What is APRU?
ARPU stands for ‘Average Revenue Per User,’ which is the average amount of revenue that comes in from each user every month. You can calculate it by dividing Monthly Recurring Revenue (MRR) by the number of paying subscribers you have:
ARPU = MRR / Number of Paying Subscriptions
Is my average revenue per user good or bad?
Average revenue per user doesn’t have any optimal value. But generally speaking, if your average revenue per user is low, you need a large number of customers to make a profit. If it’s high, you can manage with less.
When you evaluate your average revenue per user, the most important question to ask is: “how many customers can you reach and acquire?”
For example: if your average revenue per user is $20, then you need 500 customers to make $10,000 per month.
But if your average revenue per user is $80, then you only need 125 customers to make $10,000 – and if you get 500 customers that means $40,000 per month.
If you see other company’s metrics, ARPU helps you to guess who the product is targeted to. Low-ARPU businesses often target consumers, whereas high ARPU ones tend to target businesses.
ARPU is a great tool for evaluating whether or not you have the resources to acquire the customers your business needs to be a success.
Just remember: if you want to compare your ARPU to another company’s ARPU, make sure that they target the same audience with a similar product concept.
ARPU hints at whether not not you're pricing correctly
Studying your ARPU can tell you, among other things, what plans your customers prefer.
If ARPU is high compared to your plan prices, most of your customers are in high-priced plans. This is a good thing–but it can also be a sign that you’re throwing away money.
Why? If a significant segment of your customers choose the most expensive plan, there’s a possibility that at least part of them would be happy to pay more. And if you aren’t offering them a possibility to pay more, that’s money you’re leaving on the table.
So when the ARPU hits your middle plan price, it’s time to add new price points or add-ons.
Similarly, if your average revenue per user is near to your lowest plan price, it may be a sign that you could improve your marketing.
You’re acquiring people who pay little, when your product could also serve people who’d pay more. Or it may be a sign that your product is best suited for the people in lower priced plans.
A low average revenue per user means that most of your customers are in the low-priced plans. So if you try to raise ARPU by dropping the lowest price point, it will most likely backfire.
Optimal ARPU: the sales team effect
When you collect ARPUs from several months and put the values to a timeline, you’ll want the line to go upwards. But the optimal line doesn’t just go up. It looks like this:
I call this ‘the sales team effect,’ because if often happens when you hire a sales team.
That’s when people rethink the prices and find out who their ideal customers are. Then the sales team starts targeting those people, often selling high-priced plans with an annual commitment.
But nothing stops you from doing those same things without a sales team. Just offer upgrades, add-ons, annual plans and advertise them a little. Everything will happen more slowly without a sales team, but that’s just fine.
Poor performance: the flat line
You might think that the worst ARPU trend is a downwards trend. But it isn’t.
The worst possible ARPU trend is a flat line – because it tells that you don’t have price points or you aren’t experimenting with prices at all.
Having just one plan and not trying out different prices is the best way to throw away money with SaaS, because you’re ignoring the strongest financial lever that your business has.
Of course some audiences are really sensitive to prices, but maybe you could frame the pricing experiments so that you could roll back if needed?
If your ARPU looks flat, it’s time to do something to those prices!
Expect a downwards ARPU trend when you introduce annual plans
As always with SaaS, long-term business value and short term revenue play a tug of war. If you ask ARPU, the short term wins. But you want long-term wins too, like when you improve retention.
When you push people to the annual plans, ARPU will go down slightly. That’s because people in annual plans often have a discount, so they pay less per month.
But as they are committed to stay at least 12 months, they’ll eventually pay you more. Which is great and you shouldn’t panic and start preferring monthly plans again