What is Average Revenue Per User?

What is Average Revenue Per User?

Average revenue per user is a business metric that indicates business performance by exhibiting the revenue earned by a business via its services. It is often estimated by dividing the total earned revenue over a given period by the total users it had during that particular period. It showcases the health of your business and how well you are strategizing pricing decisions. ARPU can also be calculated and compared across various types of businesses or between different sectors to understand competitor strategies and more. ARPU is often employed in SaaS businesses to optimize pricing decisions and gauge revenue generation from your products.

Having a complete understanding of ARPU is important to predict revenues, manage profits, optimize prices, and address customer queries. This figure allows a clear steer view of your business potential, offering knowledge about profitable segments of your customer base. Also, by understanding the fluctuations of ARPU, you can mold marketing efforts and campaigns as per company needs. Tracking down ARPU in various time periods can significantly aid in studying the business potential and revenue patterns extracted from each customer. When ARPU goals are set, companies can lay focus on revenue maximization, customer retention, churn reduction, and long-run success.

Formula for Average Revenue Per User

Total revenue is the sum of money earned from all customers within a specific time frame. Total users is how many customers are currently utilizing your product or service within the same timeframe. Determining the average revenue per user (ARPU) is thus an easy task of dividing total revenue by total users:

ARPU = Total Revenue / Total Users

If computing monthly ARPU, divide monthly recurring revenue (MRR) by the number of active customers during that month:

ARPU = MRR/Number of Active Users

The resulting number shows the amount of money that each customer has added to the organization’s bottom line over a specific timeframe. CROs can then use this number to compare various segments of users or stages of the customer lifecycle in order to figure out which channels generate the most value for the company.

Let’s say a company has

• Total Revenue: $100,000
• Total Number of Users: 10,000

Using the formula

ARPU = Total Revenue / Total Number of Users

ARPU = $100,000 / 10,000

ARPU = $10

So, the average revenue per user (ARPU) is $10. This means that each user generates an average of $10 in revenue for the company.

Some examples of ARPU

As an example of ARPU, let us assume a company, Music Hub, earns a total revenue of $1.5 billion per year. It has a total number of subscribers, i.e., 30 million.

Based on the ARPU formula:

ARPU Calculation: $1,500,000,000 / 30,000,000 = $50 per subscriber per year

Interpretation: On average, each subscriber generates $50 in revenue per year for Music Hub.

Example 2:

Company: Game Zone

Total Revenue: $3 million per month

Total Number of Users: 1 million

• ARPU Calculation:

$3,000,000 / 1,000,000 = $3 per user per month

On average, each user generates $3 in revenue per month for Game Zone.

Example 3: SaaS (Software as a Service)

Company: ABC Software

Total Revenue: $10 million per month

Total Number of Users: 200,000

ARPU Calculation: $10,000,000 / 200,000 = $50 per user per month

Interpretation: On average, each user generates $50 in revenue per month for ABC Software.

What is the significance of measuring ARPU?

Average revenue per user is a critical KPI for SaaS businesses, as it reflects how much each user contributes to business revenue and success. It helps in better understanding pricing strategies and how they impact financial progress, thereby allowing you to make adjustments as per need. For instance, if a company finds out that a price increase leads to a declining ARPU, it means they must reconsider their pricing decision and decrease prices to encourage more customer engagement and purchase of services.

In the same way, companies rendering free services with the option of premium upgrades may use ARPU to gauge upsell success and find the need for changes required for boosting revenue from the existing customer base. If they generate lower revenues from premium users, it means there needs to be an adjustment in value proposition or pricing strategy.

This metric also allows tracking down user growth with the passage of time. When monitoring ARPU, businesses can determine if the growth tactics are effectively reaching revenue maximization goals and attracting new customers and incurring revenue retention. This metric also helps to figure out any gaps in the marketing campaigns and whether they are functional to keep the customers engaged and attract revenues. It also helps sales teams to closely monitor upselling/cross-selling opportunities to maximize customer lifetime value.

What is the difference between Average Revenue Per User and Average Revenue Per Unit?

The difference between average revenue per unit and per user is that ARPU looks at units instead of users. It showcases how much revenue each unit of production is generating for the company. It helps to know how much discounting is applied and works for tangible products as compared to software companies. Also, ARPU measures revenue generated from users, which can involve multiple streams such as subscriptions, in-app purchases, and more, whereas the ARPU per unit metric helps to calculate revenue from individual unit sales.

ARPU = Total Revenue / Average Number of Customers or Users

Where:

Total revenue is the total amount of money the company earns over a given period.

Average Number of Customers or Users is the average number of customers registered with the company over time.

What are some challenges for calculating Average Revenue Per User?

There are certain challenges that may arise when calculating ARPU, such as defining who active users are, user data calculation, user segmentation, seasonal fluctuations, trials/discounts, data privacy concerns, and technical complexities. Each of these is elaborated as follows:

Active User Calculation

Inconsistent active user definition can lead to calculation intricacies. For instance, some businesses may consider a user who logged in as an active user, while others may consider those who made a purchase as active users.

Data Accuracy

Revenue data must be factual and correct to ensure the credibility of ARPU. Data gaps, incorrect data, or lack of data can impact the results to a great extent. Inaccurate data can lead to misguided decisions, emphasizing the need for robust data validation processes. This in turn necessitates regular audits to avoid error-free revenue calculations.

Segmentation

The spending patterns of varying users may vary, and calculating an average revenue for the whole customer base must not be a good idea. Thus, customer segmentation might be a considerable option but requires time and effort to ensure smooth calculations.

Seasonal fluctuations

Seasonal trends and promotional campaigns, as well as pricing changes, can impact calculations. For accurate analytics, these fluctuations must be understood, as well as how they affect average revenue metrics.

Free trials

Pricing tactics such as discounts or free trials can influence ARPU estimates, as revenue will be delayed and not generated initially. This in turn can affect the user’s calculation, as pay-later customers make revenue a futuristic forecast.

Data Complexities

In the face of GDPR and relevant data protection laws, access to customer data for ARPU can become complex. There can be discrepancies in data collection, thereby impacting the reliability of results.

Technical Difficulties

To collect and utilize data for calculations, tracking systems implementation is important but can be arduous for some businesses. Thus, seeking technical support for data tracking is crucial.

How can businesses increase ARPU?

Businesses can increase ARPU by reducing churn, enhancing customer value, introducing bundles, cross-selling, upselling, and strategizing prices. In this way, businesses can enjoy revenue increments and also facilitate users with better quality services and well-curated prices. Here is a detail of each of the mentioned tactics to help businesses grow.

Churn reduction

Churn showcases discontent among users for a business or services as they halt using them or cancel their subscriptions with the business. Reducing churn rate can help businesses to increase ARPU by holding them and encouraging purchases.

Enhancing customer value

By allowing add-on services to the existing customer base, businesses can increase customer value. Discounting, product upgrades, and relevant offers can help to keep customer loyalty intact. Rewarding loyal customers can also improve overall customer satisfaction. Offering discounts or points associated with each purchase and then letting customers gather those points to get discounted items is also another method of enhancing customer value.

Bundling

By bundling up various products/services, businesses can maximize ARPU, as they may choose to avail bundled packages. This in turn will encourage them to buy more than one product/service. With each additional item purchased, the ARPU will rise and offer benefits to your business.

Pricing Policy

Price rises can increase ARPU as they will allow businesses to earn more on each customer purchase. However, when implementing this tactic, it is best to avoid overpricing items, as it can lead to customer churn. A professional business analyst can help to analyze your pricing policies in comparison with your competitor prices and also gather helpful feedback for optimal pricing.

Upsell/cross-sell

By upselling your products/services, you allow customers to make additional purchases. It is a considerable method of increasing ARPU by selling relevant or better-tier products/services to customers. It allows a positive experience among customers as they gain the desired products, leading to increased customer loyalty.

What is ARPU vs. Lifetime Value?

The main difference between average revenue per user and lifetime value is that ARPU considers revenue per user from a certain period of time, whereas lifetime value measures customer revenue for the entire customer journey. In some cases, ARPU and lifetime value results may vary; however, this is when a customer churns early and within the time when ARPU is calculated.

Formula for LTV:

LTV = (lifetime spend – lifetime variable costs) / number of customers acquired.

For example, a mobile gaming app ran a campaign in November, resulting in an increased user base. The ARPU in November captures revenue for that particular month. If a user makes in-app purchases worth $150 in November and stops gaming, their ARPU for November will be $150. In this scenario their LTV will be the same, assuming that their revenue did not generate beyond November. However, if another user makes a purchase of $120 worth of in-app purchases in Nov. and continues to play the game, generating additional revenue of $130 in December and $140 in January, their ARPU for Nov. will be $120, but their LTV will be $390 ($120 + $130 + $140).

What are the benefits of calculating ARPU?

ARPU calculation helps businesses by identifying revenue opportunities, offering insights about revenue status, allowing business health tracking, and product segmentation as per business needs. Here is a detailed explanation for your ease:

Revenue

ARPU allows tailored marketing and pricing strategies for attracting customers and keeping them sticking to your business. It allows strategic handling of pricing plans and add-ons, offering upgrade and downgrade roadmaps as well. Through optimized pricing, businesses can increase revenues and improve customer satisfaction. Effective pricing allows businesses to stay competitive in the ever-evolving business landscape.

Revenue insights

ARPU allows valuable analytics and insights about revenue generation and consumer spending patterns. It allows you to understand the profitability of varying customer segments. Moreover, it helps figure out opportunities for using existing information to devise future strategies. By devising strategies, businesses can identify areas for improvement and optimize revenue streams.

Business Health

ARPU helps to monitor business health and how well your business strategies are. It helps to analyze varying products’ performance, sales, and forecast revenues. ARPU is a key metric to understand your business health. Regular ARPU analysis helps to set realistic revenue targets and goals.

Segmentation

ARPU allows tracking business segmentation based on sales channels, users, and products and gauges valuable insights that can turn into actionable business data. With segmentation data, businesses can market efforts to high-value customer groups and meet the needs of valuable customers.