ARPU (average revenue per user) is a vital metric, especially for subscription-based services. It allows product owners to determine the revenue they get from both paying and non-paying users during an accounting period. With this measure, you’ll have a clear picture of the value your business provides.
In this article, you’ll get to know why ARPU is important, see the difference between this metric and LTV, and learn how to calculate and increase it.
Why is ARPU important?
Generally, average revenue per user allows companies to evaluate their financial potential, and hence, they have a basis for predicting profits. Since “a user” in this context is every client who uses your services regardless of their subscription type (free, basic, premium), you can have a clear picture of your revenue and the value you provide.
ARPU has no exact standards, and everything depends on your business and the industry. Let’s have an example.
Say, your company offers a forever free plan and also three pricing plans — $8, $20, and $50. You’ve calculated the ARPU, and it is $25. It means that the majority of your clients are ready to pay more than your cheapest plan costs. Take into account the fact that the biggest part of almost any SaaS is made up of customers using it for free. However, the majority of your clients choose an expensive pricing plan.
This example reflects the value you provide your users with. If you find out that your ARPU is very close to the cost of the most expensive pricing plan in your service, it means that people can afford it and want to pay more. Perhaps you should consider creating an advanced and more expensive plan to provide them with the services they need and blow up your revenue.
If your ARPU reaches the medium-priced plan, raise your prices without any doubt. If this metric amounts to your cheapest plan, you should focus more on your marketing and promotional strategy. The chances are that people have no idea why they should pay more for your services.
As you see, this measure brings a lot of insights to business owners. The high average revenue per user means that you’re moving in the right direction, and your clients love and appreciate your product. In addition, ARPU makes it possible to evaluate your financial situation for investors and analyze your promotional campaign’s effectiveness and your clients’ reaction to the changes in pricing. Remember that the ARPU of a healthy business grows due to new paying customers.
There’s a marketing metric very similar to ARPU — LTV. These two measurements are equally important yet somehow different. Let’s take a closer look.
ARPU vs. LTV
LTV is a customer lifetime value. This metric shows how much money a client brings you during their relationships with your brand, while ARPU means the average sum of money a user brings during a specified period, for example, a month. Hence, the difference lies in the time periods used for calculating these measures. Generally, LTV reflects the value of a client for your business, while ARPU helps you realize your company’s current situation.
Both metrics are important and interconnected. Remember that the more chances your clients have to spend money on your service, the higher your LTV will be. It’s time to learn how to calculate ARPU for your business.
How to Calculate ARPU
ARPU is calculated by SaaS, mobile app owners, any services that work on a subscription basis, and sometimes even online stores. Ecommerce companies only use ARPU as an average revenue per unit. They calculate the revenue per product to have a clearer picture of their business performance.
Generally, the formula looks the following way:
ARPU = Total revenue for a specified period/Number of customers
The time period is most often a month since users are usually billed monthly.
For example, 500 users chose your plans in the previous month, and your revenue was $3000. Therefore, your average revenue per user is $6 (3000/500).
When choosing the time period, mind how often your clients need your services and when they are billed.
In the last section, we’ll share some tips that will help you increase your ARPU.
How to Increase ARPU
We’ll offer some effective tips that any business can implement.
- Segment your users. Segmentation allows companies to better understand their customers, their needs, problems, and preferences. Find out what your best-selling products are to analyze your buyer persona and see some common patterns. Divide all your clients into groups, and create the pricing plans accordingly. You can start from plans that fit small, medium, and large businesses. This way, users will choose the best plan for their needs.
- Analyze your pricing plans. Identify your best-selling and worst-selling plans. Monitor which features in each of your pricing plans clients use most frequently and which they never use. This way, you’ll find out which options they don’t actually need and, as a result, are not willing to pay for. Create your plans based on customer segmentation.
- Make use of cross-selling and upselling. These techniques allow marketers to increase their clients’ average bills. Think of some bonuses and perks you can add to your existing plans to provide better value. Study the needs of your users carefully to reveal their pain points and features they may need to have in a bundle.
- Look for growth hacking opportunities. They allow companies to find cost-effective techniques to increase customer loyalty and trust, keep clients engaged, and improve market share. Think of developing cost-effective features that don’t require a lot of resources but will provide users with additional value. Add them to your current plans, and don’t forget about proper marketing. People should understand how your new launches will help them work more effectively.
- Increase prices. This is the easiest and most obvious way. However, make sure that your ARPU reaches your medium-priced plan in this case. It means that people realize your value and are ready to pay more.
Congrats, now you know why ARPU matters, how it differs from LTV, and how to calculate and increase it.
References
- This article offers three ways to optimize your ARPU.
- This article shares some tips to improve this measure.
Last Updated: 21.03.2023
or