ARPU is the amount of money a company earns from each of its users. The more you bill your customers, the more important understanding your average revenue per user becomes. For software businesses, understanding ARPU definition is especially important because the majority of their revenue typically comes from customer billing. The higher the ARPU, the more profitable the business.
You may have heard this term before and wondered what it meant. Or maybe you’ve wondered how to calculate ARPU.
Whatever your reason, this article will explain what ARPU is, why you should care, and how to calculate it.
What does ARPU stand for?
If you run an online business, you’ve probably already heard of ARPU, or average revenue per user. It’s a key metric for advertisers and other partners who hope to make money from an online business. But what is ARPU and how can you improve your business’s revenue per user?
Let’s take a look at the ARPU definition.
Average revenue per unit (ARPU) is an indicator of the profitability of a product based on the amount of money that is generated from each of its users or subscribers.— Investopedia
So, basically, ARPU is a key metric for understanding the health of a company’s subscription model. This metric measures how much revenue a company earns from each of its users. In other words, it measures how valuable each user is to the company.
A company with high ARPU generally has a more lucrative subscription model compared to a company with low ARPU.
ARPU can be used to calculate the average revenue generated by customers and compare it to costs to see if the company’s making money and whether the business financial situation is under control or not.
🧮 How to calculate ARPU
ARPU is calculated by dividing a company’s monthly or annual revenue by its monthly or annual ARPU count. This is a key indicator of how well a business is doing with regards to its customer base.
Here’s the formula you need:
ARPU = Total revenue (MRR) / the total number of customers over a specific period of time (month/year)
Understanding and predicting your customers’ willingness to pay is an important part of managing your business. Calculating ARPU gives you a sense of how much revenue a specific user group will generate for your business. It can be helpful in planning future product and service offerings, and it’s also a good gauge of how well your marketing and customer service strategies are working.
In other words, calculating ARPU answers the question “How much does each of my users spend in my store on an average day?
Example: how to make ARPU
Let’s imagine that Joanna has an amazing online business and her yearly revenue is around $60,000. Since the beginning of the year she’s been implementing a new marketing strategy for her Shopify store. Now Joanna wants to see the actual numbers and according to the ARPU formula her result is the following:
The main point of ARPU is that you need to make decisions based on the final number you see. Only with calculations can you create new strategies for your business. Understanding how to calculate ARPU also helps you see from which store you gain the higher revenue, so that you can either focus your growth on this store or try to improve the situation with the other ones.
⚖️ Pros and cons of ARPU
|ARPU pros||ARPU cons|
|It’s an actual number, not a rate||📌 It’s a macro-level measure|
|It helps to control the weakest and the strongest points of the business||To be useful, it needs to be provided with enough information|
|It can be the base for accelerating your MRR growth||It can be not as useful as churn and customer growth|
📌 You have to look in-depth at the numbers you see in the ARPU formula. For example, your MRR is $100 and 10 total paying users. That means that your ARPU = $10. But don’t be fooled by this number! Only two or three customers may be providing you with 90% of the revenue, since the prices on the products are different and not all the customers buy the same thing.
📊 ARPU usefulness
1. Track the health of your business
Be sure that your business strategies are working as they should with constant checking of their performance. From budgeting to planning for the future, it can be difficult to know where your company’s headed. However, a sound health strategy can help your business grow and reach its full potential. And ARPU is a key point here.
2. Analyze the products per segment
ARPU allows you to keep track of the business per different segments such as users, products, sales channels, or even geographical regions. With one formula you can not only check which product is the most sellable, or which store brings you the most revenue, but also trace your customer flow in general.
With ARPU you can set predictions of your business performance and make goals for your MRR and customers’ LTV. Customers who have a clear understanding of what they want and need from you will be more likely to buy from you again in the future. But in order to make sure that you understand your customers correctly, you should also rely on ARPU to forecast your business performance.
📈 How to increase ARPU
For businesses, it means keeping customers coming back for more. Here are a few ways of how to increase ARPU, so your customers stay loyal and bring in more revenue per user.
1. Choose the right pricing for your product
Pricing your product the right way will not only increase your ARPU, but it will also make your life easier in the long run.
Pricing your product doesn’t just involve slapping a price tag on something and expecting customers to pay. It’s a key part of your entire business model, so it’s important to understand your goals and motivations before choosing a price. Pricing your product isn’t just about making money; it’s about creating a balance that incentivizes both you and your customers.
2. Focus on product quality
The best way to attract new customers and increase your ARPU is to offer them a quality experience from the moment they enter your store to the moment they leave. It’s not enough to just launch new products or services and hope that they’ll take off. It’s essential to focus on product quality and be sure that your end product delivers what your customer’s hoping for. This will not only keep them coming back but also build your brand as a trustworthy and reliable brand.
So, how can you make sure your customers have the best product experience? You can’t treat every customer like a random sampling experiment. But, you can focus on a few key areas of your product experience to improve the overall customer experience and increase your business ARPU.
3. Reduce customer churn
Reducing customer churn is about changing your customer retention rate and increasing ARPU. You have to change your entire business model and reduce the number of barriers your customers face. Instead of focusing on growth, you’ll need to make sure your customers are happy and don’t leave you.
For better ARPU and business growth, you have to constantly keep your customers informed, address their concerns, and make sure they have everything they need. If you have a high churn rate, it’s going to be extremely difficult to grow your business. You’ll constantly have to dedicate time and resources towards retaining customers instead of growing your customer base.
Users are the lifeblood of any business. The more users you have, the more money you can make and the higher your ARPU will be.
Companies these days have to have a keen sense of customer analytics in order to remain competitive. In a world where so many businesses are going online for marketing and sales, learning how to optimize your content, design, and marketing is essential.
But with great power comes great responsibility, right? So the higher your ARPU and the higher the number of customers is, the more complicated the accounting will be for your e-commerce business. There is no easy-to-use formula such as it was with ARPU, but there’s an easy-to-use accounting software solution that helps to automate all the accounting processes.
Synder Accounting will back you up on your journey to success and will deal with such tasks as reporting, categorization, recording, etc. automatically. Try it yourself and see the results or schedule a personal Demo session and discuss your case with our experts who will help you and tell you more about Synder workflow.