Average Revenue Per User (ARPU)
Table of Contents
What Is Average Revenue Per User (ARPU)?
Average Revenue Per User (ARPU) is a business performance metric that indicates the revenue earned by a business from a single software or service user. It is calculated by dividing the total revenue earned by the company over a given period by the total number of users it had during the same period. This figure can provide valuable insights into how well a business’s products or services are performing and its ability to monetize its customer base. ARPU can also be compared across different types of businesses or between different sectors and competitors to understand their strategies’ effectiveness.
Synonyms
- ARPU
- Average revenue per customer (ARPC)
- Average revenue per paying user (ARPPU)
- Average revenue per daily active user (ARPDAU)
The Importance of Measuring ARPU
ARPU is a critical business metric for companies offering subscription-based services, such as streaming platforms and digital media outlets, since it reflects how much each user generates on average for the business. By understanding this figure, companies can better understand how their pricing models affect their overall financial performance and make adjustments accordingly. For example, if they find that raising prices has caused their ARPU to decrease, they may decide to lower them again to encourage more customers to register for the service.
Similarly, companies offering free services with premium upgrades may use ARPU as one way to track the success of their upsells and determine whether any changes should be made to boost revenue from existing users. If they notice that their ARPU from premium users is far lower than expected, they may need to reconsider the value proposition they offer or adjust their pricing strategy to generate more revenue per user.
RPU is also helpful when tracking user growth over time. By monitoring changes in ARPU, businesses can determine whether their growth strategies are effective at attracting new users and ensuring that existing customers remain engaged with their products and services. This metric can provide insights into how marketing campaigns are performing and identify any issues that need further attention to keep customers engaged and increase revenue. In addition, it can help Sales Operations identify opportunities for up-sells and cross-sells within existing customers so the company can maximize its customer lifetime value (CLV).
How to Calculate Average Revenue Per User
ARPU calculation starts with three pieces of data: total revenue and total users. Total revenue is the aggregate income earned from all customers in a given period of time. Total users is the number of customers actively using your product or service during that same time. Calculating the average revenue per user (ARPU) then becomes a simple matter of dividing total revenue by total users:
ARPU = Total Revenue / Total Users
If calculating monthly ARPU, divide monthly recurring revenue (MRR) by the number of active customers for that month:
ARPU = MRR/Number of Active Users
The resulting figure indicates how much money each customer has contributed to the organization’s bottom line over a given period. CROs can then use this metric to compare different cohorts of users or stages within the customer lifecycle to determine which channels drive the most value for the company.
Related metrics include ARPPU and ARPDAU. ARPPU (average revenue per paying user) is used by companies that offer a freemium model. ARPDAU (average revenue per daily active user) is a helpful metric for mobile app marketers to understand how much active users spend on their app.
Key Considerations for Calculating Average Revenue Per User
Many factors impact ARPU and should be considered by CROs when calculating and analyzing this sales metric, including the time period, pricing models, and acquisition costs.
Time Period
By tracking and comparing trends in ARPU over different periods of time, businesses can identify if their product’s financial value is growing or shrinking. For example, suppose their ARPU has consistently increased over an extended time span. This may indicate that their product is gaining traction with more users and generating more income per customer. On the other hand, if their ARPU is decreasing consistently, then it could suggest that customers are dissatisfied and not paying as much as they used to for the product.
Time period also impacts seasonality when it comes to monitoring ARPU trends. Seasonal changes can influence user activity and revenue, so understanding how these changes affect a business’s performance is vital for making informed decisions about product strategy and budgeting. Additionally, tracking ARPU across multiple periods can help illustrate whether or not there are cyclical patterns in customer spending which can be used to predict demand and optimize marketing campaigns accordingly.
Pricing Models
Pricing models can significantly impact ARPU, as different models create different incentives for customers to spend more or less on products and services. Subscription-based pricing models, for example, encourage long-term commitment and loyalty from customers as they pay for access over an extended period of time. As a result, this model typically generates steadier and higher ARPU than other models, such as pay-per-use or pay-as-you-go pricing. On the other hand, one-time purchase pricing or free product pricing with upgrades generate lower ARPU but often provide greater flexibility to customers who wish to avoid committing to long-term contracts or subscriptions.
In addition to choosing the right pricing model, companies should consider strategies such as tiered subscription packages that offer variations in features at different price points to maximize customer lifetime value (CLV) and increase ARPU. To optimize ARPU further, companies can experiment with special offers like discounts or upgrades that incentivize customers to spend more money upfront on a product or service.
Acquisition Costs
Acquisition costs are directly related to bringing in new users and can significantly impact a business’s ARPU. When acquisition costs are too high, companies may find themselves in an unfavorable position regarding their ARPU calculation. For example, if XYZ Company spends $30 in marketing and advertising costs to acquire one new user and that user only generates $20 in total revenue over his/her lifetime as a subscriber, then XYZ Company will end up experiencing a net loss of -10 ($30 – $20 = -$10). This would drag down their overall ARPU numbers significantly as well. On the other hand, if XYZ Company were able to keep their acquisition costs low while still ensuring that each acquired user was likely to generate enough income for a positive return on investment (ROI), then this would greatly help boost their ARPU metrics as well as their bottom line profits.
Another critical factor that affects acquisition cost efficiency is an organization’s ability to retain customers over time. It may be costly upfront to attract new users through various marketing channels and initiatives, while cultivating long-term relationships with existing customers is typically much more affordable than constantly reinvesting into acquiring new ones all the time. Companies must make sure that they are providing enough value for customers so that they will remain loyal and continue making purchases or engaging with products or services over an extended time; otherwise, they could find themself spending more than necessary trying to maintain steady growth or simply replacing existing paying customers who have churned.
Active Users vs. Inactive Users
ARPU helps businesses identify their most successful customers and provides insight into how active and inactive users may impact their overall revenue. For example, active users generate more revenue as they are more likely to purchase products or services regularly. Inactive users, on the other hand, may have low engagement levels with a business and do not contribute significantly to average revenue per user. Therefore, businesses must understand how active vs. inactive users impact ARPU to maximize their potential revenue streams.
Businesses can use data analysis to understand active user behavior and subsequently utilize marketing campaigns to increase engagement levels among inactive users. For example, advertising campaigns can be tailored specifically towards segments of inactive users who may be more likely to convert into active customers. Similarly, businesses can use targeted discounts or offers to entice inactive customers to use their products or services.
Recurring Revenue vs. Single Transactions
Understanding how recurring revenue vs. single transactions impacts ARPU is essential to optimize an organization’s monetization efforts. Recurring revenue is a steady income stream for businesses that can be more predictable than single transactions. This type of revenue typically has a higher lifetime value per customer because they pay regularly over time. It also requires less effort to acquire new customers since existing customers will typically remain loyal based on the convenience, quality, or service they receive.
Single transactions occur when customers make purchases with one-time payments, such as buying a movie ticket or ordering takeout food. Single-transaction purchases may bring higher average order values (AOV), but long-term loyalty and repeatability are lower than with recurring revenue streams.
When calculating ARPU, Revenue Operations must consider both types of revenue and how they each fit into the overall monetization strategy. For example, if the company has a high AOV and recurring traffic from subscriptions but relies on single transaction purchases, it will affect its ARPU calculation. Additionally, understanding how these two types of revenue contribute to overall profit margins helps inform strategic business decisions.
How to Increase ARPU
Increasing average revenue per user is an important goal for any business. Increasing ARPU can help a business to increase profits, acquire more customers, and build a more prosperous and sustainable business.
There are several strategies businesses can use to increase ARPU and make the most of their customer base.
Increase Customer Loyalty
One strategy to increase ARPU is to offer customers incentives such as discounts or loyalty points on their purchases. By incentivizing customers to spend more money, businesses can encourage them to buy more often and thus increase their ARPU over time. Additionally, companies should focus on providing excellent customer service, fostering customer loyalty, leading to increased purchasing frequency and higher overall revenues.
Improve Products and Services
Businesses should also work towards improving product offerings by introducing new products or services that appeal to customers and add value to their experience with the company. This could involve offering subscription models or special bundles that give customers access to exclusive products at discounted prices.
Create Engaging Marketing Campaigns
Finally, companies should actively engage with their customers through marketing campaigns on social media platforms such as Facebook and Instagram or email newsletters tailored specifically for particular target audiences. Companies can use these channels to promote new offers or discounts, introduce new products or services, provide helpful advice and tips related to using their products/services, or stay connected with their audience by providing them with interesting content that adds value beyond just selling a product/service. By engaging with customers frequently in this way, companies can increase customer retention and satisfaction leading to more purchases over time which will boost ARPU significantly.
Use Guided Selling for Upselling and Cross-selling
Guided selling is a sales strategy that helps businesses increase average revenue per user (ARPU) by leveraging customer data and insights to guide customers through the buying process. This strategy can help businesses create more meaningful, personalized connections with customers, as well as better target special deals, discounts, and promotions to those customers.
Guided selling is a common feature of CPQ software (configure, price, quote). Using CPQ, sales reps can offer recommendations tailored to each customer’s preferences or needs. As a result, customers are more likely to make additional purchases of similar products or services they may not have known even existed. In addition, guided selling helps businesses deliver the right solution for each customer at the right time.
With guided selling, businesses can also uncover new opportunities within existing accounts that could increase ARPU. By analyzing customer data such as past purchases and usage patterns, sales reps can identify gaps in service coverage and recommend complementary products or services that could help close those gaps. Targeting specific customer needs with customized solutions greatly expands opportunities for increased ARPU across accounts.
Leverage Subscription Management Tools
Effective subscription management is vital for SaaS, cloud services, and other subscription-based businesses that rely on growing their revenue through renewals. Subscription management software offers a range of features that can help enterprises to increase their ARPU, such as automated billing, customer segmentation based on usage, and personalized offers. Automated billing simplifies collecting payments by automatically setting up recurring payments for subscription customers. This helps to ensure timely payments and reduce the risk of missed or delayed payments. Customer segmentation based on usage makes targeting users with specific offers tailored to their needs and interests easier. Finally, personalized offers are designed to encourage users to upgrade or add additional services or products, which can result in increased revenue.
Another way subscription management helps to increase ARPU is through improved engagement with subscribers. Subscription management tools allow businesses to track user spending habits and tailor messages accordingly to increase engagement with subscribers and encourage them to purchase more services or products. This will result in higher revenues for the business. Additionally, subscription management tools enable customer success teams to provide better customer support by offering access to helpful resources like FAQs, tutorials, and troubleshooting guides, increasing customer satisfaction and encouraging users to spend more money on services or products.
People Also Ask
What is the difference between LTV and ARPU?
LTV (Lifetime Value) and ARPU (Average Revenue Per User) are two metrics used to measure the health of a business’s customers. LTV is calculated as the total revenue generated by a customer over their lifetime with the company, while ARPU calculates how much revenue each individual customer generates per period. The critical difference between LTV and ARPU is that while LTV measures total customer value over their entire lifecycle, ARPU measures current value or “right now” profitability. Therefore, although both metrics can help revenue teams understand overall customer profitability, LTV provides more long-term insights about a particular customer base’s future potential than ARPU alone. Understanding these two metrics can help you make better decisions related to marketing spend, product development priorities, and more.
Is ARPU a leading indicator?
ARPU alone does not necessarily serve as a leading indicator of future success. In addition to average revenue per user, metrics such as average time spent on services and customer retention rate should also be monitored to gain insight into the long-term health of a business. These metrics offer insight into user engagement levels and customer satisfaction, both of which are essential for sustainable growth over time.
Furthermore, average revenue per user can be used as part of a larger picture when considering potential future success in terms of revenue growth. For instance, if ARPU is high but user numbers are low, this could indicate that there may be issues with product pricing or service offerings that need to be addressed to drive higher adoption rates. Similarly, if user numbers remain relatively static while ARPU increases over time, this could signal that the company’s products are resonating with customers and have the potential for further expansion.
Overall, while ARPU is an essential metric to consider when gauging the success of a business’ monetization efforts, it should not be viewed as a stand-alone leading indicator for future performance.
What are examples of ARPU across industries?
ARPU can be used to evaluate the success of products in different sectors and gauge customer engagement levels. The specific value for an individual company’s ARPU will vary based on its industry, product type, and user base. For example, software companies generally have higher ARPUs than brick-and-mortar shops since their products are often subscription-based. Social media platforms may also have higher ARPUs because they offer users access to various services that can be monetized with ads or other platform-specific purchases.
The gaming industry has been particularly successful at achieving high ARPUs due to its ability to monetize through traditional subscriptions and microtransactions (purchasing virtual items). Similarly, streaming services typically use tiered subscription models to generate higher user revenues.
The telecommunications industry also relies heavily on ARPU metrics to measure the success of its plans and services. For example, most carriers now offer tiered data plans to customers that allow them to choose between various levels of service and associated price points to optimize their spending. The ability for customers to select options that fit their individual needs has resulted in higher overall revenues for telecom providers.
