What is average revenue per user (ARPU)?
Average revenue per user (ARPU) is a metric that shows the average income generated by consumers of a product or service. It’s calculated by dividing the total revenue during a specified period of time by the number of users. ARPU is used to track performance and growth of a company’s customer base and revenue over time.
The average revenue per user metric is important for app developers and their business stakeholders alike to help understand the average number of dollars each of their active users generates over a certain period of time. With this metric, decision makers can better understand the sustainability of their app and their path to profitability and wealth.
How do I calculate ARPU?
The formula for calculating ARPU is simple — you divide the total revenue by the number of subscribers or paid customers in that period. Usually, ARPU is calculated for either a monthly or annual time period, but it could be done for any interval of time.
For example, let’s say that a cable company generated $10 million in revenue last year, and that the average number of paying customers during the year was 100,000. Then, the ARPU could be calculated as $10M/100,000 = $100/user.
Why is ARPU useful?
There are a few reasons calculating ARPU can help your business — it can be used when comparing similar companies in order to determine which company does the better job of generating revenue from its users. It also provides valuable insights into the financial health of a company’s customer base. ARPU allows decision-makers to understand the monetary value of each active user, informing decisions about pricing strategies, user engagement, and overall business health.
ARPU is a valuable metric for app marketers for several reasons:
- App performance: ARPU helps marketers monitor and benchmark the financial health of their mobile apps and provides insight into the app’s revenue generation potential.
- Monetization strategy: By analyzing ARPU, marketers can identify patterns in user spending and optimize their in-app monetization strategies accordingly.
- Pricing model: ARPU helps marketers understand whether their app’s pricing model aligns with their users’ spending habits.
- Retention: Tracking ARPU over time can help marketers understand user retention and prevent churn. A declining ARPU indicates marketers need to boost their user engagement and retention strategies.
- User segmentation: Marketers can calculate ARPU for different user segments to help them better understand which users contribute the most revenue.
However, ARPU in a vacuum does not tell the whole story. ARPU, by itself, does not take factors like acquisition costs or support expenses into account. This means that a company with a high ARPU could still be losing money depending on the margin that company makes from its users. ARPU calculations are also easily skewed. For instance, if a few users make large one-time purchases, it can artificially inflate ARPU.
ARPU vs. LTV vs. CAC
To get a more comprehensive picture of a business’ or app’s financial health, it’s best to analyze ARPU alongside other related metrics like customer lifetime value (LTV) and customer acquisition cost (CAC).
While ARPU measures the average revenue generated by an individual user over a given period, LTV measures the long-term value a user brings to a business over their entire lifecycle. In other words, ARPU is a snapshot of short-term profitability whereas LTV considers repeat purchases and loyalty over time.
CAC reflects the cost to acquire new customers and is indicative of the effectiveness of a business’ customer acquisition strategies. Together, these metrics can guide marketers to achieve revenue growth and profitability.
Strategies to optimize ARPU
Optimizing ARPU is a critical component of any successful app growth strategy. Thankfully, there are many ways to achieve a higher ARPU:
- Upselling and cross-selling: Incentivize your existing user base to upgrade to higher-priced subscription plans or purchase premium features and add-ons.
- Subscription models: If applicable, earn monthly recurring revenue (MRR) by offering subscription plans to users.
- App monetization: Enable in-app purchases to entice users to increase their spending.
- User experience: Improve the customer experience to boost satisfaction and loyalty. Happy customers are more likely to spend money and stick around.
- Special offers and discounts: Incentivize users to convert with limited-time offers, discounts, and rewards for being a loyal customer.
- Personalization: Use data to target users with tailored content and recommendations. Users are more likely to convert when they receive a highly personalized experience.