Average revenue per user – an introduction
Average revenue per user (ARPU) is a metric used to monitor the revenue generated by each active user, typically expressed over a month or year. It’s used to manage performance and monitor revenue generated.
ARPU can sometimes be referred to as average revenue per unit. This is similar to average revenue per user in terms of how to calculate it.
What is average revenue per user?
Average revenue per user (ARPU) is a metric typically used by SaaS or subscription businesses (B2C or B2B). Revenue per user is measured to understand business performance, and specifically in a B2B business, it helps to measure and understand customer penetration. It’s a useful start to understanding how much can be spent on customer acquisition.
While it focuses on revenue, it’s also used to understand the quality of customers being acquired, effectiveness of marketing campaigns and return on ad spend (ROAS).
ARPU can also be useful in understanding profitability as it’s the starting point to grasping unit economics. Costs per user (or unit) can then be applied to model scaling scenarios. If a profit is made at the user level, then increasing users will contribute positively to the business overall.
An alternative measure would be average revenue per account (ARPA) which is a similar measure to ARPU but based on the number of accounts. In B2B, an account will often have multiple users.
Why is average revenue per user so important?
ARPU is an important measure as it allows for: comparison, analysis, budgeting and profitability capability.
Comparison
ARPU can be used to compare business performance over a period of time, typically month on month, or even across different marketing campaigns.
Analysis
You can use ARPU to make different analyses, whether on different segments of your business (e.g. UK vs. US) or different customer profiles (e.g. new vs. existing).
Budgeting
Along with user numbers, ARPU is often used as a driver to calculate MRR in budgeting or forecasting exercises. Marketing costs can also be linked to this, using assumptions around customer acquisition costs (CAC) or return on ad spend (ROAS).
Profitability capability
A rising trend of ARPU indicates a business’ capability to generate profits. Looking at the ARPU then allows you to assess user economics to determine if a profit is made at a user level and if it’s positively contributing to business overheads.
How to increase ARPU
There are a number of ways to increase ARPU in both B2B and B2C businesses, for example:
Price increases
Increasing your prices will automatically mean your ARPU increases. However, you need to be mindful of the impact that a price increase will have on customer churn. The quantum of the increase and the messaging around a price increase needs to be given consideration.
Variable and scalable pricing models
This is a good way to cater to a broader audience of customers without having too many price plans. Variable or scalable pricing models allow you to increase ARPU from customers who can afford it as their consumption or use increases. This helps retain smaller teams or users on cheaper price plans that don’t need as much usage. This can also be used as product-led marketing approach through nurturing lower paying customers.
Upsells, cross-sells and add-ons
Moving a customer from one price plan to a more expensive price plan for additional functionality or selling additional or complimentary services to increase the bundle size or selling add-on features to existing customers to expand their functionality of existing plans is also a good way to increase ARPU.
What does average revenue per user look like?
How do you calculate average revenue per user?
The formula to calculate ARPU is below. ARPU is normally calculated over a month or year.
ARPU = MRR / Average number of active users (or subscribers)
Note: Average users in the period (month or year) is used as there can be fluctuations near the start or end of the period that impact the result.
Average revenue per user worked example
If a company has the following, it’s ARPU can be calculated like this:
- Monthly recurring revenue: £100,000
- Active users at start of month: 4,750
- Active users at end of month: 5,250
ARPU = £100,000 / ((4,750 + 5,250) / 2) = £20 per month
Conclusion
ARPU is an important metric for a business to understand its revenue generation capabilities across its user base, and more specifically when the user base is segmented. It’s also powerful to understand pricing pressures and trends when assessing ARPU performance over time.
