We go a step further in decoding SAAS metrics. We are back with ARPU (Average Revenue per User). ARPU has been defined in many ways. My aim here is to make ARPU as simple to understand as possible. If you have missed the first blog on LTV (Life Time Value of a customer) here it is.
So why is ARPU important?
ARPU is an important indicator for margin growth. It indicates if you are going to hit your revenue targets. Many businesses find it’s more profitable to raise ARPU (through upgrades or cross-selling) than to increase their customer base because of the high cost of acquiring a new customer
A measure of the revenue generated per user or unit. Average revenue per unit allows for the analysis of a company’s revenue generation and growth at the per-unit level, which can help investors to identify which products are high or low revenue-generators.
Basically ARPU is the average revenue you make from a user for a particular month. (Paying customer)
Simplest formula of ARPU:
Let us now break down the above the formula:
Number of subscribers:
We will be taking the net of the customers of that particular month into consideration. Which consists of:
- Existing customers,
- New customers,
- Customers lost in Churn,
- The customers who have upgraded or downgraded their subscription.
We take into consideration the revenue gained or lost from all our paying customers. Since we need to take into consideration the churn as well CMRR is the way to go. Read more about it here.
Formula for CMRR:
After the CMRR is calculated we move on to calculating the ARPU for the particular month.
APRU [in excel] is calculated for the net customers of the month. Then it is calculated taking only the new customers into consideration to find out the average new revenue you are gaining per month from new customers.
Many VC funded startups do not take freemium plans into consideration while calculating ARPU. Hence the assumption that ARPU is only for paying customers.
Although I was curious to find out what would happen to the ARPU if freemium customers were included. For that part of the spreadsheet ARPPU(Average Revenue Per Paying Customer) is considered.
Here are a list of blogs for further reading on ARPU: