ARPU (average revenue per user) is a vital metric, especially for subscription-based services. It allows product owners to find out the revenue they get from both paying and non-paying users during an accounting period. With this measure, you'll have a clear picture of the value your business provides.

In this article, you'll get to know why ARPU is important, see the difference between this metric and LTV, learn how to calculate and increase it.

Why is ARPU important?

Generally, average revenue per user allows companies to evaluate their financial potential. Hence, they have the basis for predicting profits. Since "a user" in this context is every client who uses your services regardless of the subscription type (free, basic, premium), you can have a clear picture of your revenue and the value you provide.

There are no high standards for ARPU. Everything depends on your business and the industry. Let's have an example.

Say, your company offers a forever free plan, and 3 pricing plans — $8, $20, $50. You've calculated the ARPU and it is $25. It means that the majority of your clients are ready to pay more than for the cheapest plan. Take into account the fact that the biggest part of almost any SaaS is made up of customers using it for free. Hence, the majority of your clients choose an expensive pricing plan.

This example reflects the value you provide your users with. If you find out that your ARPU is very close to the most expensive pricing plan in your service, it means that people can afford and do want to pay more. So, you should consider creating an advanced and more expensive plan to provide them with the services they need and blow up your revenue.

If your ARPU reaches the medium-priced plan, raise prices without any doubts. If this metric is about your cheapest plan, you should focus more on your marketing and promotional strategy. The chances are that people have no idea why they should pay more.

So, as you see this measure brings a lot of insights to business holders. The high average revenue per user means that you're moving in the right direction and your clients love and appreciate your product. In addition, ARPU makes it possible to evaluate your financial situation for investors, analyze your promotional campaign effectiveness and your clients' reaction to the changes in pricing. Remember the ARPU of a healthy business grows due to new paying customers, but not just a price increase.

There’s a marketing metric very similar to ARPU — LTV. These two measurements are equally important but have some differences. So, let’s take a closer look.

ARPU vs LTV

LTV is a customer lifetime value. This metric shows how much money a client brings you during the relationships with your brand while ARPU means the average sum of money brought by a user during a specified period, for example, a month. So, the difference lies in the periods used for calculating these measures. Generally, LTV reflects the value of a client for your business while ARPU helps you realize the current situation for your company.

Both metrics are important and interconnected. Remember, that the more chances your clients have to spend money in your service, the higher your LTV will be. It’s time to learn how to calculate ARPU for your business.

How to calculate ARPU?

ARPU is calculated by SaaS, mobile app owners, any services that work on a subscription basis, and rarely, online stores. Ecommerce businesses only use ARPU as an average revenue per unit. They calculate the revenue per product to have a clearer picture.

Generally, the formula looks the following way:

ARPU = Total revenue for a specified period/Number of customers

The time period is very often a month — how often a user should pay for your services.

For example, 500 users chose any of your plans in the previous month. Your revenue was $3000. So, your average revenue per user is $6 (3000/500).

Taking the time period, mind how often your clients need your services.

In the last section, we’ll share some tips that will help you increase your ARPU.

How to increase ARPU?

We’ll offer some effective tips that can be implemented by any business.

  1. Segment your users. Segmentation allows companies to better understand their customers, their needs, problems, and preferences. Find out your best-selling products and analyze your buyer persona to see some common patterns. Divide all your clients into groups and create the pricing plans accordingly. You start from plans that fit small, medium, and big businesses. This way, users will choose the best plan for their needs.
  2. Analyze your pricing plans. Find out your best selling and worst selling plans. Monitor which features clients use most frequently and never use within each pricing plan. This way, you’ll find out the options they don’t really need, hence, they don’t want to pay for them. Create plans based on customer segmentation.
  3. Make use of cross-selling and upselling. These techniques allow marketers to increase the average bill of their clients. Think of some bonuses and perks you can add to your existing plans to provide better value. Study the needs of your users carefully to reveal their pain points and features they may need to have in a bundle.
  4. Look for growth hacking opportunities. They allow companies to find some cost-effective techniques that will increase customer loyalty, trust, keep them engaged, and improve the market share. Think of developing cost-effective features that don’t require a lot of resources but will provide users with additional value. Add them to your current plans and don’t forget about marketing. People should understand how your new launches will help them work more effectively.
  5. Increase prices. This is the easiest and most obvious way. But, make sure that your ARPU reaches your medium-priced plan in this case. It means that people realize your value and are ready to pay more.

Congrats, now you know why ARPU matters, the way it differs from LTV, how to calculate and increase it.

References

  1. This article offers three ways to optimize your ARPU.
  2. This article shares some tips to improve this measure.
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