Average revenue per user (ARPU) is used to measure the revenue a business generates per user within a specific period — monthly or yearly. Businesses that operate a subscription model usually use ARPU.
Software as a service (SaaS) companies use ARPU to gain valuable insights into their business operations. Telecommunication companies like AT&T and Verizon use ARPU to measure revenue generated per mobile phone user. Stock analysts have long used it to appraise the value of subscription-based companies like telecommunication companies.
Social media companies like Meta (formerly Facebook) measure ARPU and report to their investors, though they don’t operate a subscription model.
ARPU is not a generally accepted accounting principle, or GAAP, but you can use it to keep a pulse on the financial health of your business. Alongside customer growth and customer retention, ARPU is one of the most fundamental indicators of growth of a SaaS business.
It’s easy to mix up ARPU and customer lifetime value (LTV). Although both are used to measure revenue, they are different. While ARPU measures the average revenue your business generates from each customer in a specific period, LTV predicts how much you can generate from a customer during the course of their relationship with you (their lifetime). Average LTV is a function of ARPU, ARPU growth for a particular customer, and customer retention.
Understanding your ARPU gives you insight into your business. You can use it to improve your business’ profitability in the following ways:
Calculating ARPU can help you understand your business’ performance against your competitors and companies in similar verticals. It’s an easy way to stack your company against others and see where you stand. If two competing companies have the same customer acquisition cost, the company with higher ARPU is more profitable, all things being equal. ARPU can help you see how much you’re getting out of your customer base compared to your competitors.
Sometimes the difference between success and failure in business is your pricing strategy. Measuring ARPU can help you choose the best one. You can experiment and discover the price points that work for your business. For example, analyzing the ARPU of your current price segments will reveal the pricing that works — the one customers are selecting more or that is leading to more upsells (and fewer downsells).
ARPU helps you understand your customers. A low ARPU could mean that you are serving lots of low-paying customers or that you are not charging enough for your products. To increase it, you'll work on attracting high-paying customers or increasing your price, especially when you’re providing lots of value. To drive growth of a low ARPU business, it can be critical to create low-friction paths to upgrade and ARPU growth over time.
An effective marketing and sales strategy will attract new customers, make current customers more loyal to your business, and increase the number of referrals. If your sales strategy is working, your ARPU should be increasing consistently over time.
You can easily check whether or not an advertisement has a good return on investment (ROI) by multiplying the number of customers by ARPU and calculating total revenue that way.
While you should ultimately rely on LTV to discover the customer acquisition channel that gives you the most profitable customers and the channels to jettison, ARPU can also give you direction.
By analyzing the customers driven by each of the channels you use, you can understand where each group is likely to purchase. That will tell you the channel that brings in more quality customers than others. That is where you want to focus.
As mentioned earlier, ARPU helps you compare your business with your competitors and companies in similar verticals. This is also a way to discover channels that may work for you.
Because ARPU is a non-GAAP measure, there is no official standard for calculating it. However, there is a common method.
You calculate ARPU with a simple formula:
Average revenue per user = Total revenue/Total number of active users.
Let’s break that down step-by-step.
ARPU is usually calculated monthly. Whether you should measure it monthly, quarterly, bi-annually, or annually depends on your business model. For instance, a SaaS company that offers a monthly subscription should calculate monthly.
For another business, calculating quarterly or annually may produce a more workable result. Meta calculates quarterly.
Also, a business in a highly fluctuating market may be better served if it calculates quarterly or bi-annually, like Airbnb.
Active users depend on the business. For a business-to-consumer (B2C) SaaS company like Netflix, active users are the number of persons who had an active subscription in a set period. It can get a bit tricky for business-to-business (B2B) SaaS companies that offer enterprise-level plans where a single plan can accommodate multiple users. In this sort of situation, you can track per plan or per user depending on your purpose.
Active users are users that are generating money for your business. Don’t include customers who are on a free plan or still on trial.
Add all the revenue that your customers generated within the selected time frame. Include any product purchases, add-ons, upgrades, or renewals.
You can calculate ARPU with the above formula and plug in all of these figures.
A shortcut that some businesses use is to divide the total active subscribers at the beginning of the period by month and total active subscribers at the end of the period by month and then take the average of those.
Calculating ARPU can provide some insightful information. How do you use that to drive profitability?
You need to understand that ARPU is a great way to understand your business’ revenue, but it’s not a complete source of truth for every aspect of your business. For instance, it will not give a holistic view of the financial health of your business because it doesn’t capture everything.
Customer growth and customer retention are two critical metrics you can calculate in addition to ARPU to understand the growth of your SaaS or other subscription-based business.
Using data to determine the right action in business is not new. Platforms like Quala are at the forefront of helping businesses understand their customers by combining insights from frontline teams with customer data to provide a complete view of customer health that drives the right actions for the right customers. Knowing the right moment to offer an upsell or upgrade can drive ARPU growth.
Learn more on how Quala can empower your customer success team to do more with less.