In the business universe, not knowing how customers impact your revenue can be dangerous. Your marketing efforts may not be properly targeted and you might end up aiming for customer volume rather than profitability.
But if we do a 180-degree turn and focus on having a super clear understanding of the monetary value each user brings, you’ll know when and how:
- to optimize your pricing models
- to refine marketing strategies
- to allocate resources
Finding yourself in this scenario is essentially putting one’s knowledge of the Average Revenue Per User (ARPU) metric into practice. One business that we believe has mastered this is Netflix—among the key statistics it shares is its revenue per user by region, which is in the billions!
So here are some questions we will aim to answer in this guide: is ARPU just another fancy marketing term? Or is it the clarity you’ve always needed?
Dive into the details of ARPU and never have to rely on guesswork again.
What is ARPU?
ARPU, short for Average Revenue Per User, is a metric that represents the average revenue earned by a business for each user or customer over a specific period. While it’s used across multiple industries, subscription-based or pay-per-user business models track it most often. Since users are usually billed month to month, ARPU is typically calculated based on monthly recurring revenue (MRR), too.
How is ARPU calculated?
Here’s how: Simply divide the total revenue in a set period by the total number of users in the same period.
For example, if your business rakes in $5,000 from 1,000 users in a month, the ARPU is calculated as $5,000 / 1,000 = $5. Your ARPU is $5.
Why does ARPU matter?
Knowing your business’s ARPU is the key to understanding your revenue stream on an individual user basis.
The metric also reveals the value different segments or customer groups bring to your business, allowing you to tailor your strategies to each segment of customer data and maximize their contribution.
Here are other reasons why ARPU is relevant to your business:
- Using ARPU data, businesses can make informed strategic decisions that align with revenue objectives.
- Comparing your business’s ARPU over time or against industry standards lets you gauge the effectiveness of your revenue-generating tactics.
- ARPU can be a tool for financial forecasting or predicting future revenue streams.
6 factors that contribute to your ARPU
ARPU is only a general overview of revenue generated per user. It’s also important to understand the contributing factors and metrics that eventually shape it. That way, you know how ARPU will be affected when the other aspects of your business model are tweaked.
- Pricing models: Premium plans with additional features increase the average revenue generated per user. Conversely, a decrease in pricing also decreases the ARPU. According to Meta’s 2022 Revenue per User report, its ARPU dropped by 3 percent from 2021—and this may be attributed to Meta’s decrease in price per ad.
- Sales maximization strategies: These strategies focus on increasing the value of a transaction or expanding the scope of a customer’s purchase—and usually encompass both upselling and cross-selling strategies. The more customers purchase, the more positive the ARPU gets.
- Discounts and promotions: Customers tend to be drawn to discounts or promotions. However, even if these tactics draw more users, they can also temporarily lower ARPU. A good balance ensures that ARPU remains healthy despite lower price tags.
- Customer Acquisition Costs (CAC): Lower ARPU compared to CAC has a negative impact on every business. Keep in mind that ARPU only shows revenue and doesn’t account for the cost of acquiring those users. It’s essential to consider both ARPU and to get a comprehensive understanding of your business’s financial health and performance.
- Conversion rates: A higher conversion rate means the number of paying subscribers is increasing. As the total revenue is divided by the number of users to calculate ARPU, an increase in revenue from conversions directly contributes to higher ARPU numbers.
- Churn rate: The churn rate, which represents the percentage of users who stop using a service, also contributes to ARPU. Lower churn rates mean a stable user base—translating to consistent ARPU levels.
Common mistakes and pitfalls businesses make when interpreting ARPU
When interpreting your business’ ARPU, avoid making decisions based on flawed interpretations. Here are the seven common mistakes that business owners tend to fall victim to when computing and analyzing the ARPU.
Overlooking the expenses of getting new users
As mentioned, failing to factor in the customer acquisition cost impacts ARPU. While a high ARPU might seem promising, it can be misleading if the associated acquisition expenses aren’t taken into consideration. Unless acquisition cost is taken into account in ARPU analysis, businesses risk pursuing strategies that might appear financially beneficial but won’t be cost-effective in the long run.
Misinterpreting seasonal variances
You need to factor in every possible fluctuation in metrics related to holidays, industry cycles, or even specific market seasons. Recognizing and adjusting for these seasonal nuances ensures a more accurate understanding of trends. For example, the Black Friday season is a peak season for retailers, while the winter months may be the off-peak season for businesses in the tours or travel services industry.
Chasing short-term wins
If you’re just concentrating on quickly increasing ARPU—without assessing the long-term impact—you’re into aggressive selling tactics.
Sadly, this can result in sacrificing customer loyalty and satisfaction. Short-term wins that compromise customer satisfaction may contribute to increased customer churn in the long run. For subscription businesses, it’s advisable to focus on keeping subscribers satisfied for a higher customer lifetime value—which translates to long-term success and stronger customer relationships.
Disregarding user engagement indicators
High ARPU doesn’t necessarily equate to engaged and satisfied users; simply increasing your user count may not necessarily translate to proportionate revenue growth.
Ignoring metrics related to user engagement, customer usage, satisfaction, customer behavior, and customer feedback may result in a misalignment between revenue figures and overall business health.
Leaving out segmentation
Treating all users as a homogeneous group? That’s a recipe for failure especially under the pay-per-user model. Forgetting to segment can lead to skewed interpretations because ARPU may vary significantly across user categories.
Not recognizing customer lifetime value (LTV)
Focusing on ARPU alone without thinking about Customer Lifetime Value (LTV) isn’t good, especially for businesses that follow the subscription model.
You can get quick gains by focusing on ARPU instead of long-term customer value, but this will reduce sustainable growth in the future.
Comparing your business to industry benchmarks without full context
Businesses may compare their revenue figures to industry averages without regard to their specific business model, target audience, or the unique value proposition they offer, which is pointless. For example, your ARPU may appear to be underperforming when compared to a general group—but it may be above average when compared to businesses of the same size and in the same niche.
How to use ARPU for your business
Once you already know the basics of ARPU and what it means for your business, you’ll surely want to keep an eye on this metric. Here are some strategic approaches to leverage the ARPU metric for your business success.
Resource allocation optimization
Revenue per user can be the metric that will guide your investment decisions. You can identify segments, areas, or products/services with high ARPU contributions and then prioritize their development, improvement, or marketing.
Example: SaaS companies can decide if they need to focus on new customers, look for enterprise customers, or just focus on retention strategies for billing customers.
Strategic decisions involve identifying and putting money in channels that yield users with higher potential ARPU. Businesses can assess the cost of acquiring users against the expected or target ARPU to determine the profitability of specific acquisition channels.
Example: When data shows that paid ads are effective in bringing in conversions, you can opt to invest more in advertising and pull the plug on other acquisition efforts with a low conversion rate.
Forecasting and planning
Leverage ARPU for financial forecasting and planning. For pay-per-use examples, ARPU is closely tied to the success of different subscription plans or pricing tiers.
Example: Analyze ARPU to assess the performance of existing plans and make some adjustments—even if it means introducing a new pricing strategy to optimize recurring revenue.
Compare your ARPU to assess how your business compares against competitors. For those in the Mobile Games market, the average revenue per user (ARPU) is estimated to reach US$56.24 by 2024. Meanwhile, ARPU in the U.S. eCommerce market is expected to reach US$850.4.
Example: Knowing your ARPU and your competitors’ ARPU gives you an idea of how your business performs compared to others in your niche.
6 strategies that will boost your ARPU
1. Use upselling tactics
Craft irresistible offers tailored for your existing users. The trick? Highlight the additional benefits and value they can gain by upgrading their existing subscription. Successfully upselling not only boosts the average spend per user but also amplifies the overall value users receive.
2. Be a cross-selling master
Identify complementary products or services that seamlessly align with your current offerings and create bundled packages or promotions that showcase each’s compatibility.
The magic lies in expanding your offerings by encouraging your existing customers to explore additional offerings—and it will positively impact ARPU.
3. Personalize everything you can
In terms of revenue optimization, personalization is king—it can drive a 10-15% lift in revenue.
Tailoring product recommendations, content, or experiences based on individual user preferences is the secret sauce to boosting sales. It’s also true that personalization makes a decisive difference in elevating customer satisfaction and user engagement—loyal and satisfied users can become your greatest advocates.
4. Optimize subscription plans
Evaluate your current subscription tiers and continuously test and iterate what works best. You can create subscription plans with added benefits for various needs of your user base. Every now and then, you can also survey your subscribers to assess if their needs and preferences have changed.
5. Implement referral programs
One way to boost ARPU is to turn satisfied customers into enthusiastic advocates. Design a referral program that rewards users for bringing in new customers so you emphasize the value both parties receive. This is leveraging the loyalty and satisfaction of your existing customers to drive increased spending.
6. Set up a failed payment recovery process
Recovering failed payments significantly impacts Average Revenue Per User (ARPU). Here’s the simple reason—failed payments directly result in revenue loss. After all, each unsuccessful transaction is a missed opportunity to collect the expected revenue from a user.
Since ARPU is calculated by dividing the total revenue, payment failures affect a decline in ARPU figures. Additionally, the manual effort required to address failed payments, like contacting users, resolving billing issues, and managing recovery processes, causes operational inefficiencies. Hence, ensure that your failed payment recovery process is both efficient and effective.
Recover Payments, for example, combines technology with the human touch to recover lost revenue for subscription businesses. The tech integrates with your payment processing systems and uncovers the amount you are really losing. Then, a payment recovery team strategizes and executes campaigns while business owners can monitor the amount being recovered.
The key to great ARPU is continuously providing value to your subscribers
One thing is for sure, mastering ARPU is a necessity for businesses looking to thrive and survive—especially in the subscription industry.
But just as ARPU serves as a diagnostic tool for revenue health, be sure to leverage specialists in failed payment recovery to boost your business revenue. If the intricate process of recovering failed payments seems daunting, perhaps it’s time for you to check out Recover Payments. Invest in specialists who can ensure that every dollar owed to your business is recovered efficiently. Get in touch with Recover Payments today.