ARPU, an acronym for average revenue per user, is a crucial metric that reveals the average revenue generated by each active user of your SaaS application over a specific period of time.
In business, ARPU plays a similar role to customer lifetime value (CLTV or LTV). It serves as a means to assess the value of your users, whether individually or grouped into segments and cohorts.
That's why it's essential for SaaS companies to get to grips with and measure it accurately.
How to calculate Average Revenue Per User (ARPU)
To calculate ARPU, you divide your total revenue by the number of users within a particular time period. This period can range from a week, month, or year, to any other period aligned with a specific campaign, marketing season or business strategy.
Typically, revenue per user is evaluated and compared month-to-month, based on monthly recurring revenue (MRR).
When measured over a month, the formula for determining ARPU is this:
$$\text{Average Revenue Per User (ARPU)}=\frac{\text{MRR}}{\text{Number of Active Users}}$$
For freemium SaaS companies, you'll also want to ensure that you calculate average revenue per paying user (ARPPU). This metric follows the same calculation method as ARPU, but focuses solely on your segment of paying users:
$$\text{Average Revenue Per Paying User (ARPPU)}=\frac{\text{MRR}}{\text{Number of Active Paying Users}}$$
In a successful ad free freemium SaaS business model, ARPPU will always surpass ARPU significantly. For freemium consumer SaaS applications that heavily rely on ad revenue, the values of ARPU and ARPPU are more likely to be closer together.
SaaS companies can also explore various adaptations of the average revenue per user formula to gain more specific insight. An example of this is the calculation of Average Revenue Per Daily Active User (ARPDAU), which filters out all of your inactive users:
$$\text{Average Revenue Per Daily Active User (ARPDAU)}=\frac{\text{MRR}}{\text{Number of Daily Active Users}}$$
Why is ARPU important for a SaaS Business?
ARPU is important for marketers, product managers and executives. By comparing the average revenue per user across various marketing campaigns, ad networks, and distribution channels, valuable insights can be gained regarding the quality of users acquired from your investments in growth.
This information is essential for determining things like your return on ad spend (ROAS) and return on investment (ROI) for each marketing effort you make. When assessed alongside the LTV of users, ARPU helps you to calculate the maximum user acquisition cost you can sustain to ensure a positive ROAS.
Additionally, ARPU assists marketers in determining the number of new users required to meet specific revenue targets, guiding strategic decisions and resource allocation.
For product managers and executives, understanding your application's ARPU is key to understanding your customer base and refining your pricing strategy. If your ARPU is lower than expected, it may indicate an overemphasis on acquiring low-revenue customers or suggest that your products and services are underpriced.
By leveraging ARPU data effectively, you can tailor your strategies to attract and retain high-value users, ultimately maximising your revenue potential.
Going further than ARPU, ARPDAU is useful for providing insight into whether your revenue is being driven by active or inactive accounts: if your ARPDAU is high but your ARPU is low, it's a sign that you have a lot of "poor fit" inactive accounts, for example.
Similarly, if you have a similar ARPU to ARPDAU but lots of inactive accounts -- you might have a future issue with churn as those inactive accounts fail to renew their subscriptions.
Measuring ARPDAU for customers generated by a particular marketing distribution channel can tell you more, such as whether a particular channel is good for generating daily active users that don't spend as much.
What is a good ARPU in SaaS?
What makes a good ARPU (Average Revenue Per User) varies by industry and company objectives. Typically, an increasing or high ARPU signifies effective monetisation of your user base, often attributed to successful marketing campaigns or valuable product offerings. Conversely, a decreasing or low ARPU can raise concerns, indicating potential customer dissatisfaction, sub-optimal pricing strategies, or the necessity to reassess your approach to marketing.
Establishing ARPU benchmarks and targets involves leveraging historical data, analysing trends, and segmenting ARPU by customer demographics, product categories, or geographical locations. ARPU serves as a valuable tool for predicting profits, evaluating the value of each customer, and making well-informed decisions regarding pricing strategies and subscription trends.
A "good" ARPU for an Enterprise SaaS company for example is going to be much higher than a good ARPU for a Freemium SaaS company targeting SMBs, which would usually be higher still than a Freemium SaaS targeting Consumers directly.
How to increase Your SaaS Product's ARPU
1) Grow Your Product Itself
In SaaS it's essential to continuously assess the growth potential of your product. Consider adding new features, expanding market share with different products, or entering new markets with additional services over time.
Identifying opportunities to enhance the value of your existing product is key to increasing users and ARPU as your business scales up.
For instance, HubSpot has transitioned from a primarily email-focused marketing automation platform to a comprehensive CRM, CMS, customer service solution and more. This evolution provides loyal, long-term customers with an integrated value-add that supports their business growth, eliminating the need for separate systems for other growth functions. This strategic move has significantly boosted HubSpot's ARPU among customers seeking the enhanced value offered by the wider platform.
2) Upsell and cross-sell
Additional opportunities for enhancing the value of your SaaS product include upselling, cross-selling, offering add-ons, and providing upgrades. These strategies can encourage customers to increase their spending, ultimately boosting your ARPU.
Each customer interacts with your product differently. Some may only require basic features, while others may be eager to access your full range of product features and upgrade whenever a new release is announced.
Existing, satisfied customers have already established trust in your company and product, making them more likely to subscribe to premium features compared to new users.
3) Optimise your pricing structure
Making adjustments to your product pricing is a clear and direct method for boosting your average revenue per user. However, it is crucial to carefully strategise and prioritise your customers' interests throughout the process.
Implement a Value-Based scalable pricing model
A flat pricing model can be a solid foundation for a new SaaS company looking to attract users. As your startup evolves and aims to boost its ARPU, it's worth considering implementing value-based variable pricing structures that align with your customers' evolving needs and team sizes. Identifying the most valuable product features for each user segment and pricing them accordingly to their value to the customer is key.
Implementing scalable pricing empowers SaaS startups to increase their ARPU, particularly from customers who are financially able. While individuals and small teams may initially opt for free or basic plans due to budget constraints, nurturing them as their businesses expand will lead to both customer retention and ARPU growth over time.
Try Increasing Your Prices
When considering raising prices, it is crucial to approach it strategically and with careful consideration of potential consequences. Users should be informed well in advance, provided with transparent pricing details, and given insights into the decision-making process.
SaaS price increases can lead to widespread frustration among loyal users of your product and damage your brand when they're not thought through strategically, and communicated clearly to customers well in advance.
In situations where customers lose trust and confidence in a SaaS product, they are likely to seek alternatives, especially if the cost of switching is low.
While customers may understand the need for subscription fee increases to support business growth or reflect the value of new features, sudden and drastic changes to pricing can leave loyal users feeling undervalued and upset.
Implemented well, price increases can increase your ARPU, especially if you haven't increased your pricing for a long time and pricing is rarely something your users complain about.
4) Bundle your products together
Packaging products together to provide value at a competitive price is a common marketing strategy seen in the e-commerce and B2C industries. Think of a trip to the shop for groceries and all the "buy any 3 for the price of 2" offers you see, for example.
For SaaS companies, creating bundled packages that include a variety of add-ons can be a compelling way to attract new users at a higher ARPU than if they were to simply choose a standard plan.
Furthermore, bundling can effectively boost the ARPU of existing customers, especially when presented as a special offer during subscription renewal periods.
5) Reduce your customer churn rates
By prioritising customer success, you can ensure that your loyal customer base remains intact. This not only boosts customer lifetime value (LTV) but also creates more opportunities for upselling and cross-selling, ultimately leading to an increase in your average revenue per user (ARPU).
Focusing on minimising churn enables you to retain valuable paying customers who might otherwise leave, contributing to a rise in monthly recurring revenue (MRR) and subsequently growing your ARPU.
ARPU vs. lifetime value (LTV)
Although both ARPU and LTV are essential metrics for assessing the success of a SaaS business, they differ in their calculation, focus, and timeframe. Let's delve into these variances to understand their significance in making better decisions for your business.
How Each Metric is Calculated
- ARPU is calculated by dividing the total revenue generated during a specific period by the number of users or customers within that same timeframe.
- LTV is calculated by taking into account the average purchase value, frequency, customer lifespan, and deducting the related costs.
Focus of Each Metric
- ARPU assesses the revenue generated per user or customer, primarily analysing the success of your monetisation and pricing strategy.
- LTV focuses on the overall value that a customer contributes over the course of their relationship with your company, taking into account recurring revenue, upselling, cross-selling, and retention strategies.
Timeframes of Each Metric
- ARPU offers valuable insights into shorter-term revenue generation, calculated for specific periods such as monthly, quarterly, or annually.
- LTV adopts a long-term outlook, taking into account the entirety of the customer's relationship duration with your company.
Significance in Decision-Making
ARPU
- Assists in evaluating the effectiveness of pricing strategies, product offerings, and customer segmentation.
- Acts as a vital performance metric, assessing the efficiency of revenue generation and the success of monetisation strategies.
- Highlights trends over time, enabling your business to refine and enhance its strategies.
LTV
- Predicts the overall value that a customer is anticipated to bring throughout their lifetime.
- Informs strategic choices concerning customer acquisition expenses and retention tactics.
- Assists in resource allocation and prioritising efforts to retain high-worth customers.
- Recognises opportunities for upselling and cross-selling, enhancing customer value and driving revenue expansion.
In essence, while ARPU and LTV share the common objective of measuring revenue generation, they differ in how they are calculated, their focus, and the timeframe they cover.
Both metrics are crucial for making business decisions, with ARPU offering insights into short-term performance and LTV guiding long-term strategic planning. Understanding these distinctions is key to gaining valuable insights into a SaaS business's revenue streams, customer base, and growth potential.
