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A Quick Guide to Understanding the ARPU Metric
ARPU, short for average revenue per user, is underestimated by most SaaS companies. However, it is just as important, if not more, as other value metrics like the SaaS conversion rate. Yes, MRR is a metric that is used to calculate both the total paying customer as well as the growth potential and come up with strategies on to increase recurring revenue. But, if you are planning to measure the success of your product, you need to stop looking at other Saas metrics and focus on the ARPU formula. But let’s dive into what the ARPU SaaS metric is all about and how it can help subscription companies to optimize the marketing budget, specifically the customer segmentation, and increase monthly recurring revenue.
ARPU = MRR/Number of Active users per fixed period
When discussing ARPU, you need to treat this topic seriously because it brings forward so many secrets which are definitely worth knowing. Let us elaborate on this topic a bit. ARPU shows you how much your customers bring you, per user. If the ARPU value is low, then expanding in the way you might have hoped to do may be close to impossible. When your ARPU is low, you may not be able to continue with your growth strategies, without giving up on your profit. And let’s be honest here. Who wants to give up profit? And that’s fine, that’s really ok because you can adapt your growth strategy based on these insights. Adapt in terms of support, sale approaches and other elements you were thinking of including in your growth strategy. The good news about a low ARPU is that you are aware of it. You know where you are situated in terms of customer value and you can create a strategy starting with this detail. You can approach the problem directly. And in the e-commerce world, this is a huge benefit and you need to embrace it with both arms.What is ARPU?
ARPU is one of the key SaaS metrics that help SaaS businesses calculate the average revenue generated by their paying customers. This metric is calculated on a given period using the ARPU formula, usually monthly. So, thanks to the average ARPU, a SaaS business can create customer groups, check how many inactive customers there are, and stay on top of the company’s revenue growth.
How To Calculate ARPU
Understanding how to calculate average revenue per user is actually not that difficult. As always, there is a method that you need to know about. The average income per customer formula is the following:
ARPU = MRR / # of active customers
You look at your entire Monthly Recurring Revenue and divide it by the number of active users. However, time to make a small mention here. When calculating ARPU, you need to consider a fixed time frame. For instance, you can focus on discovering the monthly ARPU SaaS rate. Your number of existing loyal customers may vary, which basically means that your ARPU total revenue may also change. Once you calculate ARPU, you will most certainly ask yourself the following question: what is a good ARPU? Honestly, there is no generally accepted answer to this question. It very much depends on the industry the SaaS company is part of, its market, and its pricing plans. A good average ARPU in the gaming world could be very different from a good one in the tourism industry. Still, as long as you have a higher ARPU than in your previous means, you are good. ARPU growth is always welcomed.Top 3 Reasons Why SaaS ARPU is Important
While you may find other key SaaS metrics that could provide you with more insights, tracking ARPU to understand the average revenue per subscriber is very relevant for the overall health of your business.
Price and product alignment
In the recurring revenue model, it is important to offer your paying user value in exchange for a monthly price. But how will you set the correct pricing tiers? How can you weigh value? Through ARPU calculation. A low ARPU indicates that you, yourself, are not benefiting from your customers. While you are offering value, you are not extracting value. If your average profit per user is not high, you might want to consider higher pricing tiers.
Improved marketing insights
Your average revenue per account or user tells you if your sales and marketing teams are applying the correct strategies to increase revenue from your active customers. Here is how. If your average revenue per user ARPU is low, but your CAC, customer acquisition cost, is high, then you need to target or segment customers better. Orientating your marketing efforts towards more profitable customer segments, meaning those higher paying customers, is important to ensure your business is doing well. Making use of SaaS customer service is also an idea. Out of all the techniques out there, customer experience SaaS strategies are among the most effective.
Future business stability
When the average revenue per user formula displays that you aren’t doing so good, your focus needs to be on your MRR and how you can increase recurring revenue. Because only if you obtain more value from your monthly recurring user can you reach your growth goals. And that can be quite the handful. However, if you do notice an ARPU growth, especially in a highly competitive, large market, you can definitely conclude that there are excellent circumstances for revenue growth. So, having a high average revenue per customer is always a good sign in terms of how much revenue your subscription payments coming from existing customers are bringing in.
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