What is Average Revenue Per User (ARPU)?
There are a great many sales metrics that you should track for your SaaS. Besides the most popular ones, such as MRR and LTV, another important one is ARPU, which is the average revenue per user. Although ARPU is referred to as the “vanity metric” by some, it provides valuable insights when used correctly and alongside other metrics.
In this article, I will provide detailed information about ARPU so that you can know why it’s important and how to use it.
What is Average Revenue Per User (ARPU)?
ARPU is the average revenue per user. In some cases, it refers to the average revenue per unit or average revenue per account.
ARPU tells you how much a single customer is worth for your business on average. It measures the earnings that you get from each user monthly or yearly.
Why Is ARPU Important? (Specifically for SaaS)
ARPU is a key metric for SaaS growth. It provides one of the quickest ways to determine if your company is on the right track. Here are some of the reasons why tracking this metric is very important:
- ARPU affects MRR and LTV
A higher ARPU leads to higher MRR in the short run and higher LTV in the long run, which are the most important metrics for business health.
MRR is an excellent indicator of the financial performance of your company that gives insight into future cash flows and helps forecast profits. Higher LTV means higher profits as LTV tells you how valuable a customer is for your company over the whole period of the relationship.
- Indication of financial viability
ARPU tells you about your company’s overall long-term financial outlook and whether you need a lot of customers to reach your monthly MRR goals. A high ARPU means you can reach your MRR goals more quickly and provides opportunities for revenue growth. A low ARPU means you will need a lot of customers and is not a good sign for long-term success.
- Can induce change for higher profitability
ARPU provides information that can lead you to take a more profitable course of action. If your company is consistently acquiring new customers and your revenue is rising while ARPU stays the same, it can signify that your product is underpriced. Or, if your ARPU is lower than the cost of attaining new customers, it indicates a loss with each customer.
It’s important to note that, like other SaaS metrics, you can fully benefit from ARPU only if you use it in context to other metrics, such as customer acquisition cost (CAC).
For instance, you could still have a high ARPU if you have a high customer churn rate (CCR), which would give a false indication for growth. So you should also take other factors and metrics into consideration when using ARPU.
How To Calculate ARPU?
To calculate ARPU, all you need to do is divide the total revenue by the total number of customers in a given period.
The total revenue is usually MRR (monthly recurring revenue) since subscriptions renew each month.
MRR is simply a summation of the recurring revenue of customers for a given month.
For example: if you had 500 customers in the past month and generated $100,000 of MRR, then ARPU=$100,000/500=$200.
Since ARPU is directly correlated with MRR, ARPU increases as the customer starts spending more money in your company, such as purchasing a higher subscription.
What Should You Include In ARPU
You should include the following in ARPU:
- MRR or ARR (Annual recurring revenue). This is revenue from monthly subscriptions or account renewals.
- Lost MRR from customers who churn
- Upsells: revenue from plan upgrades
- Cross-sells: revenue from customers who purchase additional products from you
- New purchase: revenue from customers who buy your product for the first time with an additional upfront fee
- Total paying customers include both existing and new customers, customers lost with churn, and customers who upgraded/downgraded their subscriptions.
To get a more accurate ARPU, you should not include
- Free items/tiers
- Inactive or free customers
in your calculation since they will take up space and distort the revenue stream.
What Are The Differences Between ARPU and LTV?
LTV is customer lifetime value, which measures the revenue you expect from the average user over the entire lifetime with the company. Though ARPU can sometimes be confused with LTV, they are different metrics.
Differences between ARPU and LTV:
- LTV measures how much a customer is worth to your business so that you can know how much money to allocate for acquiring new customers. LTV is a future-looking metric since it takes into considertion the whole lifespan of a customer. On the other hand, ARPU focuses on the current performance. It considers how much a customer brings in now, and not the profitability over time.
- ARPU is used in the calculation of LTV. Though LTV can be found in different ways, one way is to multiply ARPU by average customer lifespan. The average customer lifespan is the number of months that the average customer remains subscribed to your service.
Another way you can calculate LTV is to divide ARPU by Churn Rate.
How To Use ARPU?
1. Compare yourself to competitors
It’s important that you compare your ARPU with that of competitors. This will give you an idea of how you’re doing in relation to other businesses employing a similar approach to yours and ensure that your company stays relevant in the market.
2. Profitability analysis
With the right segmentation, you can find the ARPU for each segment individually. The value of ARPU can help you decide what action you should take for each segment and increase profitability.
For instance, you can segment customers based on tiers and find ARPU for each to understand which brings in the most revenue. This can help you determine what promotional tactics are the most effective.
3. Evaluate marketing channels
You can also segment customers based on the marketing channel that they’ve come from and find the ARPU for each channel. By comparing the revenue that customers bring from each channel, you can understand how to allocate your marketing budget and increase customer influx.
For instance, if you are a SaaS company with various accounts on social media, you can use the number of customers from each channel and the revenue for each to find ARPU. This will provide information about the most profitable channel that you should focus on more.
4. Assess quality of revenue
ARPU is essential for attracting investors and evaluating the quality of your revenue. An increasing trend of ARPU, especially for new startups, gives a positive image to investors and indicates that your company is doing well financially.
5. Forecast revenue
ARPU can give an estimation of the amount of the projected revenue that you will generate. Once you calculate ARPU for a period of time, you can expect similar results for a given period in the future. However, these forecasts will be more accurate if you consider other factors based on previous retention and customer flow and compare the ARPU of each period to the one prior.
How To Optimize ARPU?
There are many steps you can take to increase ARPU. Here are some of them:
1. Increase prices
A straightforward way to increase ARPU is to increase your prices.
However, it’s important to be informative and transparent about price-changing decisions and notify customers beforehand. Otherwise, they might start looking for alternatives.
2. Cross-sell and Upsell
Cross-selling and upselling are different growth strategies that can help increase revenue. Upselling is a strategy in which you sell a higher package to an existing customer. Cross-selling is a strategy in which you sell additional related products to customers. Many SaaS companies prioritize upselling and cross-selling because they find it easier to convince existing customers to upgrade their original purchase than acquire new customers.
3. Reduce customer churn
The churn rate is the percentage of customers who cancel or stop renewing their subscriptions. Reducing churn rate drives growth and increases ARPU. It also helps create more opportunities for cross-selling and upselling.
4. Use variable or scalable pricing
If you’re using a flat-pricing model, you should consider variable and scalable pricing to grow your company and increase ARPU.
Variable pricing helps expand to new customers, increase market share, create more upselling and cross-selling opportunities, and increase revenue potential. Variable pricing models can be tiered-based based on features, usage, and the number of users.
Scalable pricing allows you to scale your prices up or down so that you can attract the smallest customers who still bring in profit and the largest customers who are willing to invest much greater sums. You can scale prices based on features, depth of usage, and the number of users.
5. Segment customer base
When calculating ARPU, you should segment your customer base. Small, medium and enterprise customers use different services that have different costs. Calculating ARPU separately for each segment will provide more accurate results that you can use for revenue management.
The SaaS Analytics Tool You Need
HockeyStack is an end-to-end analytics tool for SaaS companies. With HockeyStack, you can track and analyze data from the product, sales, subscription revenue, and marketing in one tool and get access to hidden insights, such as the LTV of a piece of content, or the churn rate of each marketing channel along with users’ reasons for churn.
HockeyStack allows you to build dashboards with no code using any metric you need from any department!
HockeyStack offers these features with no code:
- Step-by-step user journey
- Custom dashboards
- Funnels and goals
- Attribution analysis
- Revenue analytics
HockeyStack has a free forever plan and 3 paid plans. Paid plans have a 14-day trial with a 30-day refund guarantee.
You can check out the pricing page here.
- Crisp Chat
- Salesforce (coming soon)
- Zapier (coming soon)
HockeyStack Pros and Cons
The unique benefit of HockeyStack is its ability to unify your marketing, revenue, sales, and product data using no code. This allows you to uncover unique insights that you wouldn’t be able to by using multiple tools as they cause you to have fragmented data.
- You can integrate with Stripe, Paddle, and Hubspot and build every single dashboard that you can think of, using all sales, marketing, revenue, and product metrics.
- You can create funnels, goals, and surveys, which are rare to get with other tools on this list.
- You don’t need any developers, tracking is cookieless, and the script is small, so it doesn’t increase your site loading time.
- Has a free plan.
HockeyStack generally lacks reporting features as it’s not focused on agencies and other reporting-based businesses.
- The tool lacks some integrations, such as Salesforce and Zapier. (on the roadmap)
ARPU is a crucial metric for SaaS that helps you understand your customers and improve profitability. By knowing ARPU, you can compare your company with peers, improve customer segmentation, and forecast future revenue. If your ARPU is lower than desired, you can optimize for higher revenue by increasing prices, reducing churn, and using different pricing and growth strategies.
ARPU for SaaS is usually measured monthly by using MRR. However, ARPU can also be measured annually, or in some cases daily, weekly, or quarterly.
ARPU is one of the most important revenue metrics for SaaS. It helps you understand the financial health of your business and plan for both the short-term and long-term.
ARPA is the average revenue per account. It can sometimes be equivalent to ARPU, but a customer may have more than one account in your company, in which case it would be different.