Average Revenue Per User (ARPU) is simply the average amount of revenue your startup receives per customer in a specified timeframe.
ARPU is typically calculated monthly or yearly. ARPU is a core metric for understanding the average value of a customer to the company and is a leading indicator. In other words, a high ARPU indicates high monthly recurring revenue and a growing ARPU indicates strong customer retention.
ARPU is very useful in segmenting customers by their relative value — best paying, average paying, less-than-average paying and dedicating resources to retain the best, grow the middle and minimize investment of time and resources on lowest paying customers.
It is, therefore, a critical metric for driving growth strategy.
How to calculate ARPU
ARPU is a key metric to know and thankfully, is simple to calculate by dividing total revenue by total number of customers.
For SaaS businesses, it is important to note that revenue implies recurring revenue. As your business matures, you can calculate different variations of ARPU that provide deeper insights.
For example, ARPU can be calculated for customers who have upgraded their subscription. In this instance, you would take the amount of additional revenue generated from upgrades in each period and then divide that amount by the number of customers who have upgraded. Once you know ARPU related to upgrades, you can determine whether focusing on upselling is key (or not) to your growth strategy.
Typical pitfalls when calculating ARPU
ARPU is simple to calculate. However, it is important to watch out for the following common mistakes:
Total number of customers:
ARPU must include the total number of customers including non-paying customers. This is particularly relevant if your startup offers a freemium product and has active, non-paying customers. If useful, Average Revenue per Paying User can be calculated separately using the same approach as ARPU.
Adjusting for Churn:
There is no need to adjust the total revenue figure for loss in revenue due to Churn. It is a common mistake to subtract the lost revenue figure to arrive at the total revenue figure. However, as the revenue drops so does the number of customers and both the variables fall out of the ARPU calculation naturally when you look at the total revenue figure for a period.
Is there an industry benchmark for ARPU?
Like most SaaS metrics, ARPU varies significantly across industry, size and stage of the business, the product, and the market and therefore is impossible to benchmark.
However, ARPU is a trend metric. This means that rather than benchmark your startup’s ARPU figure against a set number, it is more important to track the trajectory and ensure that it is consistently increasing. A fluctuating or declining ARPU signals high churn, which in turn cancels growth from new customers and up/cross selling.
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