ARPU in SaaS companies
All successful SaaS companies have one thing in common. They understand their customers and utilize intelligent tools to track revenue and have a handle on how much value their products and services provided to those users.
What is ARPU?
ARPU stands for average revenue per user. Also known as average revenue per customer (ARPC), it is an invaluable metric used to conduct an in-depth analysis of your customer base and ascertain the average revenue generated by a single customer.
Moreover, your ARPU figure is crucial in deciding your SaaS company's product and monetization strategies.
Here, we will provide some tips on ARPU calculations. Both ARPU and your overall business health will benefit from this metric.
ARPU refers to the average revenue generated by a paying user. Typically, this would be calculated monthly to analyze the instant value of said paying customers. This would provide your monthly average revenue per user figure.
Whilst, at its core, it involves dividing total revenue by the number of units sold, there's more to know about ARPU.
Want to know more about your monthly ARPU - including how to calculate the revenue for individual users? Then read on for an in-depth understanding of how it can elevate your business.
Monthly recurring revenue (MRR)
Before we go any further with your ARPU calculation, it's important to define MRR or Monthly recurring revenue.
MRR is the amount of revenue seen as a reliable predictor for future months. It is considered to hold a relatively high degree of certainty.
How to calculate MRR
To calculate MRR for your SaaS business, multiply your monthly subscription price by the number of active paying users.
For instance, your SaaS company charges a monthly subscription price of $250. Your MRR may look something like this:
January: 4 customers x $250 = $1000
February: 6 customers x $250 = $1500
March: 8 customers x $250 = $2000
Important inclusions in your calculations
Although this calculation is relatively straightforward, there are some things you need to be aware of and make sure you always include in your calculations. They are;
- All recurring monthly revenue from customers, including the total subscription fees
- All extra recurring charges, including additional licenses, etc.
- Upgrades and downgrades in the subscription level
- Losses in recurring monthly revenue
- Discounts provided to customers
Calculating average revenue per user (ARPU)
If you're wondering how to calculate average revenue per user within a SaaS business, here is the formula you can use;
ARPU = MRR / active paying users
Begin calculating ARPU with your MRR (during a specified period of time, and divide it by the total number of active users during that same period.
For example, if you have an MRR of $2,000 in March and a total of 100 active paid users in March, your ARPU is $20.
One important thing to remember when calculating average revenue per user is that it is imperative to calculate active users only - rather than the total number of users.
Although the number of free users obtained via trials and such is crucial to monitor, when it comes to the average revenue per user (ARPU) metric, they are inactive customers who offer little more than noise and distraction. In this case, we only need to know about the paying users.
Other methods of average revenue calculation
Setting the ARPU formula aside for a moment, you may also be able to estimate your average revenue per user using your total revenue generated rather than MRR. However, the results of using this method can be inaccurate and fluctuate. When non-recurring income is included, the ARPU might vary considerably from month to month, making it impossible to glean precise conclusions.
If the company generates a significant amount of non-recurring revenue, we recommend adopting a more extended time period to determine ARPU, such as an annual revenue period. This can assist in leveling out the distortion caused by one-time revenue items like set-up fees.
What is a good ARPU?
The standard for a "good" average revenue per user varies depending on a number of factors. There is no standard answer across the board, as customer personas vary, and it would be like comparing apples to oranges.
Factors that impact the average revenue per user from company to company
Comparing yourself to businesses with key differences is unlikely to produce helpful data. There are factors that can alter the average customer type and the image of the average user. These factors include;
- Product segment
- Market segment
How to achieve a higher ARPU?
If you're looking for ways to achieve a higher ARPU, you could try the following methods;
- Quality over quantity is key
- Focus on encouraging your existing customer base to increase their spending and become higher paying customers. For instance, if you are in the business of mobile apps, this additional revenue may come through in-app purchases. For internet companies, bundle upgrades may be a good strategy
- Carefully evaluate your pricing model
- Hire a Customer Success Manager to focus on customer retention rather than customer acquisition. This can increase your loyal customers' lifetime value and turn low ARPU customers into high ARPU customers.
This is a measure of value, on average, for a new customer that signs up for your service. It takes into account variable costs, including transaction fees, refunds, and support.
Why is ARPU important?
Your average revenue per user (ARPU) provides granularity into how your SaaS revenue is tracked by isolating a user's average revenue.
This metric enables SaaS companies to not only execute an in-depth examination of growth potential on an individual customer basis but also predict their future revenue-generating capability.
Furthermore, if you are able to achieve a high ARPU, you have peace of mind that you are providing your users with good value for money.
Here are a few other reasons why ARPU is so invaluable;
- It provides insights into your pricing model
- It enables you to target the right customers
- It allows you to calculate other valuable metrics like net revenue retention
Average revenue per user (ARPU) provides insights into your pricing strategy
A low ARPU is not the end of the world, but it means you have work to do. Having a low ARPU simply means bringing in more business in order to stay afloat. You'll need to make sure you are targeting a big enough market.
Ideally, you'll see your ARPU tracking on an upward trend; however, downward trends can also be okay as long as your overall revenue continues to increase.
One scenario where this could occur is when users are upgrading from monthly to annual subscriptions.
High ARPU and growth in your user base are great signs. However, if you are struggling to acquire users while maintaining a high average revenue per user (ARPU), it may be time to re-evaluate your prices, as they may be too high in relation to the market.
Let's take a look at an example of two companies that provide products with similar functionalities:
Company A's MRR from all of their customers is $2,000, and their ARPU is (2000/4) = $20.
Company B's MRR is $50, and ARPU is (100/4) = $25.
As you can see from the example, even though the ARPU of company B is high compared to that of company A, it has acquired only a small number of customers.
This can be an issue for the company when there are many potential customers available in a large market. Decreasing the product price could help company B acquire more customers and capture more of the market share.
ARPU helps you to target the right set of customers
ARPU is a critical metric in analyzing whether you are targeting the right set of customers or not. In most cases, ARPU should be increasing consistently, especially if you are a young business just starting out in the SaaS industry.
When you see your average revenue per customer increase, it indicates that the value propositions and targeting efforts to potential customers are improving each month. In a nutshell, your sales and marketing efforts are paying off, and your efficiency is improving.
Average revenue per user (ARPU) helps you to calculate Net revenue retention
Net revenue retention (NRR) is another critical metric to assess the performance of a SaaS business. It represents the percentage of recurring revenue generated from your active customers over a specific time. With the help of ARPU, you can calculate NRR.
How to calculate Net Revenue Retention (NRR)
Net revenue retention (NRR) is another critical metric to assess the performance of a SaaS business. It represents the percentage of MRR generated from your active users over a specific time. With the help of ARPU, you can calculate NRR.
How to calculate Net Revenue Retention (NRR)
Before you begin calculating your NRR, you need access to the following information:
- Last month's MRR
- Total revenue generated by upgrades and cross-selling
- Total revenue lost by account downgrades
- Total revenue lost by customer churn
The NRR Formula
Then, you execute the formula below:
When it comes to expanding your SaaS business through the current customer base, sustaining net MRR and avoiding revenue churn should be your main objective.