Average revenue per user (ARPU) is a metric that shows the average revenue generated by each active user of your product over a period of time. Originally, it was a metric only used by the telecom industry but has since been adopted by tech companies for SaaS, social media, and mobile applications.
The way we do business has changed substantially over recent years. With the popularity of subscription-based products, we need a new way to measure how successful our products are.
ARPU was adopted to help businesses with this, as the metric provides direct insight into which website actions translate into revenue. This helps guide strategies across the entire business, including marketing and product planning, because it identifies high-value areas that can be incorporated into future projects. A healthy ARPU also keeps company executives happy, as a focus on this metric ensures the company focuses on the customers who keep the business going.
As with most metrics, we need to measure ARPU over a period of time. This is commonly a week or a month but can stretch to annually depending on the business needs. Once you have your timeframe, the calculation is simple:
Total revenue for the time period/Total number of customers during the same period = ARPU.
It’s important to note that the total number of customers should only include paying customers, not any that may be on a free account or trial period. Total revenue will include new and recurring purchases like subscription renewals, upsells, and cross-sells.
ARPU is great for product managers looking to maintain products that have already been released.
ARPU helps product managers see how user numbers stack up to revenue. This helps identify areas for improvement.
For example, there may be features on your application that are commonly used but aren’t giving users a reason to upgrade to a paid account. Declining ARPU can also help indicate users are growing disinterested in the product, warning you early that new features are needed.
APRU can also show how well your marketing efforts and pricing strategies are working. If the ARPU doesn’t rise during a campaign, it’s time to rethink your marketing strategy.
There are, of course, pros and cons to ARPU.
In its favor, APRU gives businesses an advantage by uncovering a business’ strengths and weaknesses. It’s also a great metric to use for comparisons against competitors.
However, the APRU figure can give a distorted view of your business. It’s a big-picture metric that cannot capture the nuanced details required for total success. Metrics like user growth and user churn may provide more benefits, but it really depends on how your business operates.