All successful businesses have one thing in common – they understand their customers and track how much their products and services provide value to those customers.
Average Revenue per User (ARPU), also known as Average Revenue per customer, is one of those metrics that come in handy when you need to analyse your active customers closely. Moreover, ARPU is crucial in deciding your SaaS business's product and pricing strategies.
Want to know how to calculate ARPU? Then keep reading to get an in-depth understanding of how it can help your business.
What is ARPU?
ARPU is the average revenue generated from a paying customer or user. It is usually calculated every month to analyse the instant value generated by a paying customer.
How to calculate ARPU?
If you are running a SaaS business, you can calculate the ARPU by dividing your MRR (Monthly Recurring Revenue) by the total number of active paying users.
For example, if you have an MRR of $2,000 in March and a total of 100 users in March, your ARPU is $20.
Note: It is vital to remember that ARPU is calculated based on the number of active paying users rather than the total number of users. Although customers obtained via free trials are crucial to monitor, they add noise and distraction to this metric.
ARPU may also be estimated using total revenue rather than MRR. However, the results of using this method can be inaccurate and fluctuating. 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 Period. This can assist in levelling out the distortion caused by one-time revenue items like set-up fees.
You can calculate ARPU on your own or you can click here to try one of gini’s financing tools to calculate your ARPU in a few minutes.
Why is ARPU important?
Your ARPU number provides granularity into how your SaaS revenue is tracking. This metric enables SaaS companies to do an in-depth examination of growth potential on a per-customer basis and predict their future revenue-generating capability. Furthermore, if you can achieve a high ARPU, you get the idea that you have a product producing good value for your customers. Here are a few other reasons why ARPU is important:
- It provides insights into your pricing strategy
- It enables you to target the right customers
- It allows you to calculate other valuable metrics like net revenue retention
ARPU provides insights for your pricing strategy
ARPU provides insights for your pricing strategy. A low ARPU is okay, but it means you need more customers to stay afloat. You’ll need to make sure you are targeting a big enough market.
Ideally, you'll see your ARPU tracking upward; however, downward trends can also be okay as long as your overall revenue increases. This could happen if customers are upgrading from monthly to annual subscriptions. High ARPU and growth in your user base is a great sign. However, if you are struggling to acquire users while maintaining a high ARPU, you may be priced too high in the market.
Let's take a look at an example of two companies that provide products with similar functionalities:
So, for company A, the MRR from all the customers is $2,000, and ARPU is (2000/4) = $20.
Similarly, for company B, the 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 would help company B acquire more customers and capture more market share.
ARPU helps you to target the right set of customers
ARPU is a critical metric in analysing 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 increasing you get an indication that the value propositions and targeting put out by your sales and marketing teams are getting better each month. Basically your sales and marketing efficiency is improving.
ARPU helps you to calculate Net Revenue Retention
Net Revenue Retention (NRR) is another critical metric to measure the performance of a SaaS business. It represents the percentage of recurring revenue generated from your current clients over a specific time. With the help of ARPU, you can calculate NRR.
When it comes to expanding a SaaS business through the current customer base, sustaining net recurring revenue and avoiding revenue churn is the most crucial objective for the SaaS business owner. Thus, ARPU helps business owners to calculate NRR accurately.
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