A key performance indicator (KPI), average revenue per user (ARPU) measures the revenue generated per user/customer over a specific period of time. This metric has many uses, from helping organizations assess how well they are monetizing their user base through providing business performance comparisons across customer segments and competitors to helping businesses determine pricing, subscription models, and upselling strategies. It also highlights the financial health and growth potential of the company, enables businesses to better understand which customer segments provide the highest value, and helps organizations evaluate their customer acquisition costs (CAC).
While used across a variety of industries, ARPU is especially important to software as a service (SaaS), subscription-based, telecommunications, digital media, social media, and gaming organizations. Read on to learn more about ARPU – how to calculate, what it takes to increase ARPU, its advantages and disadvantages, how ARPU trends affect financial forecasting, the relationship between ARPU and the subscription economy, ARPU and your accounts receivable reports, and the association between ARPU and revenue recognition.
What is ARPU?
Average revenue per user enables businesses to better understand customer value and where revenue is coming from. A similar phrase, average revenue per unit, refers to the amount of money a company can expect to receive from selling a unit of a product.
To illustrate ARPU, let’s assume that in the month of May your SaaS company has a total monthly revenue of $100,000 and total subscribers during the month was 2,000. Your ARPU for May would be $50.00
ARPU = Total Revenue / Total Subscribers
ARPU = $100,000 / $2,000 = $50.00
While the above example is of monthly ARPU, ARPU can be calculated for other time frames like quarterly and annually.
Quarterly ARPU: By calculating ARPU over a longer period, you can better identify changes in customer behavior or seasonal trends.
Annual ARPU: This metric provides a comprehensive overview of customer value and is useful in evaluating customer loyalty and the success of your retention strategies.
Unlike other metrics, ARPU doesn’t have a standard to help determine where you are on the scale, e.g. excellent, good, fair, poor. What typically constitutes excellent or good ARPU differs based on many factors like the nature of the product/service, your target market, and/or the company’s objectives. However, generally speaking, a higher ARPU is usually viewed as positive. One way to gauge your ARPU is by assessing it within the context of your industry, competitive landscape, and your company’s strategy.
How to Increase ARPU
Essentially, the key to increasing ARPU is to provide real value. The following provides 5 best practices to follow:
- Add value through additional services, premium features/functionality, upgrades and add-ons, and multiple pricing plans.
- Analyze customer data to create customer segments and target these segments with personalized services and products that will enhance their current packages.
- Offer subscription models and tiered pricing.
- Engage with customers frequently through loyalty programs, discounts, rewards, early access to new products, features/functionality, personalized offers, discounts, newsletters, etc.
- Gather customer feedback and act on the input by demonstrating an understanding of their needs and quickly addressing issues.
Pros and Cons to Consider
While useful to analysts and investors, ARPU also provides a point of comparison among companies within your industry, as well as highlights insights into the relative success of the company’s market segments. Let’s look at the top 3 advantages and disadvantages.
Pros
- For investors, it provides a point of comparison among competitors.
- For companies, it serves as a starting point to analyze the business’ strengths and weaknesses.
- High ARPU can serve as a status symbol or provide competitive distinction within the industry.
Cons
- Given that ARPU is a macro level measure, it may be presented without the detail needed to make it meaningful.
- In some situations user growth/user churn can be a more useful figure.
- The ARPU figure may be misrepresented.
ARPU Trends and Financial Forecasting
ARPU impacts financial forecasting by shaping revenue expectations and business strategy. When analyzed in conjunction with other metrics such as CAC, churn, and pricing strategies, ARPU helps to create accurate and realistic financial models.
How do ARPU trends affect your financial reporting? To start, ARPU is a key driver of total revenue when it’s multiplied by the total number of subscribers. Increasing ARPU trends indicate higher monetization per customer, leading to stronger revenue forecasts. Declining ARPU trends, however, signal pricing pressure, lower customer spend, or a customer shift to lower value products and/or services. Additionally, higher ARPU often improves gross margins, whereas declining ARPU serves as an indicator that the company needs to take proactive actions such as cutting costs or increasing marketing spend.
ARPU trends influence pricing strategies, meaning a decline may prompt the business to increase prices and/or offer new premium products/services. When it comes to investors, ARPU trends are monitored closely as a KPI. Rising ARPU supports higher valuations, while downward ARPU indicates competitive pressure or customer churn. Finally, higher ARPU supports stronger cash flow, whereas declining ARPU may require adjustments in budgeting, marketing spend and/or operational efficiency.
ARPU and Subscription-Based Businesses
As previously touched on, ARPU is an important KPI for subscription-based businesses. This business model relies on recurring revenue rather than one-time purchases, making it critical to track ARPU to understand customer value, optimize pricing strategies, and forecast revenue growth.
Subscription-based businesses use ARPU to:
- Determine the effectiveness of their pricing models (freemium, tiered, flat-rate, etc.)
- Identify high-value vs. low value customers to tailor marketing and retention efforts.
- Monitor trends in user spending to assess overall financial health.
- Determine new features, premium offerings, and cross-sells/up-sales.
ARPU and Accounts Receivable Reports
Both ARPU and accounts receivable reports provide insights into a company’s revenue, however they serve different purposes. ARPU reflects revenue efficiency per user, while accounts receivable reports track cash inflows. For instance, if ARPU is rising and accounts receivable is also rising, this may signal collection issues.
Here’s a synopsis of the relationship between the two:
- ARPU is based on recognized revenue regardless of whether the revenue has been collected or not, however the accounts receivable report will show how much of the revenue remains outstanding.
- When credit is extended to subscribers, high ARPU might not immediately translate into cash flow, resulting in an increase in accounts receivable.
- When a portion of accounts receivable becomes uncollectible, it can reduce ARPU since some of the revenue may never be realized.
- If ARPU is high, but accounts receivable reports reflect delayed payments, this could signal issues with collections.
ARPU and Revenue Recognition
Key financial concepts for subscription-based and service-driven businesses, ARPU and revenue recognition relate in the following manner.
- ARPU reflects recognized revenue, not just invoiced amounts.
- Deferred revenue impacts revenue recognition, potentially affecting ARPU trends.
- Changes in pricing models or contract structures impact both ARPU and revenue recognition.
Essentially ARPU is a metric used to measure the revenue generated per subscriber over a specific period. Whereas revenue recognition refers to the accounting principle that determines when and how revenue is recorded in financial statements.
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