Average revenue per user or ARPU is an indicator of the profitability of a product. It is based on the amount of revenue generated from each of its users or subscribers.
Define Average Revenue Per User
ARPU is essentially a metric that helps in understanding the amount of money generated. It is calculated in accordance with the active user of an app over a given period.
Originally used in the telecom industry, this metric was gradually used by various types of businesses, mainly the media industry. In the context of mobile marketing, ARPU is similar to lifetime value (LTV).
It’s a structured way to determine or calculate the value of your users, or groups of users that you have organised into different segments. LTV helps in understanding the value of your user over their complete lifecycle, whereas ARPU measures it over a set period of time.
Importance of ARPU
Average revenue per user is a helpful way to measure the earnings generated per user or unit. Analysts and investors find this metric useful to compare the numbers from rivals in the same industry. It is essentially helpful for mobile marketers to identify which company is doing the best to maximise the revenue from its users or subscribers.
Another key benefit of using ARPU is that it helps businesses gain interesting insights when paired with other metrics to evaluate different customer segments. It also helps in forecasting your users based on customer acquisition and retention assumptions. By multiplying the number by your ARPU, you can get a revenue forecast.
How to Calculate ARPU?
You can calculate average revenue per unit by dividing your revenue by your number of users over the time period you want. It can be weeks, months or even a year.
The ARPU formula is:
- ARPU = Monthly recurring revenue (MRR) / Number of active users
In case you sell multiple products, you can calculate ARPU for each product and identify which product gives you the best revenue. Then, combine the total for each product to see ARPU for all your products. For tangible products, use the number of units sold and for intangible products, like SaaS, look at your subscriptions.
How to Increase ARPU?
With the aid of ARPU, you can also develop or modify your pricing strategy. For instance, if the ARPU of your app is too low, you may be focusing too much on low-revenue customers or underpricing products. Therefore, you can increase your ARPU by focusing on high-revenue users.
As a marketer, you need to understand which user fits your exact profile and is valuable to you. These users are most likely to upgrade their service for functionality. Therefore, the key to increasing your ARPU is to have a well-rounded persona and understanding of your user needs. This can help you create the right marketing solution to attract users, improving your ARPU.
Thus, average revenue per unit can help you build a larger customer base to help grow your business. From business forecasting to comparison between different companies within the same industry, this metric provides significant insight to gain users. Use it to your advantage by improving your business’s ARPU.