Last editedApr 20223 min read
Although ARPU is sometimes referred to as a “vanity metric” (a metric that measures something that doesn’t matter), it has a large number of benefits that may serve to have a direct impact on your business’s bottom line. But it’s not enough to simply learn how to calculate ARPU – you also need to know how to interpret it. Knowing what counts as a “good” average ARPU is a significant part of that. Find out everything you need to know about understanding ARPU.
First off, what is ARPU? Essentially, ARPU stands for Average Revenue Per User. This means that the metric helps to measure the amount of revenue brought in from a customer over a given period (usually monthly or annually). ARPU has a wide range of uses. Not only does it provide an excellent snapshot of your business’s financial health, but it can also be used to tweak your long and short-term strategy and – in the long run – boost your company’s bottom line.
Put simply, a higher ARPU means that you’ll be able to generate revenue more effectively in the future. You can also use your average ARPU to work out whether you’re extracting enough value from your buying personas (you may not be aligning the value of your product to the right customer), while checking if you have an effective pricing strategy. All in all, ARPU is a great way to explore the financial viability of your business and analyse whether you’re set up for long-term success.
How to calculate ARPU
Learning how to calculate ARPU is a relatively simple process. Although there’s no standard method, you can use the following formula for your calculations:
ARPU = Monthly Recurring Revenue (MRR) / Total Active Users
Quick note – while we’re using MRR, you may also decide to look at annual or quarterly revenue, depending on your business model. If your business only sells annual subscriptions, then average revenue by month isn’t going to be an especially revealing metric.
Let’s take a look at an example to see how this works in practice. Imagine that Company A generated around $350,000 last month from a total user base of 25,000. You can calculate ARPU like so:
ARPU = $350,000 / 25,000 = $14
Or in other words, each user generates $14 in revenue over the course of a month for Company A. But what does that figure mean in actual terms? Is $14 a “good” ARPU or does it leave Company A in dire straits?
What is a good average ARPU?
The standard for average ARPU is likely to fluctuate from location to location, industry to industry, and pricing model to pricing model. As such, there’s no single answer to the question. In the mobile games industry, the average ARPU is around $1.96. However, WeChat – the Chinese social media app – has an estimated ARPU of $7.00. To identify a “good” average ARPU for your business, the best option may be to look at your competitors, as well as big names within your industry. That way, you can calculate the benchmark ARPU for your industry and aim towards that.
In any case, you should always aim for a higher ARPU than what you currently have. While downward trends can be acceptable, as long as your business’s revenues are increasing (for example, this could be the case if more of your customers are switching to annual subscriptions from monthly subscriptions), you’ll generally want to see your average ARPU tracking upward. If your business’s ARPU does start to decline, you’ll need to find more customers to maintain revenues, which can be a challenge.
So, when looking back to our earlier example, we’d need to know a little more information about Company A before we can say whether $14 counts as a good average ARPU. Assuming that the industry average for ARPU is lower than $14 – which it will be in most cases – it’s clear that Company A does have a good ARPU.
LTV vs. ARPU
One of the key areas of confusion when it comes to ARPU is how it differs from LTV (customer lifetime value). While these metrics may look relatively similar, there’s a significant difference between them. In short, LTV measures the amount of revenue you can expect to make from a customer for the amount of time that they remain a customer. Unlike ARPU, LTV considers all of your business’s variable costs, including operating expenses, acquisition costs, and transaction fees. So, when it comes to LTV vs. ARPU, there’s a clear distinction. ARPU measures ongoing profitability, whereas LTV measures the value of each individual customer.
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