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.
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.
Table of Contents:
- What does ARPU stand for?
- What is ARPU (Average Revenue Per User)?
- Average Revenue Per Unit
- ARPU Revenue Formula
- How to Calculate ARPU
- Key Differences Between ARPU and LTV
- How to Use ARPU
- How to Increase ARPU
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 its 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.
What is ARPU (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 business's total revenue by its total number of users.
This is not a GAAP accounting term, so technically, there’s no official ‘standard’ for calculating it, but it’s generally done 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 the number of units sold. Average revenue per unit is used by companies that sell tangible products instead of providing a service or software.
Average Revenue Per User vs. Average Revenue Per Unit
Average revenue per unit differs from ‘per user’ because it focuses on revenue generated by one unit (so, one product sold). It’s most often used for tangible products.
Below we’ll go over how to calculate ARPU using a formula.
ARPU Revenue Formula
To calculate ARPU, divide the total revenue in a set period by the total number of users in the same period.
ARPU = Total Revenue / # of Users
How to Calculate ARPU
Calculating ARPU means knowing your total revenue during a given time period and the total number of paying customers during that same time period. Users in a free trial are not included in this metric.
What time-frame should you use?
A month is the most common time period for calculating ARPU because most subscription based companies have a monthly billing plan. If this is your business, you’d take your total monthly revenue and divide by the number of users in that month.
If you aren'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. Airbnb, for example, probably doesn’t expect daily bookings, so it might measure ARPU on a quarterly basis.
How to Calculate Total Revenue
To calculate total revenue determine the number of products, goods, or services sold during the time frame you choose. Then, multiply the cost of the product or service by the number you’ve sold.
Next, you’ll multiply the cost of the product or service by the number you’ve sold. 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).
If you sell multiple products, you can:
- Calculate ARPU for each individual product and see what produces the most revenue.
- Combine the totals for each product to see ARPU for all your products. For tangible products, you’ll use the number of units sold; for intangible products like SaaS, you’ll look at subscriptions.
How to Define a User
Defining a user depends on your business.
A consumer-based monthly subscription company like Spotify or Netflix might define a user as someone with an active subscription that month. The same goes for a SaaS company like HubSpot.
The only difference is when you have multiple seats per account, and the pricing scales with users. Then, 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 where transaction might be one-off, you could define a user as someone who made a purchase during the target time period.
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’.
Since there are a number of ways to define active user, you'll want to align your definition with how your business generates revenue.
Key Differences between ARPU and LTV
Some confuse ARPU with customer lifetime value (LTV).
While they are related, they are different metrics.
Lifetime value measures the average and estimated value of a customer for their entire period of doing business with you.
You calculate LTV using the following formula:
LTV = (Lifetime spend - lifetime variable costs) / # of customers acquired
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 mentioned, ARPU is a great way to benchmark your business against direct 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 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 lower-tier users generate the same support cost per user but only a fraction of the ARPU, hence why you see companies like Optimizely eliminating low-level plans.
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.
How to Increase ARPU
Increasing your ARPU (and having a high ARPU in general) comes down to targeting the right audience. If the product you introduce to the market doesn’t meet the needs of your target audience, you won’t get users, generate revenue, or grow your business.
People who don’t fit your exact profile also aren’t valuable to you because, while they may use a specific part of what you offer (like one tool in your suite of tools), they’re less likely to upgrade their service for more functionality.
So, the key to increasing your ARPU is having a well-rounded buyer persona and understanding of your persona and a product designed to meet your audience’s exact needs. Then, when you go to market, you’ll attract the right users looking for the exact solution you offer, building your ARPU.
You can also steadily increase your ARPU over time by continuing to add value to your users. For example, maybe you introduce new features to a tiered plan that inspires a lower-level subscriber to upgrade to a new tier to use that feature.
Price increases are another way to increase ARPU, like adding new features or upgrading your overall product or service. You might update pricing because of market competition or production/material costs, but these instances are less of a value-add than performance or feature upgrades.
Over to You
If you have a high ARPU, building a larger customer base will help you grow your business. If your ARPU is low and the difference in cost doesn’t equal out to the total revenue, you can assume that you might need to make some changes to your strategy to improve your business’ ARPU.