If you’re running a company built around the subscription model, you should place a heavy focus on understanding your customers. ARPU (average revenue per user) is a metric that allows you to do exactly that, giving you the opportunity to identify trends and implement changes to your long and short-term business strategy. Find out more about ARPU for SaaS with our comprehensive guide.
ARPU is a term referring to the amount of revenue generated by a user across a specific period of time, usually a month or a year. ARPU is most commonly used to analyze subscription-based businesses and SAAS companies. For example, with ARPU for SaaS, you can use the metric to monitor the value of your business’s various monthly subscription levels. Then, you can compare the value of your users from each level to determine which of your company’s premium subscription offers are the best revenue drivers.
How to do an ARPU calculation?
Because ARPU is a non-GAAP metric, there isn’t an official, or standardized, way to calculate it. However, there is a generic ARPU formula that is used across the board. This ARPU formula is as follows:
ARPU = Monthly Recurring Revenue (MRR) / Total Active Users
Remember, when you’re doing an ARPU calculation, don’t include your freemium users among your “Total Active Users.” This is because freemium users aren’t adding to your revenue, so including these users may skew your numbers. If you do want to include free/freemium users, it may also be worthwhile to calculate ARPPU (Average Revenue Per Paid User) to understand the average revenue generated by subscribers who are paying for your goods or services.
ARPU vs. LTV
It’s easy to confuse ARPU and LTV (customer lifetime value), since they measure relatively similar things. However, there are a couple of key differences that you should keep in mind. Put simply, LTV is a measure of the entire value generated by a single user during their relationship with your company. So, when you’re thinking about ARPU vs. LTV, remember that while LTV measures the profitability of each customer on a per unit basis, ARPU measures your business’s overall health.
What is ARPU used for?
ARPU is a great indicator of the financial health of your company, providing you with an excellent analytical framework to understand the effectiveness of your business’s revenue generation function. There are a wide range of ways to use the ARPU formula within your business, including:
Streamlining buyer personas – ARPU can help you understand your customer base in a little more depth. For instance, if your ARPU is too low, you may be focusing too much on low revenue customers and need to work on extracting more value from your product/service.
Benchmarking your business against competitors – The ARPU formula can be an excellent way to compare your business to your competitors, as well as companies in other verticals. Put simply, the calculation provides an easy way for different businesses to compare the amount of revenue drawn from their customer base. Generally, the higher your ARPU, the greater your profitability.
Exploring pricing experiments – Analyzing your business’s ARPU can also help you to understand whether your pricing strategy is working. For example, if you have a low ARPU it may indicate that you’re underpricing your products. Running pricing experiments could help you find out if your customers would be willing to pay more for what you’re offering.
Improving the efficiency of marketing and sales – As your value proposition gets clearer and your sales pitches get better, ARPU for SaaS should be increasing over time. If it isn’t, it may indicate that there’s an issue with the effectiveness of your marketing and sales teams.
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