Average revenue per user or unit (ARPU) is a useful metric for measuring and tracking annual growth. Let’s review how to calculate ARPU and use it to improve forecasting and revenue planning for your Customer Success team and business.
What is average revenue per user (ARPU)?
Average Revenue Per User or Unit (ARPU) is the revenue generated per user or unit within a time period, usually monthly or yearly:
- User is the primary term for most SaaS or subscription-based companies (anyone selling software or services)
- Unit is the primary term for companies that sell and track tangible products/goods
How to define a user when calculating ARPU
Defining a user depends on how you structure your business. For most SaaS or subscription-based companies, a user is an individual or group with an active subscription in a given time period (usually monthly). If you have multiple users per account for your software, then consider defining a user as the entire account for easier calculating. Just make sure your definition of user supports how your business generates revenue.
How to calculate average revenue per user/unit with examples
The most common time period for calculating ARPU is on a monthly basis (i.e. take your business’s MRR) but feel free to adjust based on your specific products and/or services. And it may seem obvious, but remember to remove users on free trials before calculating.
Below is the simple equation for average revenue per user/unit:
ARPU examples
Here are two quick examples of ARPU calculations:
- Monthly: In January, you report revenue of $500,000 with 10,000 users. Your monthly ARPU is $50 ($500,000 revenue ÷ 10,000 users).
- Annual: Your customers purchase some new add-ons you introduced at the end of the year. Therefore, you report annual revenue of $750,000 with 10,000 users for the year. Your yearly ARPU is $75 ($750,000 revenue ÷ 10,000 users).
How to use ARPU in your business’ growth strategy
What’s the best way for your Customer Success team to strategically apply ARPU to your goals?
- Competitive analysis: If you have a handle on your own average revenue per user, then it’s easier to compare with the competition’s pricing and growth tactics.
- Customer acquisition channels: Review how your ARPU is fluctuating concurrently with your acquisition strategy. Collaborate with your sales and marketing teams to better understand which channels are thriving, or where and when to try something new.
- Customer segments: Evaluate if you’re reaching the right audience at the right time (note: are your CAC numbers at odds with ARPU?)
- Pricing, product upgrades, or new features: Consider if your product portfolio could use a refresh based on average revenue per user (in conjunction with customer feedback)
How ARPU differs from CLTV
Average revenue per user/unit is primarily an ongoing, growth-focused metric. ARPU is meant to offer revenue snapshots that will help inform other strategies around customer acquisition, product updates and pricing, and forecasting.
While ARPU may seem to indicate a customer’s overall value, it’s a short-term metric. Customer lifetime value (CLTV) is focused on a broader but more finite metric, since it calculates the gross profit a customer delivers over their “lifetime” AKA their relationship with your business.
Additional resources on annual recurring revenue
- Webinar: SaaS retention benchmarks: How does your company compare? with Rob Belcher, managing director at SaaS Capital
- Webinar: Champion scalable sustainable growth through customer success
- Blog: Key SaaS and Customer Success metrics you should care about with You Mon Tsang, CEO and co-founder, ChurnZero and Dave Kellogg, Dave Kellogg Consulting