Average Revenue Per User (ARPU) is a KPI that many business owners pay attention to. In eCommerce, many people know it as Average Order Value (AOV), which is similarly relevant. But what is ARPU and how can you use it to grow your business?
Average Revenue Per User is a key performance indicator for calculating the average revenue generated from customers acquired. In other words, it’s a metric to calculate how profitable your sales turnover is.
In simple terms, the Average Revenue Per User is the average revenue per user for a company. It is an absolute necessity for any analytics and performance tracking system. It tells you how much a customer is worth.
Why Is It Necessary to Understand ARPU?
Revenue per user is an important metric to keep track of because it tells you the health of the business and how well it is able to monetize non-organic traffic.
The higher a business’s ARPU, the greater the likelihood that the company will be able to obtain more income in the future. Furthermore, if you can achieve a high ARPU about the value you provide or the company’s income, you know you have a product that is producing a superior value ratio.
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Marketing & Sales are Bringin the Right Deals
The metric Average Revenue Per User (or ARPU) is a KPI that can help with differentiating the productivity of your sales & marketing teams. This metric will tell you if the right people are being contacted and if they’re being sold the right things.
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Product Validation
Product validation has become a foundational topic in the startup and business community. As you grow your business, you must continue to validate your product. What was once a great idea may have become a bad one. ARPU allows your product team to determine whether or not the product’s worth is being communicated to the appropriate client.
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ARPU Indicates The Financial Health of your Company
If your ARPU is less than $50, you know you need a metric ton of consumers to develop a viable business. In this way, it enables you to evaluate what type of business you need to be in terms of price and value. Most of the time, ARPU lets you know if your product’s price is too low in a market that isn’t large enough. A high ARPU in a huge market, on the other hand, suggests that you’re off to a good start in terms of success.
What Does ARPU Reveal About Your SaaS Company?
ARPU for various segments of your client base provides feedback on how current procedures are working and assists you in making decisions for your company’s future. Understanding ARPU will reveal the following information to you:
- Your sales and marketing team’s effectiveness.
- Product validation and price alignment.
- Your company’s financial viability.
- MRR and LTV growth.
What To Include in ARPU
The average revenue per user is a calculation of all revenue generated by your active users divided by the total number of customers from whom the revenue was generated. The following elements should be included in your ARPU calculations:
- Monthly Recurring Revenue: The entire amount of recurring revenue generated by your company for the month.
- MRR lost from churned customers: This component of MRR calculates the MRR lost from customers who really churned, not those who canceled.
- Downgrades: The total dollar amount of clients who have downgraded their service is included here. This is significant since downgrades indicate revenue lost from existing customers who have not churned.
- Upgrades: a subset of MRR that reflects the upgrade dollars from your existing customer base.
*Do not include: Inactive users or users that use the free version of your product.
ARPU Formula
ARPU = Total number of active users/total number of customers
How to Increase Average Revenue Per User
- Up-Sells
- Cross-Sells
- Add Value (new features)
- Adjust Pricing
- Introduce Bundles
To Finish…
Customers are crucial to the success of your SaaS business. So, it is essential that you understand what drives them to purchase, and how you can increase their value over time with cross-selling and upselling efforts. Whether they’re on a free or premium plan, customers should have a path towards improving their ARPU.
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Read More:
How to Forecast MRR: A Super Quick Guide
Churn Analysis in SaaS Business
