SaaS Average Revenue per User (ARPU)
Definition of ARPU
ARPU is revenue the company gets from a single customer in a certain amount of time, usually month or year. In other words, the ARPU definition is an average revenue per customer.
How to calculate ARPU?
The formula used to obtain this number is not that accurate because ARPU calculation is done by dividing two total numbers- total revenue, yearly or often monthly revenue known also as MRR (Monthly Recurring Revenue) with a total number of customers.
At first glance, you may think that this vague value doesn’t represent any meaningful data that can help you modify your SaaS business path.
- Total monthly revenue / Total number of users = ARPU
Magnitude of ARPU
By properly breaking down the information that ARPU gives you and seeing the current financial situation you can easily spot what needs to be done next.
Speaking of which, the next step should be adapting and implementing changes in accordance with low or high overall average monthly revenue. If you have a low ARPU that means your customer base is too thin to reach your financial goals and you need to work on it as soon as possible. Even worse is if your company doesn’t have much competition in the current market and you are still struggling to meet those goals. Those are the signs of serious problems inside your organization. It means that you are either not targeting the right core customers or that you are under-pricing yourself. Vice versa, the best-case scenario is high APRU in a highly-competitive landscape.
ARPU for SaaS companies is an absolute necessity and one of the most important SaaS metrics because by understanding it you can truly understand your customers, their trends, and what exactly do they love or hate about your product.
If you have various SaaS pricing models it gives you a clear picture of what model is the most popular among customers and which ones are not. The last thing you want is to waste your time, energy, and money on the monetization model that brings the least amount of money. But be careful here to not limit too much your customers with only a few options. So, it is no exaggeration to say that depending on your ability to quickly adapt according to your ARPU can either make or break your entire SaaS business.
The wide range of companies that monitor and pay attention to their ARPU numbers also speak in favor of the importance of it. It’s mostly used in the telecommunications and cable sector by Verizon, AT&T, Comcast, and others too. Social media giants such as Facebook also use ARPU calculation as a guide for further actions.
Why is ARPU important?
- To better understand your own customers
- You can easily spot what needs changing
- Shows you what method brings the most money to a company
Keep in mind, that your goal is to attract long-term customers. Those kinds of customers will ensure that your Average Revenue per User value only goes higher than previous ones. In the SaaS world only by understanding your customers’ needs can you hope to succeed and grow your business.