June 6, 2023
Jonathan Charpentier
Average revenue per user, or ARPU, is a KPI your SaaS business can use to see how much revenue each paid subscriber generates over a given period of time. Initially used by telecom companies like AT&T or Comcast, this metric is now crucial for any business looking for a macro-level view of the revenue each customer brings in.
The ARPU calculation is a simple equation that divides total revenue by the total number of users. It helps identify underperforming products and features while helping business leaders understand their company’s revenue generation capabilities at the per-subscriber level.
Although Generally Accepted Accounting Practices (GAAP) doesn’t require businesses to calculate ARPU, it’s still an important metric to include in your analysis. Here’s how you calculate ARPU, why you should utilize it, and how to increase profitability through the use of ARPU.
You can calculate your average revenue per user by using the following ARPU formula:
The period we mentioned above is usually by the month for SaaS businesses. However, decision-makers may find it helpful to evaluate ARPU over the course of a week, quarter, or even annually.
It’s important to remember that you must use the same period when obtaining your number of active users. While user numbers vary, to get an accurate ARPU picture, you should average the number of customers at the start of the period with the number of customers at the end.
Alternatively, you can use monthly recurring revenue in your ARPU formula, as described with the equation:
For this variation, you can use upgraded MRR (the revenue gained through upgrades), downgraded MRR (revenue lost to downgrades), or churned MRR (revenue lost to customer churn).
Some SaaS businesses might find including free and freemium users in their ARPU equations helpful. In that case, use a separate ARPPU (average revenue per paid user) metric for viewing the revenue you generate via paid subscriptions only.
ARPU has its critics who claim a high ARPU is just for show, and it does come with some drawbacks and limitations, such as being a macro-level KPI. It can be hard to discern revenue generation capabilities without additional details on users and the types of services offered.
Despite its detractors, ARPU has significant utility for SaaS companies. It can help you analyze customer sentiment toward various price points and helps define upselling or cross-selling pricepoint strategies. You can also use ARPU to dial in your pricing structure, as a low ARPU could indicate undercharging for your product.
Calculating your ARPU makes it easier to launch products that meet your customer’s needs while generating revenue growth. Plus, ARPU can be a vital indicator of retention issues or pricing flaws.
Now that you understand what average revenue per user is and how to calculate it, let’s discuss some strategies for increasing your business’ ARPU. As you evaluate these methods, you will notice how ARPU calculations play a crucial role in the success of your efforts.
Customer acquisition is expensive. According to a report by Insivia, the average cost to acquire a new customer is $1.86 for each $1 of revenue from new customers. And you can calculate precisely how much it costs you using customer acquisition cost (CAC) metrics. Understanding how much it costs to obtain new subscribers will highlight retention’s importance.
Revamp your retention tactics by leveraging the data you receive from customers who unsubscribe. That means evaluating your off-boarding and exit interview strategy to help you identify critical factors in leaving, such as price points, included features, and product relevance to the customer’s needs.
Obtaining this information allows you to personalize your product offerings. Personalizing the features and prices to match your client’s needs makes them less likely to part ways.
Additionally, you can use customer lifetime value (LTV) metrics to evaluate the effectiveness of your retention efforts. If you spend too much time keeping customers with a low ARPU, you could miss out on more profit per customer.
The most profitable SaaS companies change their pricing grids every six to nine months. If you aren’t following a similar structure, you could be leaving money on the table. In fact, you should be reviewing your product pricing strategy at least once per quarter.
A change in your subscription plans and how you display your prices. Experiment with a yearly subscription option instead of a monthly pricing model.
To maximize the effectiveness of your pricing strategies and increase your ARPU, you want to ensure your higher prices don’t scare your customers away. Engage in additional market and customer research where necessary to fine-tune your pricing grid — and don’t forget to test along the way!
After narrowing down potential new pricing, review those prices with a customer advisory panel. A customer advisory panel can help you identify potential customer sentiment and approval. It’s essential to keep clear communications with customers so they stay informed of the new prices. You may also find it helpful to increase prices during new product or feature launches.
High-revenue buyers contribute to a higher average revenue per user because each subscription brings in more revenue. That means targeting these buyers and adding more of them to your monthly user base equals higher ARPU.
Start by performing cohort analysis and market or user segmentation to create the ideal customer profile based on your current high-revenue subscribers. From this ideal customer profile, you can focus your marketing and sales efforts on putting content in front of buyers’ eyes.
Experiment with various marketing strategies to attract these high-revenue buyers through A/B testing, PPC ads, and SEO strategy. Adding more high-revenue buyers to your sales funnel gives you a more significant opportunity of creating customers and add more to your monthly profitability.
Average revenue per user is a useful SaaS metric that is easy to calculate yet provides a high-level view of the revenue generated by your paying customer base. This simple formula lets you understand how customers view the value provided versus the pricing plan you implement.
Additionally, ARPU is a versatile metric, allowing you to use monthly recurring revenue, downgraded MRR, upgraded MRR, and churned MRR. You can also include freemium or free users and track two metrics by incorporating an ARPPU metric to separate total users from paying users.
Of course, you will want to keep time frames consistent between active users and the amount of revenue to not unintentionally skew your ARPU results. And with a few tactics, such as revamping your retention methods, you can increase a low ARPU into a high ARPU and reap the benefits of additional revenue!
