Average Revenue per User

What is Average Revenue per User?

Average Revenue per User, or ARPU, measures the amount of revenue generated by your product or service from each customer. Typically measured by subscription-based companies , ARPU is a somewhat controversial KPI that’s sometimes been labeled as a “vanity metric,” due to the way companies tend to flaunt this figure. There’s also no clear guideline about what types of revenue should be included in ARPU calculations, so it’s easy for this metric to be inflated, or presented in the most desirable light.

That said, ARPU can still provide important insights into your company’s customer base and direction of growth. When evaluated properly in the context of other KPIs, there’s no reason that ARPU should be avoided as a legitimate metric.

Average Revenue per User is a relevant metric for your sales and finance teams to monitor.

Why is Average Revenue per User important for subscription companies?

“What’s a customer worth?” This is the central question behind calculating your Average Revenue per User. While not the actual measure of ROI (return on investment), ARPU operates under a similar paradigm – maximizing the value that can be obtained per customer. With this in mind, ARPU is an important KPI for exploring your customer base’s spending habits and the direction of your company’s growth.

A good ARPU indicates your company has both a good foothold in the market and a strong customer base. As your churn rate is low and subscription upgrade levels are high, your customers are likely affluent, or at least your product / subscription prices are well-matched to your customers’ general income level. This scenario is indicative of strong marketing decisions and targeting of your ICP (ideal customer profile).

At the same time, you’ve managed to find your niche in the market and exploit it, either by offering a product or service no one else is, or simply by being better than your competitors. In short, your customers are highly satisfied with your product or service, and your ARPU reflects this.

A bad ARPU, on the other hand, indicates your market foothold and / or customer base are weak. You probably have too high of a churn rate and level of subscription downgrades, indicating customer dissatisfaction with your product / service; the quality of your product / service not being reflected in the stated price, a mismatch between your customers’ income level and your prices; or a combination of all these factors.

ARPU, then, serves as a bellwether for important trends affecting your business, whether positive or negative. It can provide important insight on which of your business practices are working well, and which require improvement.

How to calculate Average Revenue per User

Best practices for Average Revenue per User

Increasing Average Revenue per User can occur either through upselling your customers (offering them higher-value subscriptions or bundles), or by expanding your customer base. Of course, upselling will only work if your customers already appreciate your product / service to begin with.

This is where the controversy with ARPU comes in – if you’re upselling your customers and presenting the resulting higher ARPU in your public statistics, it’s a somewhat dishonest or at least questionable move.

That said, ARPU can be a good metric to present to your company’s investors, as it can provide an indication of your growth trajectory. With this in mind, you can track your ARPU alongside your competitors’, in order to gain better and deeper insights about the state of the market.

Other KPIs similar to Average Revenue per User include:

• Average Revenue per Account
• Average Deal Size
• Customer Acquisition Cost