What is Average Revenue Per User (ARPU) in SaaS?
Average Revenue Per User (ARPU) is a term borrowed from the Telecom industry where it is treated as a benchmark metric to project revenue of a business. ARPU refers to the revenue generated by a user over a specific period of time.
Extending this concept to SaaS, it is the revenue generated from each paid subscription over a period, typically per month or year and is termed ARPU (Average Revenue per user).
ARPU is used interchangeably with Average Revenue Per Account (ARPA) and Average Revenue Per Subscription (ARPS) depending on how you price your customers. Since it is a non-GAAP metric, there is no standard as to how this should be measured. For simplicity, we will refer to ARPU as Average Revenue Per User.
How to calculate ARPU?
ARPU (monthly) = Total MRR / Total Active Subscriptions (Users)
ARPU is your total MRR or Committed MRR (CMRR) divided by the total number of active users/subscriptions.
The calculation of ARPU can include the following metrics:
- Upgrade MRR: Revenue obtained only from subscriptions that have upgraded from a lower to a higher plan.
- Downgrade MRR: Revenue lost due to subscriptions moving to lower plans.
- Churned MRR: MRR lost due to customers canceling their subscriptions or reducing the number of features used (in the case of usage-based pricing)
It is important to note that your ARPU should not include free/freemium users as they do not add to your revenue. However, if you want to include free users in your ARPU calculation it is better to have a separate metric ARPPU (Average Revenue Per Paid User) that only calculates the revenue per paid subscription.
How to leverage ARPU for your business?
ARPU is a key unit economics indicator that directly tells you how well your business is functioning. It allows for the analysis of a company’s revenue generation and growth per-unit level. Here are a few ways you can use ARPU for your business:
- Understanding buyer personas: ARPU is a great way to understand your customers. If your ARPU is low it could mean that you are targeting too many low revenue customers and you need to extract more value (revenue) from your product.
- Running Pricing Experiments: Looking at your ARPU can indicate whether you have priced your product correctly. A SaaS with a low ARPU could be underpricing its product and this indicates room for an increase in pricing and running experiments to see if people are willing to pay more for your product.
- Add-ons and upgrades: Looking at ARPU can help you create a clear strategy for upgrades and upsells. It can indicate upgrade and downgrade trends helping you prioritize features that you can then upsell to customers in a particular pricing plan.