What is Average Revenue Per User?
Average Revenue Per User (ARPU) refers to the average amount of revenue generated by each active user of a product.
It's a key indicator of profitability and growth and is commonly used by product-led growth (PLG) companies to measure the organization's ability to drive product usage and capture value from that usage.
How to calculate Average Revenue Per User
To calculate your organization's ARPU, you can use the following formula:
Average Revenue Per User = Total revenue generated during the specified time period ÷ Number of active users during the same period
ARPU is most commonly measured monthly, using monthly recurring revenue (MRR) as an input.
Track Average Revenue Per User alongside other important product-led growth metrics
While ARPU is a valuable metric that can help you track your organization's performance over time, you should always track it alongside other PLG metrics to paint a complete picture.
Tracking and analyzing multiple metrics isn't always easy, though – most companies have important data scattered across different SaaS tools and other systems. In our experience, product teams prefer to analyze data in operating documents they already know and love, like Google Sheets ❤️.
Getting high-quality data into an operating document like a GSheet isn't necessarily easy, as you probably know all too well. Especially if it requires you to spend hours manually downloading CSVs from different sources and copying the data into a rickety, VLOOKUP-filled spreadsheet 👎.
While you can use the basic calculation we shared earlier, there's a much more efficient way to calculate your team's ARPU (and other essential PLG metrics): the AirOps PLG Scorecard.
This template makes measuring product performance a breeze. In addition to ARPU, use it to easily track metrics such as:
- Cost Per Lead
- Activation Velocity
- Monthly Recurring Revenue (MRR)
- Net Promoter Score (NPS)
- Customer Churn
… and more! Get in touch with our team to learn more and get started! While ARPU is an important metric for PLG organizations to measure, you need a more complete picture if you want to measure your product's overall performance and effectiveness.
Frequently asked questions about Average Revenue Per User
Should my organization track Average Revenue Per User?
Is ARPU an essential metric for your company to track? It depends on your company, what you sell, and your goals.
If you're a SaaS company selling a subscription product or service, tracking ARPU is a great way to assess whether the company is meeting its revenue-related goals. You can also use this metric to predict a user's profitability over time.
In general, ARPU can be a valuable tool for evaluating the success of your organization's pricing and customer acquisition strategies. By tracking ARPU, you can see how much money individual customers bring in over time and spot potential areas for improvement.
What are some of the most critical best practices to keep in mind when measuring Average Revenue Per User?
When tracking and measuring ARPU, segmentation is vital.
For example, when you segment ARPU based on pricing models or how much different customer cohorts pay, you'll gain insights into which customers and plans are most profitable. Ultimately, understanding user spending patterns can simplify the process of monetizing users.
For example, if you have two tiers of customers - those who spend $75 per month on your service and those who spend $150 per month - you can segment them by their ARPU to better understand their profitability. You may find that the $75 tier is much more profitable than the $150 tier, or vice versa. This information can help you adjust your pricing accordingly.
Additionally, it's also important to focus on both your current and new customers when assessing ARPU – your current users just might be the key to optimizing and increasing your ARPU.
What are the benefits of tracking Average Revenue Per User?
If you opt to include ARPU in your PLG organization's metrics framework, you can use the data to:
- Track your company’s financial performance month-over-month (or quarter-over-quarter / year-over-year, depending on the timeframe you choose to measure)
- Make adjustments to your pricing plans to improve profitability
- Gain a better understanding of which monetization models and plans your users prefer
- Segment customers for profitability analysis based on their ARPU, then identify potential opportunities for targeted marketing campaigns, cross-sells, and up-sells
- Segment customers based on ARPU and acquisition channels to compare the profitability of various marketing channels (when evaluating customer acquisition channels, you should also use lifetime value as the ultimate indicator of whether a channel is profitable)
- Identify any trends that exist between your best customers (so you can find more of your most profitable customers)
- Make more informed decisions about product development
What are some of the limitations of the Average Revenue Per User metric?
As mentioned earlier, ARPU is only valuable when tracked alongside other metrics.
It can quickly become a vanity metric if you don't assess it alongside metrics like total revenue and LTV:CAC (Lifetime Value to Customer Acquisition Cost).
What is a "good" Average Revenue Per User?
A high ARPU is a good indication of your business's overall health and profitability, but what exactly constitutes a "good" ARPU? It all depends on your industry and your company.
While there's no one-size-fits-all answer to this question, if your ARPU consistently increases over time and aligns with industry standards, you're on the right track. If you notice that your organization's ARPU is decreasing over time, it's time to find the root cause. For example, your pricing strategy may be out of line with the value customers receive.
Of course, it's not just about quantity and ever-increasing numbers – your ARPU's sustainability and growth potential are also important.
How can I improve my organization's Average Revenue Per User?
If you want to improve your company's ARPU, focus on retention and finding new ways to increase customer loyalty.
Consider offering incentives for customer loyalty, such as rewards programs or discounted subscription rates for longer commitment periods (like a discounted annual plan). Additionally, regularly collecting and analyzing customer feedback can help you proactively identify potential areas for improvement.
Additionally, promotions targeted at specific segments of your customer base can also help increase ARPU.
What's the difference between Average Revenue Per User and Average Revenue Per Account (ARPA)?
When discussing revenue generated from a particular customer base, it is helpful to distinguish between ARPU and Average Revenue Per Account (ARPA).
While ARPU measures the average amount of revenue generated from individual users within a specific time, ARPA measures the average amount of revenue generated from each account within a particular time period.
For example, if a company has 10 customers, each with 1 user, ARPU would be the same as ARPA. However, if some customers had multiple users within the same account, there would likely be a difference between its ARPU and ARPA values.
Ultimately, both metrics can provide helpful information about a company's revenue generation. To truly understand customer behavior and spending patterns, analyzing both ARPU and ARPA can be helpful.
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