in their plan, or design them a bespoke plan. This will help customers feel they’re getting value for money as they only pay for features they regularly use. You can also offer exclusive add-ons to encourage the customer to spend more.
To maintain or increase your ARPU, ensure you’re retaining your most high-value clients, whether that’s by offering them custom features or assigning an account manager. Work on bringing in new business with high value.