ARPU is a common metric that’s useful for all types of businesses, but it's most commonly used to analyze subscription based uses. It’s a simple, straightforward metric with a handful of use cases.
What does ARPU stand for?
The acronym ARPU stands for Average Revenue Per User. This metric is used by businesses to measure the factors that are contributing to the organization’s overall revenue. ARPU helps companies analyze their growth patterns and compare their success to competitors.
Calculating ARPU is a great way for a business to continuously track their annual growth progress. For example, service and software businesses that offer different monthly subscription levels can use ARPU to monitor the monetary value of each new user. They can then compare the value of users for each subscription to determine which premium offers are the most influential in driving revenue.
In this post, we’ll dive into what ARPU is, how to calculate the metric for various businesses, and how you can use it to drive business results.
Average Revenue Per User
Average revenue per user measures the amount of money that a company can expect to generate from an individual customer. It’s calculated by dividing the total revenue of the business by its total number of users.
This is not a GAAP accounting term, so technically there’s no official ‘standard’ of how it’s calculated. However, the calculation is generally used in the same way across the board.
Average Revenue Per Unit
Average revenue per unit is the amount of money a company can expect to receive from selling one unit of product. It’s calculated the same way as average revenue per unit by dividing the company’s total revenue by its number of units sold. Average revenue per unit is often used by companies that sell tangible products instead of providing a service or software.
Average Revenue Per User vs. Average Revenue Per Unit
In the investing world, sometimes this formula is referred to as “Average Revenue Per Unit.” The calculation of the formula is essentially the same, but it’s meaning is a bit different.
ARPU Revenue Formula
The calculation of ARPU is quite straightforward. It simply involves taking the total revenue in a given time period by the number of users in that time period.
ARPU = Total Revenue / # of Users
What time-frame should you use?
By far, the most common time period is monthly. Any company that sells a monthly subscription probably uses monthly. In this case, to calculate your ARPU, you would take the total revenue for the month and divide by the total active customers in that month.
If your business isn’t a subscription, think of how often a user ‘should’ use your service. At LawnStarter, we expect people to get their lawns cut at least once per month, so we measure it on a monthly basis.
In some cases, a different time period might make sense -- it depends on how often your users are expected to use your product. Airbnb, for example, probably doesn’t expect their users to make a booking monthly since most people don’t travel monthly. Therefore, they might measure ARPU on a quarterly basis.
How to Calculate Total Revenue
To calculate the total revenue for your business, we first need to determine the number of goods or services sold during a specific time period. Companies that sell multiple products will want to look at each product’s total revenue individually, and then combine their totals together. This allows you to see which specific products are producing the most revenue.
If you’re selling a product that’s tangible, you’ll want to calculate the total number of units sold per each product. If you’re selling a service or software product, you can look at the total number of subscriptions that were purchased.
Once we know the total of goods sold, next we’ll have to calculate the price of these goods. This will be the number that the customer pays for one unit of the product or service.
Now that we have determined both the number of goods sold as well as the price of each good, we can multiply these values together to calculate total revenue. To help, here’s an example using HubSpot’s subscription model.
HubSpot offers our Marketing Hub Starter plan for $50 per month. Let’s say we sell 10 of those plans. If we multiply our quantity of goods sold (10) by our price ($50), then our total revenue for this product would be $500 (10 x $50 = $500).
How to Define a User
How do you define users?
There’s no clear-cut definition, but it depends on your business.
For a consumer-based monthly subscription company like Spotify or Netflix, you would generally define a user as one who had an active subscription that month.
The same goes for a subscription SaaS company like HubSpot. The only difference is when you have multiple seats per account, and the pricing scales with users. In that case, you might define a user as a seat or as an account, depending on your purpose (more on this later).
If you’re an ecommerce store like Amazon, or an as-needed service like Instacart, you would probably define a user as one who purchased that time period because the transactions are one-off,.
For ad-based websites (non-subscription) like most news sources, you would probably use visitors. For a social network or consumer app, you might identify a key action or sequences within that app as ‘activity’.
There are a number of ways to calculate active users, so you'll want to align the definition with the frequency and manner in which you make money.
Lifetime value is a measure of how profitable each customer is on a unit basis, whereas ARPU is a way to measure the overall health of the business on an ongoing basis.
How to Use ARPU
1. Comparison to Competitors
The best use for ARPU is in comparison to competitors and companies in other verticals. It’s an easy, high-level way to compare how much one company makes off its users compared to another. For decades, stock analysts have been using ARPU to analyze and compare subscription-based businesses, like telecom providers.
All else equal, the company with the higher ARPU is more profitable.
2. Choosing your Customer Acquisition Channels
When evaluating customer acquisition channels, you should use lifetime value as the ultimate indicator of whether a customer acquisition channel is profitable or not. However, ARPU can still be valuable.
As previously mentioned, ARPU is a great way to benchmark your business with other businesses, both competitors and companies in similar verticals. Therefore, this is a quick yet effective way to make a list of similar companies whose channels may also work for you.
3. Segmenting your Users for Profitability Analysis
Most businesses have some sort of segmentation. In SaaS, you typically will have different tiers of customers, ranging from freemium to entry level to enterprise.
Looking at ARPU by a segment can reveal interesting insights when paired with other metrics.
For example, it’s quite likely that your enterprise users with have a much higher ARPU than your entry level plan. But what about your support cost per user for each of these segments?
Many businesses find that the lower level users generate the same amount of support cost on a per user, but only a fraction of the ARPU. Hence why you see companies like Optimizely eliminating low-level plans.
Or, the balance may not be so out of whack that you lose your lower tier, but perhaps you could use this insight to adjust pricing.
Many financial models involve first forecasting your users based on acquisition, customer acquisition, and retention assumptions. By simply multiplying that number by your ARPU, you get a revenue forecast.
Of course, you might need to make adjustments if you think your ARPU will change over time.
If you use ARPU differently, I’d love to hear from you on Twitter.