When playing scrabble, you need to arrange your letter tiles in such a way that you can earn more points than your opponents. Now think of your software customers as letter tiles, each holding a unique value that contributes to your overall score—your revenue.
The points you earn from each tile are your Average Revenue per User (ARPU).
Just as you focus on high-value tiles to win the game, working on your ARPU can help sustain your company’s long-term growth. So, here’s everything you need to know about ARPU.
TL;DR
- ARPU, or Average Revenue Per User, helps SaaS companies understand how much revenue each customer generates within a specific timeframe. It inspires data-driven decisions regarding marketing strategies, pricing, and customer retention initiatives.
- Divide the total revenue by the number of users to get your ARPU. Here’s how to improve it: enhance your offerings, implement pricing strategies, cross-sell and upsell, prioritize retention, and fix revenue leaks.
- In plugging revenue leaks, automated subscription billing and dunning management proved invaluable for EnVue Telematics. These smart solutions improved their billing accuracy and, in turn, increased ARPU.
What is ARPU?
Average Revenue Per User (ARPU) measures the amount of revenue each customer generates over a given period.
To calculate it, divide your total revenue during a specific period by the total number of active users.
ARPU Formula: Total Revenue / Total Number of Active Users
“Active users” are individuals or entities that use your software and related services. They drive recurring purchases, service subscriptions, membership renewals, and premium feature activations.
A balanced ARPU leads to long-term profitability and stability. You’ll need it to retain existing patrons and motivate subscriptions from occasional and low-spending users, especially for startups.
This metric identifies high-spending customers who significantly contribute to your bottom line. Low ARPU indicates your customer base has limited spending capacity or product engagement. It could be due to changing financial circumstances, poor value perception in higher-tier plans, or lower-cost alternatives.
High ARPU suggests they’re subscribing to higher-priced plans or checking out more often. While this may initially seem favorable, you can’t risk over-reliance on a small group of high-spending customers.
Changes in their spending behavior can cause sudden revenue fluctuations, as seen during the Covid-19 pandemic. 23.5% of organizations reported over 10% decrease in their SaaS spending, while 20.5% spent less than 10%.
This downturn is inevitable, but SaaS providers can mitigate losses by diversifying their user base and implementing ARPU strategies.
Top Industries Utilizing ARPU for Revenue Metrics
75% of tech businesses offer subscription plans, but only 20% succeed in increasing customer retention. To implement targeted retention strategies and lower churn rates, ARPU has become the go-to KPI in SaaS.
While one-time purchases and pay-per-use models have their place, it’s the recurring subscriptions that provide steady monthly revenue.
Stable inflows are equally important for industries beyond SaaS, so they also need ARPU to plan for long-term growth. Let’s examine other sectors that employ this metric.
Social media platforms
ARPU measures how effectively a social media platform engages its users and attracts advertisers. Its calculation takes into account several monetization strategies, including advertising, sponsored content, in-app purchases, and subscription models.
Let’s consider Facebook’s ARPU in different regions. The Asia Pacific earned $4.52, while the US and Canada earned $4.85 during Q1 2023. This disparity highlights varying dynamics of user engagement and advertiser demand across different markets.
ARPU can help platforms offer regionally-specific content and payment services in local currencies. The more accessible the platform, the higher the revenue potential.
Telecommunications
Multiple companies vie for market share in the telecom industry. Users can easily switch to competitors with so many options available. Telecom service providers can leverage ARPU to understand their subscribers’ usage patterns.
If a huge portion of a company’s user base consumes a lot of data, it can introduce data-centric plans or optional data add-ons. Similarly, it can offer international calling packages to high-value customers who often make international calls to boost revenue.
eCommerce Sector
By understanding customer purchasing habits, online retailers can effectively target high-value shoppers and increase revenue per head.
Say an online beauty shop discovers that a specific customer segment spends more on premium skincare items. Thanks to this insight, the owner can offer exclusive discounts on complementary products or create personalized bundles to leverage sales.
ARPU has unique applications and influencing factors in different industries. With that in mind, here’s how to properly compute it to realize its potential.
How To Calculate ARPU
The math to calculate ARPU is straightforward. But determining the right variables can be tricky at first.
Follow these easy steps to calculate and monitor your ARPU.
- Select the specific period (e.g., month, quarter, year) for which you want to calculate average revenue per user.
- Sum up the total revenue generated within the chosen time period.
- Determine the total number of active users during that same period.
- Divide the total revenue by the number of customers you calculated earlier to obtain the ARPU value.
Example: Your SaaS business turns in $500,000 in total revenue from 10,000 active customers this month. Therefore, your ARPU is $50 ($500,000 divided by 10,000).
Is $50 ARPU in SaaS competitive enough? It can be. It depends on your niche, target market, location, and pricing plan.
Dos and don’ts when computing ARPU
The formula given above doesn’t guarantee accurate results when calculating ARPU. Here are some common mistakes to avoid and helpful tips to consider:
DOs:
- DO adhere to GAAP. Generally Accepted Accounting Principles provide a standardized framework for businesses to prepare accurate, consistent, and reliable financial statements. It lets you improve comparability between different companies and industry benchmarks.
- DO define “active users”. Consistency is key. Define what constitutes an active user to have a more realistic calculation. Establish minimum thresholds for each relevant user action (i.e., purchases, subscriptions, log-ins) within the selected time period.
- DO track customer churn and retention. High retention and low churn rates don’t only mean lasting customer relationships but also a higher total number of users. This larger customer pool can help you generate consistent revenue over time.
- DO analyze trends and benchmarks. Compare calculations against your historical data or industry benchmarks. This will help you understand how external (e.g., shifts in customer behavior) and internal factors (pricing adjustments, marketing campaigns, etc.) affect ARPU.
DON’Ts
- DON’T calculate at random intervals. Choose a specific period to allow for consistent comparisons and trend analysis. Depending on your business model and sales cycle, you can measure ARPU on an annual, quarterly, or monthly basis.
- DON’T include non-revenue users. Include all revenue streams (e.g., subscription fees, one-time purchases, and add-ons) within the specified period of time. But don’t forget to exclude non-revenue-generating users (e.g., free trial or basic users in a freemium model).
- DON’T confuse ARPU with other metrics. ARPU differs from other metrics like Average Revenue Per Paying User (ARPPU) and Average Revenue Per Account (ARPA). They only evaluate paying users or accounts, allowing for more specific but limited revenue analysis.
- DON’T rely solely on ARPU. ARPU is a valuable metric, but it should be considered alongside customer acquisition costs, customer lifetime value (LTV), and other profitability KPIs. Doing so gives you a holistic view of your business’s financial health.
By incorporating these best practices, you can eliminate guesstimates and optimize your financial performance. Below are more post-computation tactics to enhance your ARPU.
How To Improve ARPU
Calculating is only the first step to improving your ARPU. In this section, we’ll delve into actionable SaaS strategies that can help further enhance your revenue.
Enhance product or service value
Leverage your product differentiators. Perhaps it’s your top-notch software features, hands-on support—or both. Understand users’ evolving needs and incorporate new functionalities (e.g., built-in integration and customization options) to provide an all-in-one solution.
Implement pricing strategies
Analyze market trends, review competitors’ pricing models, and conduct customer surveys to develop effective pricing strategies. Try offering discounted longer-term subscriptions or tiered pricing options with varying features to incentivize higher spending.
Consider cross-selling and upselling
Offer additional products or services to existing users, or encourage them to upgrade to higher-priced plans. A project management software company can cross-sell collaboration tools, such as team chat and file-sharing solutions. Or, upsell to an enterprise-level solution.
Prioritize customer retention
Focus on retaining existing users by delivering exceptional experiences and loyalty programs. Reward them for reaching transaction caps.
Find and fix revenue leaks
Revenue leaks are when you lose potential revenue due to inefficiencies like under-billing, delayed collections, or involuntary churn (i.e., forgotten payments). Streamline your bill payments and dunning management to reduce these leaks while improving your users’ payment experience.
Downgrades occur when users switch to lower-cost plans or reduce usage, decreasing ARPU. Reinforce your unique value proposition with the techniques above to minimize their impact on your revenue.
Case Studies: ARPU Growth Through Automated Subscription Billing And Dunning Management
In this section, we’ll look at real-world case studies that highlight the impact of outdated processes on ARPU.
Learn how the following organizations moved on from labor-intensive practices to streamlined systems, ultimately strengthening their financial outcomes.
EnVue Telematics
Providing top-grade telematics solutions, EnVue Telematics struggled with a manual and lengthy subscription billing process. They lack real-time visibility into their subscription revenue, and forecasting takes days (if not weeks).
Eventually, they sought advanced billing automation and found Stax Bill to be the perfect fit. Our software helped the firm reduce its cumbersome process by around 60% and achieve greater billing accuracy.
They also recover additional monthly recurring revenue (MRR) / annual recurring revenue (ARR). Today, EnVue Telematics enjoys 24/7 insight into its customer activity, subscription status, sales effectiveness, and overall revenue growth.
Drive SaaS Success With Enhanced ARPU
Optimizing ARPU is paramount for tech industries, particularly SaaS companies, seeking success in competitive markets. To maximize revenue generation, you must:
- enhance product or service value to attract and retain customers,
- implement pricing strategies that align with user needs and market trends,
- consider cross-selling and upselling to increase average user spending,
- prioritize customer retention through exceptional experience, and
- fix revenue leaks through automated billing and dunning management.
Don’t let revenue slip through the cracks. Generate the most revenue per user with the right SaaS subscription billing tool today. Learn more.
FAQs About Average Revenue Per User (ARPU)
Q: What is ARPU?
ARPU, or Average Revenue Per User, is a metric that helps companies—particularly SaaS businesses—understand the revenue generated by each customer within a specific timeframe. This metric is an essential tool for data-driven decision making. When you have a good handle on your ARPU, you’re able to effectively shape marketing strategies, pricing models, and customer retention initiatives.
Q: How is ARPU calculated?
The formula for ARPU is:
ARPU = Total Revenue / Total Number of Active Users
Here’s a bit more detail on how to calculate it:
First select a specific period (e.g., month, quarter, year). From there, add up the total revenue generated within this period.
Next, determine the total number of active users during the same period.
Finally, divide the total revenue by the number of users to get the ARPU value.
Q: What is a good ARPU?
A ‘good’ ARPU depends on several factors including industry, target market, and pricing model. It reflects the spending capacity and product engagement of your customer base. A balanced ARPU suggests healthy customer spending, consistent revenue, and potential for long-term profitability and stability.
Q: What is ARPU growth?
ARPU growth refers to the increase in the Average Revenue Per User over time. When your ARPU is growing, it’s a sign that the company is succeeding in enhancing its offerings, implementing effective pricing strategies, and retaining customers—all of which contribute to a higher average revenue from each user.
Q: How do you increase ARPU?
There are a number of ways to boost your ARPU, including:
- enhancing product or service value
- implementing strategic pricing models
- cross-selling and upselling
- prioritizing customer retention
- fixing revenue leaks.
In addition, automated subscription billing and dunning management can help improve billing accuracy and, in turn, increase ARPU.
