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.
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.
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
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;
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.
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.
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.
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;
If you're looking for ways to achieve a higher ARPU, you could try the following methods;
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.
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;
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
$20/month
100 customers in March
Company B
$100/month
4 customers in March
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 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.
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.
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.
Before you begin calculating your NRR, you need access to the following information:
Then, you execute the formula below:
NRR = (A + B - C - D) / A
Or, NRR = (last month’s MRR + total revenue from upgrades and cross-selling - customer downgrades - churn) / last month’s MRR
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.
