ARPU calculates how much revenue an average user or unit is generating.
The metric help companies analyze their growth patterns.
To use ARPU as a predictive metric a company must be able to estimate total revenue and the number of active customers for a given period.
Now that we’ve got the metric and formula right, let's look into how ARPU actively can be used to grow businesses.
The ARPU metric can disclose how much money one company is making off its customers compared to one of its competitors. If you know your competitors ARPU it is relatively easy to compare it to your own business.
An important thing to bare in mind, is that ARPU does not tell anything about the costs related to revenue. And therefore does not reveal which company is making the highest profit.
Therefore, to get the most useful comparison choose the same type of companies with comparable expenses. Like subscription businesses. In that way ARPU can give an indication of the compared companies health.
ARPU can also tell whether a product is good on a revenue-per-customer basis. Let’s set up 2 scenarios:
Scenario 1 tells that the new product is being purchased but not by existing customers. Whereas scenario 2 shows that existing customers have fancied the add on product and thus upgraded their plan.
As there are fewer costs related selling to already existing customers scenario 2 will be the preferred scenario.
There can be valuable insights to obtain by segmenting your users and measure the ARPU for each segment. If you run a subscription business, the segments will most likely be grouped as the following:
Taking into account the support cost used for each segment can reveal useful insights. It is much likely that enterprise users will have a higher ARPU than entry level users. But surprisingly, many companies discover they use the same amount of support cost on entry level users as they do for enterprise users. While only generating a small part of the ARPU some companies choose to adjust the pricing or completely eliminating their entry level products.
Average Revenue Per User and Average Revenue Per Unit are both valid acronyms of ARPU. These are different metrics and which one to use depends on the type of business the metric are to analyze.
The time frame for this metric is optional. Nevertheless, it is crucial that the correct time frame is applied. Suggested time frames will be outlined in the following.
This metric is mostly used for subscription business. It calculates the revenue a company expect to earn from an individual customer.
It is measured by dividing the total revenue by the estimated total number of users in a given time frame.
ARPU (User) formula:
ARPU (User) = Total revenue / # of users
The suggested time frame to base your calculation on is monthly. If you have a subscription business your customers are probably subscribed on a monthly basis. Therefore the total revenue and number of users should derive from the same time frame.
This metric is mostly used by companies selling tangible products and thus not SaaS companies.
ARPU (Unit) calculates the amount of money a company can expect to receive when selling one unit. It is measured the same way as average revenue per user, only by shifting numbers of users to number of units sold.
ARPU (Unit) formula:
ARPU (Unit) = Total revenue / # of units sold
To come up with an appropriate time frame you should ask yourself the following question:
“How often “should” a customer use my product or service?
So, if a company is selling a beauty product that are made to last for 3 months, the time frame should be 3 months.