In this digital world, what separates a successful entrepreneur from a failure is the measure of how well they know their customers. There are various tools to find the customer needs and satisfaction; one such tool is ARPU.
As the user’s business grows, this metric starts quantifying, and customer personas start trickling down your software. At such a time, ARPU becomes of quite high importance. At this point, if you’re asking yourself, “What is ARPU? How to use it efficiently?” then you’ve come to the right place. Read on ahead.
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What is ARPU?
To put it simply, ARPU stands for Average Revenue Per User. While it can be simply put in the four words of its abbreviation, its implications on a business are quite huge. It is the very first metric any company uses to check their growth, even before they have a solid customer base. It basically denotes the average revenue you’re getting per customer; knowing this helps the business calculate and analyze how much growth they can expect in the future.
Many people in this business dismiss ARPU as a way to boost your ego, as a ‘vanity metric.’ While that’s important too, it cannot be simply downplayed as some vanity metric. It is a very important tool for businesses with Software as a Service (SaaS) models. Graphing this value helps you know what is trending among your customers and lets you up-sell or down-sell some product. This is a very important feature of ARPU.
As mentioned earlier, it’s calculated as the average revenue per user; it is usually calculated per month. This means that it is a good way to know and eventually boost the monthly revenue of your business. This has a positive impact on the business, no matter how you look at it. Higher ARPU has other benefits too, like the higher its value, the higher the customer’s lifetime value (LTV) of the business. This means that more people will be attracted to your business.
It helps put up short-term and long-term goals for your business, and metrics like the monthly revenue and lifetime value of the business are very important to long-term planning. For short-term planning, it depends on what kind of products have been asked for by the customer, which is easy to know if you analyze your company’s ARPU.
How to calculate ARPU?
How to calculate ARPU? It is quite simple, one of the simplest metrics to calculate. There is a certain metric called the monthly recurring revenue (MRR), which is the basic calculation. This, when divided by the total number of customers, gives you your company’s ARPU.
What does it signify?
It signifies a lot of things in your business; here’s a list of all such measurements:
- It indicates the financial health of your business: ARPU, if below $100, shows that your business has the potential to grow sustainably. It allows you to see what kind of business you should run from the perspective of your company’s sustainability, pricing and value. A high ARPU signifies that you’re tending towards high growth.
- Product validation: One very big mistake you’re prone to making if you ignore ARPU is that you might not be able to price your product rightly. For example, if you’re selling a product to Google, you should be pricing your product accordingly, at least $500,000 for it.
- Marketing validation: ARPU is a good measure to know whether your team is performing well or not. If they are working to the best of their abilities, your company’s ARPU will constantly increase, and that should exactly be the case. Essentially, it should reflect the increase in your efficiency, and that will help increase the attractiveness of your portfolio.
ARPU, as discussed earlier, is highly dependent on the MRR and LTV of your company. A high ARPU helps you increase your MRR, the more your average revenue, the more you can put it back into your business to attract more customers in the short term. From a more long-term perspective, a high ARPU means that you can increase the lifetime value of your business for your customers.
A segmented version of your ARPU tells you what plan of yours is trending. You can change the prices of the trendy plans accordingly.
ARPU Do’s and Don’ts
What should you include in your ARPU calculations? There are various Do’s and Don’ts while taking into consideration your company’s ARPU. Here’s a list of the same:
- The monthly recurring revenue: This is obvious; we have been discussing the same for the last couple of paragraphs, so including the MRR is a very important Do in ARPU calculation.
- Account upgrades: It depends on how much your business has grown. The more the growth, the more the increase in the ARPU of your company. You want growth to be maxed out, at least as much as possible.
- Account downgrades: In an ideal world, growth is accompanied by more growth. But in the real world, growth is often accompanied by a downgrade in some other aspect of the business. In this case, when one product gains popularity, other products from your company might lose popularity. This can lead to some downgrades in your business account.
- Lost MRR from customers that have been churned, rather than having them cancel your subscription.
- Total Paying customers: You cannot include the people who are not paying, i.e., using a free service from you in your ARPU calculations. This is bound to throw off the metric, so only include the people who are paying for your subscription.
- These are various do’s; let’s look at some don’ts now. Don’t ever include inactive customers. This is mostly like the previous point. Always include paying customers only. Don’t ever include customers using a free trial or using your service for free.
- In case you include these forbidden customers, you’ll end up watering down your ARPU, downplaying yourself. You don’t want that, as an investor that might look at your company’s portfolio might get turned off by the lesser ARPU (that is your average revenue, after all). So beware of using such metrics.
How to optimize ARPU
How to optimize ARPU? There are three main ways to increase and optimize the ARPU of your company, essentially making your company more efficient. Here are those methods:
- Use of Add-ons, use of value metrics, and use of upgrades: You need to increase the revenue from your customers, period. This can be done by the use of apt value metrics and pricing your products right. This attracts more customers and retains as many consumers as possible. Using add-ons means that you’re making your software more interactive for the user. Impressing consumers is a very important factor in retaining consumers.
- Ensure retention for each and every customer: ARPU is mainly affected by active customers who aren’t burnt out (churned customers). To ensure that your customer base is happy and not feeling burnt out, you should try reaching out to them and using customer satisfaction software. This ensures that every last customer is happy and contributes to your ARPU metric.
- Make sure your customer targeting and segmentation are on point: Making sure that you are targeting the right customer segments is very important to increase the value of your average revenue. This ensures that most of your customers remain active and don’t churn out easily. If you’re in a market where you can target millions of customers, to start with a low ARPU isn’t that bad. On the other hand, if you’re targeting a niche, a high ARPU would be best.
As discussed throughout this article, having a high ARPU should be your main target in case you are running a SaaS business. Having low ARPU is not recommended until you are figuring out your consumer base and experimenting with the market. Always aim for the sky.
Conclusion
In conclusion, the basic takeaway from this article is that keep your ARPU as high as possible. Keeping a low ARPU has never benefited anyone; it harms your business by getting the investors to turn away from the prospect of investing in your business. The aspect of your business that is highly affected and affects this metric is the sales team. Focus on improving the sales of your business to attain a higher ARPU. This will increase your product’s or service’s demand in the market, directly affecting your average revenue, which in turn gets everyone to know about you and increase your ARPU.
Take it easy and take one step at a time. Get your sales team to talk to the right consumer base and build good customer relationships. Having loyal, paying customers is a good way to maintain your ARPU metric, but always try to expand your business.
You can read more about SaaS businesses through the SaaSworthy website; you won’t be disappointed.
