Average Revenue Per User (ARPU)

Average Revenue Per User (ARPU) is a financial metric commonly used in the SaaS industry that identifies the revenue generated by a single average user over a specified time period.

As a SaaS founder, understanding ARPU allows you to forecast your business’s revenue and over time reveal the value of your customer base, giving you the capacity to make data-driven adjustments about where you’re focusing your time and resources.

Average Revenue Per User (ARPU) is the revenue generated by an average user over a specific period of time (e.g. month, quarter, year). It acts as a benchmark metric, allowing you to forecast business revenue and assess customer value.

Calculating ARPU is super simple once you have elected the time period you’re after.

ARPU = Total revenue in given period / Active customers in given period

Suppose last month you made $100,000 from 10 active customers, you’d have an ARPU of $10,000. When it gets really interesting is when you compare the metric over different periods. If last year this month you had 5 customers and $60,000 in revenue, then your ARPU has fallen and you might need to assess the customers you’re acquiring and value you’re providing.

While part of the beauty of this metric lies in its simplicity, there are some things to consider before relying too heavily on this equation.

It’s important to remember that this metric only reveals an average, which can be misleading. It’s important to find the appropriate segmented approach to using this metric when assessing how much revenue users are bringing to your business. Looking across a breadth of segments will produce vastly different results, giving you the nuance you need to really understand how revenue is coming into your company.

It’s also important to note that ARPU changes as your company grows. Early-stage companies are likely to generate a lower ARPU along with greater fluctuations in this metric over time. On the flip side, more established companies are likely to see a higher ARPU and more consistency.

ARPU is a key metric and measurement tool for financial performance, and it can operate in different ways. Some of the best uses of ARPU include:

• Using previous ARPU to establish a baseline, and then using this to create and monitor revenue performance against targets and KPIs.
• Segmentation of your user base can reveal which channels, networks, and aspects of your platform are working best.
• ARPU can be used as an industry benchmark, so you can see how you’re stacking up against your competitors.

From just a glance you can see how your company’s revenue and user base is faring.

For instance, if your ARPU is increasing, it may indicate that your company is attracting more high-value customers.

In contrast, a decreasing ARPU may indicate that your company needs to refocus on high-value customers or adjust its pricing strategy.

ARPU is a helpful metric for SaaS and subscription businesses as it helps in analyzing revenue generation and growth at a per-user level.

Here are some ways to use optimize for ARPU:

1. User behavior analysis: ARPU can help identify the habits of your customer base and understand if you need to extract more value from low-revenue customers.
2. Adjust pricing: you may be underpricing your platform if your ARPU is consistently low despite maintaining or growing your customer base. Experimenting with pricing can help identify the correct pricing strategy.
3. Product innovation: By enhancing or iterating your product, you can attract new customers and even charge a higher price for your platform, ultimately helping to increase ARPU.

By tracking revenue at a per-user level using metrics such as ARPU, your company can learn how much value you’re extracting from your user base.