The Average Revenue Per User (ARPU) is the income or revenue created by every active person using a mobile application. It is almost similar to Average Revenue Per Account (ARPA), normally used for SaaS models. The only difference is that SaaS models appear to view this on account level as opposed to consumer apps that usually monetize individual users.
ARPU is a formula used in calculating the average revenue that you get from every user over a specific period of time. The calculation gives businesses a chance to narrow down their analysis of the potential growth on the level of individual customers. This helps them to come up with the best way to generate revenue through their apps.
How do you calculate ARPU?
You can calculate ARPU by dividing total revenue by the average number of users during a particular period. Because of the role that it plays in modeling growth, ARPU has turned out as a key revenue metric for SaaS subscription businesses. If you want to learn more, AppsFlyer has a great article that talks in detail about how to calculate ARPU.
Why should anyone care about ARPU?
To put it in simple words, ARPU is the average amount of revenue that a business receives every month per user. Although some people see ARPU as a waste of time, it is a powerful metric that can assist in identifying trends in a group of clients if performed properly.
Tracking ARPU gives you an opportunity to plan for both the short-term and long-term. It can also be a tool for accelerating monthly recurring revenue (MRR) growth via higher-paying customers. Besides, a higher ARPU can be an influential factor for Customer Lifetime Value (LTV) goals.
Why is it important to understand ARPU?
Every business needs to know where it is coming from and where it is headed. Understanding ARPU gives you an insight into how your company is fearing, particularly when it comes to narrowing down information by cohort and segment.
If the ARPU of your company is higher, then it means that it has a higher chance of generating more revenue in future. Additionally, if you are having a higher ARPU in relation to the value being provided, then you can be confident that the product you are offering has a better value ratio.
Below are some of the reasons why ARPU is important:
It shows the financial health of your business
ARPU is a metric that helps you know if you are in the right business or not. It gives you a general overview with regards to the performance of your business. For example, ARPU can tell you whether your product is undervalued or overvalued in the current market.
It helps validate the efforts of sales and marketing teams
In normal circumstances, ARPU is supposed to keep on increasing over a period of time, more so if you are new in the SaaS business. This is because it will show that your sales and marketing efforts are paying off because you are targeting the right audience.
In general, ARPU is one of the best metrics when it comes to measuring performance in SaaS businesses. You should understand how to use and take advantage of it.