Average revenue per user, or ARPU, is a widely underestimated metric that enables you to make sense of customer behavior and relate it to revenue fluctuations.
When running a business, keeping up with all the important metrics and KPIs may seem like an endless avalanche of diagrams, equations, reports, and paperwork. However, cumbersome as it is, measuring performance is essential to maintaining the health of your business, and gives you a clue of what to improve in order to accelerate growth.
Tracking ARPU can help you know your customers better by understanding what they value in your products, how they use them, and what you can change to capitalize better on your business relationship. It’s a simple, yet versatile metric that, combined with other KPIs, can be vital for growing your revenue and business success.
What Is ARPU?
Average revenue per user is also known as average revenue per customer, average revenue per account, and average revenue per unit, but is most commonly referred to as ARPU. It is a commonly tracked metric in the telecom industry and by companies using a subscription business model, and can be applied to any other type of business as well. ARPU calculates the revenue a user generates for a company over a set period of time.
The metric is used as a business health indicator, helping companies to measure how well their business is performing on a granular level. It can also be used to estimate future growth and, in combination with other metrics, to define how many customers a company needs, optimize pricing strategies and models, and improve long-term profitability.
ARPU is often mistakenly considered to be the same thing as customer lifetime value (LTV). However, while the two have similarities and are connected, they are not the same thing.
LTV focuses on the revenue a business will generate from a client during their “life” time with the business, and ARPU is calculated over shorter periods of time like a month, a quarter, or a year. The goal of LTV is to estimate the overall worth of a customer to the company, while ARPU is more of an operative metric that avails in diagnosing issues and finding solutions.
The average revenue per user calculation is simple. You add together your total monthly recurring revenue (MRR) and divide it by the number of active customers.
The MRR of your business can be estimated by adding up the revenue generated by all products and plans over a month, including account renewals, subscriptions, add-ons, upgrades, and so on.
If you want to calculate the ARPU for a longer period of time you can use the quarterly recurring revenue (QRR) or the annual one (ARR). However, for more actionable results, it’s best to monitor ARPU on a monthly basis. This will allow you to make on-point observations and timely adjustments, and monitor the results regularly.
As for the number of customers, when calculating ARPU, it’s advisable to include in your equation only paying clients and active users, because they are the ones who account for the MRR and bring in profits. Otherwise, the results you obtain will not be accurate and can be misleading.
However, if you have a freemium plan and you’d like to understand to what degree your paid plans are capable of sustaining it, you can include them in a separate calculation and make a comparison.
Another approach to consider when calculating ARPU is customer segmentation. To evaluate the profitability of different plans and subscription types, you can measure the average revenue per user they provide separately. Leveraging this tactic will allow you to find tailored solutions on how to extract more value from different buyer personas, address their individual needs, and improve their ARPU.
How to Use ARPU?
Understanding and tracking average revenue per user values can be greatly useful in planning your business. It can help you understand your customers, and improve the overall positioning and performance of your products.
Find the Best Product Value / Number of Customers Proportionality
Measuring ARPU can be leveraged to identify the Product Value / Number of Customers proportion appropriate for your business. In other words, depending on the value of your product, you can estimate how many customers you need to generate enough revenue to make your business profitable.
For example, to obtain profitable ARPU from low-value products you need to have a great number of customers, as opposed to high-value products where a smaller number of customers will deliver high ARPU.
If your business can’t acquire enough customers to make the ARPU profitable in the long term, you should consider adding more value to your product and offering higher tiers that will attract customers who pay more and deliver a better ARPU.
Estimate Customer Pay-Back Time and Rentability
By comparing customer acquisition costs (CAC) with ARPU and LTV you can understand how long it takes for customers to exceed the CAC and start bringing in revenue, and see if your business can afford it.
If the CAC for a short LTV client is, for example, twice as expensive as the ARPU they deliver, your business will be operating at a loss. The customers you bring in will not be able to provide enough revenue over their lifetime to make up for the costs of their acquisition, let alone grow revenue.
However, a customer with high CAC and lower ARPU may pay back for their acquisition costs in a month or two, and if they have a long LTV they will still be beneficial to the overall health and revenue growth of your business.
Monitor Customer Behavior and Identify Trends
When you are regularly tracking ARPU on a monthly basis, fluctuations in the numbers can give you valuable insights into customer behavior. By analyzing the events that caused them, you can identify trends and take timely actions to address issues.
For example, a sudden drop in ARPU can be a signal that many mid-range or small customers are downgrading and you should investigate why. The problem can be fixed by optimizing your plans’ value, and potentially offer some features as add-ons.
Or the same event can be caused by one or two high-end accounts terminating their contract and causing a major revenue loss for your business in which case you should work on your retention strategy and try to bring them back.
Compare Your Business to the Competitors
Competitor analysis is important for every company. No business exists in the marketplace in isolation and monitoring what others in your niche are doing is a good way to improve your product positioning.
Measuring ARPU and comparing it to this of your competitors will allow you to be up to date with the market and identify issues in your strategies.
For example, if other companies in your range have much higher ARPU, maybe they have better customer targeting. Or they could be offering the same value for a higher price, which means that you may be undercharging your customers to the detriment of your revenue. On the other hand, if they offer better value for a lower price, your inferior ARPU may be due to slower customer acquisition rates caused by your high prices.
Revenue and Growth Predictions
All in all, the goal of every business should be to gradually increase its ARPU in order to grow. Based on your current revenue and number of users, you can set growth goals, and forecast your business development in future periods.
Monitoring how your stats are changing over time, can let you know if you are on the right track. Leveraging this information you can analyze and cross-reference data from previous periods to identify what causes revenue bottlenecks or drops and make timely changes in your strategies.
How to Improve ARPU?
If the average revenue per user of your business doesn’t meet your expectations or is not showing incrementality over time, there are many steps you can take to improve it and grow profits.
The first thing you should do is to identify what causes the issues. This can be done by monitoring customer behavior and usage statistics, cross-referencing them with the ARPU for past periods, and finding discrepancies in the month-over-month performance. Analyzing this data will give you a clue where to find the problem and how to fix it.
Review Your Buyer Personas
All customers are important and should be paid attention to but not all customers are equally valuable for your business growth. And a low ARPU can mean that you are targeting the wrong audience.
Low-end customers and high-end ones take up the same amount of energy to nurture and service and bring in substantially different revenue. When you have too many low solvency clients and not enough big-game accounts, this may cause a discrepancy between your revenue growth expectations and reality, and you should consider making some changes.
By reviewing and adjusting your buyer personas, you can start targeting higher-end customers, who will bring in more profits and will, ultimately, improve your average revenue per user and overall revenue.
Adjust Your Pricing
Increasing prices by even 0.1% can lead to a significant improvement in revenue. However, to make sure that you find the optimal price adjustment that will boost your ARPU, but will not impact customer satisfaction in a negative way, consider first conducting pricing research.
You may find out that your customers are willing to pay more for your products and you have been undercharging them all along. Or that your customer acquisition was not working out so well because your prices were too high.
Whatever the case, adjusting the prices can be a powerful tool to improve your ARPU, your MRR, and your YRR, but should be done strategically and with caution.
Rethink Your Pricing Model
Regardless of what pricing model you are using to charge your customers for your products and services, analyzing usage and behavior can provide customer insights that can be leveraged to improve ARPU.
If your freemium or base offer is taking up the majority of accounts and your other plans are underperforming, you should maybe consider redistributing value throughout your pricing model or even changing it. This will enable you to improve your product’s market positioning and optimize ARPU.
For example, when your customers are buying feature add-ons to a certain plan instead of upgrading to the next one, offering a new package in-between can be a great way to improve the value-price-satisfaction balance for both you and your customer.
Furthermore, analyzing usage behavior and doing pricing and user satisfaction research will allow you to understand how your customers really use your product and what can be done better.
Based on this information, you can revise your pricing model and find out that a different approach – like usage-based or per-user, for example, will be more convenient to your customers and will deliver a higher ARPU.
Reduce Customer Churn
Clients leaving can seriously impact a business’s revenue and ARPU. Analyzing why and which of your subscription plans or products they are displeased with, will give you insight into where to focus your attention.
For example, as mentioned, a sudden drop in ARPU can be caused by many low-tier customers leaving at once or just a single big-game account that has terminated its contract. Working to identify the reasons behind the customer’s behavior will allow you to find a solution to reduce churn and improve ARPU.
Upsell and Cross-sell to Low ARPU Customers
low-key accounts that are actively using your products should be nurtured into increasing their adoption. This can be done by upselling and cross-selling upper-level tiers or add-on feature upgrades.
By personalizing your offer based on the specifics of their business and the way they are using the product, you can offer customers a better solution that will both increase their satisfaction with your services and improve your ARPU.
The goal, however, is not to try to change customers who can’t afford to invest more or are perfectly happy with what they have. To make this approach successful, you should aim to address the needs of those who have better solvency and can, indeed, benefit from exploring your products further. By providing more value to them you can increase the revenue they bring in while improving their experience with your services.
Boost Sales Volume on Premium Products
As mentioned, the ARPU of big-game accounts and premium to platinum tiers, as well as annual plans, is much higher than that of cheaper products.
By focusing on your more expensive solutions in your sales and marketing strategy, you can boost sales volumes and improve the ARPU and overall revenue of your company.
Furthermore, if you make your annual plans more lucrative to customers, you will not only boost your sales volume, but you will reduce customer churn, keep clients around for longer, and improve the probability of successful upselling and cross-selling.
Average revenue per user is a versatile, yet simple metric that can provide valuable customer insight and help you understand your client’s relationship with your product. By regularly tracking this and taking actions to maintain incrementality of the values, you can meet your business growth goals and significantly improve your total revenue.