We've just added a new chart to the Analytics pages which tracks your Average Revenue Per Account or ARPA. ARPU is the average amount of monthly revenue that you receive per user and it is one of the most important revenue metrics for subscription businesses and Software As A Service (SAAS) subscription businesses in particular.
An Example APRU Chart
ARPU Data Table
What is ARPU?
Simply said, Average revenue per user (ARPU) is the average amount of monthly revenue that you receive per user. It's calculated by dividing total revenue by the number of customers you have in each month. It's considered one of the most important revenue metrics for subscription businesses and Software As A Service (SAAS) subscription businesses in particular.
Why should you care about your ARPU?
Firstly, driving up ARPU almost always drives up your Monthly Recurring Revenue (MRR) which means more revenue for your business each month. The only circumstance in which this is not true is if your customer churn rate causes you to lose revenue faster than your average revenue per customer increase gains revenue. So, all other things being equal, you should be looking at ways to increase your ARPU across your business by upselling customers onto higher paid plans and one time payment items.
ARPU is a great way to compare the revenue you are receiving against different customer segments. For example, you could compare ARPU between customers at two different locations or in two different sectors of your business and look to identify reasons for underperformance and opportunities to drive additional revenue.
Our Plan Group feature is a great way to facilitate these comparisons as with all our Analytics pages you can use the Plan Group selector to compare ARPU for each of your plan groups. So, if you want to compare one group of customers to another based on their plan, simply set up a plan group and use the Plan Group selector to compare them.
What's included in our ARPU calculations?
ARPU is calculated from 2 figures: Monthly Recurring Revenue (MRR) and the total number of customers you have.
Your MRR is calculated from your current revenue from weekly, monthly or annual subscriptions. We rebase annual and weekly subscriptions to a monthly figure so that all subscription lengths are represented proportionally.
The critical factors can which affect your MRR are:
- Upgrades, upsells, and add-ons: People who switch to a higher pricing tier, add additional subscriptions, and/or extra features that are charged separately of their main plan.
- Downgrades: The opposite of the previous elements, those are customers who are now paying a lower monthly rate due to going to a lower pricing tier.
- Churned MRR: These are the accounts of customers who canceled their subscription during the time period.
Although these are already taken into account when you look at MRR, it is important to keep in mind that they affect your ARPU — taking measures to improve each of these factors can have an effect on your overall ARPU metric.
What's not included in our ARPU calculations?
We don't include “free” or “inactive” customers that you are not generating any revenue from. Conversion is truth, so if someone's not paying you, then they shouldn't be included in your ARPU. If you do include them, you will end up watering down your revenue average for the month and providing investors/stakeholders with a distorted image of how the company is performing.
What's the difference between ARPU and Customer Lifetime Value (LTV)?
There can be some confusion as to which is which so let's clear that up:
LTV tracks the total amount of money an average customer pays you before they churn over the lifetime of their subscription to your service. As such, it is a measure of how well you’re retaining customers combined with how much you make from each customer. It's a very useful figure to track the net revenue you are making per customer compared to the cost of acquiring that customer.
ARPU tracks the average amount of money customers are paying you each month. It's better suited for evaluating the performance of factors such as your prices, how you segregate your payment plans and how effective you are at upselling customers onto higher priced plans and one-off services.
Why Understanding ARPU Is So Important
Understanding your ARPU figure is a birds eye view into how well a company is actually doing, especially when breaking down the information by segment and cohort. The higher the ARPU for a company, the better the chance that the company is able to extract more cash in the future. Additionally, if you're able to have a high ARPU relative to the value you're providing or the company's revenue, you know you have a product that's driving a better value ratio. In summary though, here's why APRU is important:
Indicates the health of your business financially If your ARPU is sub $100, then you know you need to get a metric ton of customers to grow a sustainable company. In this manner, ARPU allows you to see what kind of business you need to be from a pricing and value perspective. Most often times ARPU is the "canary in the mind" indicating that your product may be too cheap in a market that isn't big enough. Alternatively a high ARPU in a large market indicates you're off to the races in terms of growth and prosperity.
Product validation that you're extracting enough value from your personas One of the biggest mistakes we see from companies is that they're targeting small or enormous customers and the ARPU isn't high enough for the value that's being provided. For instance, if you're selling a product to Disney and they're getting $1M worth of value in time, cost, etc. efficiencies, then you should be charging at least $100k for that product. ARPU helps your product team see if they're aligning the value of the product to the right customer.
Validation that your marketing and sales teams are driving the right deals ARPU should be increasing consistently over time, especially if you're just starting out in the SaaS game. The reason for this constant need for improvement is because it indicates that your sales and marketing value propositions and targeting are constantly getting better quarter over quarter. Essentially, you're becoming more efficient.
How can you increase your ARPU?
Design your product for growth As a startup, you should be continually looking at the growth potential of your product. Can you add new features? Can you increase your market share with different products? Or expand into new markets by adding extra services over time? Every opportunity you can see for building added value into your existing product is a way for you to increase users or ARPU as your business progresses.
Optimize your pricing structure Adjusting your product pricing is the most obvious and straightforward way to increase your average revenue per user. However, this needs to be strategically planned and keep your customers’ best interests in mind. Consider whether you should grandfather existing customers onto their originally priced plans, or whether you automatically move them to high priced plans (while giving them plenty of notification of course).
Price increases Obviously if you put your prices up, your ARPU will follow suit. But if you’re increasing prices, it needs to be done strategically and with a thought to the possible consequences. Your users should be given plenty of notice, pricing transparency, and some insights into your decision.
Variable and scalable pricing models A flat pricing model is a great start for a new SaaS looking to attract users. Once your startup is more established and looking at increasing its ARPU, it’s time to think about variable pricing structures that allow your company to grow along with your customers and their teams. You need to look at which product features are most relevant to your different user segments, and then price them accordingly. The ideal situation is that as your customer's business grows, so does the amount they pay for your service. This could be based on a per customer charge, a monthly account value or the number of support staff who can log into your service.
Scalable pricing allows SaaS startups to increase their ARPU, but only from customers who can afford it. Individuals and smaller teams might not have the budget, so remain on the free or basic plans, but if you nurture them and their businesses grow, you have a good chance of retaining these customers and increasing your ARPU over time.
- Upselling and cross-selling Upsells, cross-sells, add-ons, upgrades – whatever your SaaS product is, it’s likely you can figure out a way to add more value to base subscriptions that encourage people to increase their spend, and in turn, increase your ARPU. Each of your customers will use your product in different ways. Some will require only basic features, while others might want your full range of product features and be excited to upgrade every time you announce a new release. Happy, existing customers already have built in trust with your company and product and are often more willing to subscribe to premium features than brand new users.