The secret to running a successful business is simple: you have to know both your customers and your data.
Companies that rely on customer analytics to gauge and direct their operations benefit from 93% higher profits, 112% increased sales growth, and a 115% higher return on investment.
To stay up-to-date on their business performance, companies track Average Revenue Per User (or ARPU for short) to get a sense of their financial performance.
Average Revenue Per User (ARPU) is a growth and performance measure, which tells companies how much monetary value (revenue) their average customer generates in a given month.
Stock analysts were the first to use ARPU as a financial metric to assess the value of subscription companies, such as those in telecommunications.
Companies that traditionally sold physical products could allocate higher prices to the items they were selling, but they could never tell when the next purchase was going to happen. In comparison, subscription companies had lower prices (monthly subscription fees), but could bet on sales coming in regularly. Stock analysts needed a new way to measure the performance of subscription companies. They loved ARPU because it allowed them to compare company performance between businesses of different sizes, as well as check whether a company was increasing the average revenue generated by each customer.
ARPU is not just beneficial for stock analysts, but for companies too. You can use it to analyze the difference between the average revenue of customers on different subscriptions, allowing you to understand the monetary value that each subscription generates as a whole.
ARPU is a non-GAAP (generally accepted accounting principles) measure, meaning that there is no official set of instructions for how to calculate it. However, there are some general principles that can guide your calculations.
ARPU is calculated using the following formula:
Let’s break it down step by step.
By far the most popular choice is to track ARPU monthly. Companies look at their transaction data and generate a report similar to this:
The preference for tracking on a monthly basis is a reflection of business operations, so it’s not set in stone. For example, Airbnb would not get much value from a monthly ARPU if, on average, most users go traveling twice a year. They might opt for a longer time period instead, such as quarterly or half-yearly ARPU.
Decide on a time frame that makes sense for your business. The specific time period is determined by looking at the frequency of repurchases or length of sales cycles.
The total number of active users is tricky because it depends on how your company makes money. Let’s look at a couple of examples of potential active users for different business models:
The principle behind picking your active user is to determine who generates money for your company. Is it an individual customer who purchases from your shop? Perhaps a company (comprised of many individuals, but still a company) that buys your corporate software? Or maybe an app user who looks at your ads?
For subscription businesses, this could be more challenging. Be sure to include anyone who is actively paying for a subscription, but exclude people from your subscriber base who are on a trial or are freemium users. You should also include people who churned in your specified time period - they might not be paying customers anymore, but they were from the beginning of the period up until the point that they canceled their subscription.
To get the total number of active users, simply count the number of distinct customers, companies, software subscribers, or website visitors in the time frame that you’ve chosen.
Sum up all of the revenue that your customers generated during your selected time range. Include any product purchases, monthly subscription renewals, add-ons, and upgrades - basically any line item that pays. Make sure to also include negative revenue, such as refunds.
Finally, plug in the total revenue alongside the total number of active users into the calculation outlined above to get your ARPU.
When ARPU is interpreted correctly, it can bring several benefits to a company:
There are two common mistakes that you should avoid when interpreting ARPU:
A good ARPU depends on the industry that you’re in. For e-commerce companies, it’s anything above $252, while in gaming, a figure north of $66 is satisfactory. Telecommunications companies will be looking for an ARPU of more than $30, while only $1.7 is a good result for non-paying mobile app users (e.g. ad revenue generated by serving ads to mobile users with freemium accounts).
Finding the benchmark for your specific industry can be challenging because companies are very secretive about their financial metrics and performance. Search databases like statista with the query “ARPU [industry]” to find the numbers relevant to your business.
ARPU is extremely useful for gaining an understanding of how other businesses are performing. Just be careful when interpreting it. ARPU varies between companies in the same verticals, between industries, and across geographical locations. Keep in mind that a higher ARPU is not necessarily a sign of a better business. Unless you know the additional costs associated with customer acquisition and retention, it’s impossible to paint a full picture of your business’s performance.
There are three things that you can do to increase your ARPU:
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