Marketing metrics: How to track ARPU and interpret its value

Bonus material: Marketing Metrics Calculator.

The secret to running a successful business is simple: you have to know both your customers and your data.

Companies that rely on customer analytics to gauge and direct their operations benefit from 93% higher profits, 112% increased sales growth, and a 115% higher return on investment.

To stay up-to-date on their business performance, companies track Average Revenue Per User (or ARPU for short) to get a sense of their financial performance.

What is Average Revenue Per User (ARPU)? 

Average Revenue Per User (ARPU) is a growth and performance measure, which tells companies how much monetary value (revenue) their average customer generates in a given month.

Stock analysts were the first to use ARPU as a financial metric to assess the value of subscription companies, such as those in telecommunications. 

Companies that traditionally sold physical products could allocate higher prices to the items they were selling, but they could never tell when the next purchase was going to happen. In comparison, subscription companies had lower prices (monthly subscription fees), but could bet on sales coming in regularly. Stock analysts needed a new way to measure the performance of subscription companies. They loved ARPU because it allowed them to compare company performance between businesses of different sizes, as well as check whether a company was increasing the average revenue generated by each customer.

ARPU is not just beneficial for stock analysts, but for companies too. You can use it to analyze the difference between the average revenue of customers on different subscriptions, allowing you to understand the monetary value that each subscription generates as a whole.

‍

How do you calculate Average Revenue Per User (ARPU)?

ARPU is a non-GAAP (generally accepted accounting principles) measure, meaning that there is no official set of instructions for how to calculate it. However, there are some general principles that can guide your calculations.

ARPU is calculated using the following formula:

Let’s break it down step by step.

Step 1: Decide on a time period

By far the most popular choice is to track ARPU monthly. Companies look at their transaction data and generate a report similar to this:

The preference for tracking on a monthly basis is a reflection of business operations, so it’s not set in stone. For example, Airbnb would not get much value from a monthly ARPU if, on average, most users go traveling twice a year. They might opt for a longer time period instead, such as quarterly or half-yearly ARPU.

Decide on a time frame that makes sense for your business. The specific time period is determined by looking at the frequency of repurchases or length of sales cycles. 

Step 2: Track the total number of active users

The total number of active users is tricky because it depends on how your company makes money. Let’s look at a couple of examples of potential active users for different business models:

The principle behind picking your active user is to determine who generates money for your company. Is it an individual customer who purchases from your shop? Perhaps a company (comprised of many individuals, but still a company) that buys your corporate software? Or maybe an app user who looks at your ads?

For subscription businesses, this could be more challenging. Be sure to include anyone who is actively paying for a subscription, but exclude people from your subscriber base who are on a trial or are freemium users. You should also include people who churned in your specified time period - they might not be paying customers anymore, but they were from the beginning of the period up until the point that they canceled their subscription.

To get the total number of active users, simply count the number of distinct customers, companies, software subscribers, or website visitors in the time frame that you’ve chosen.

Step 3: Calculate total revenue

Sum up all of the revenue that your customers generated during your selected time range. Include any product purchases, monthly subscription renewals, add-ons, and upgrades - basically any line item that pays. Make sure to also include negative revenue, such as refunds.

Finally, plug in the total revenue alongside the total number of active users into the calculation outlined above to get your ARPU.

Grab your Marketing Metrics Calculator.

How to understand and interpret Average Revenue Per User (ARPU)

When ARPU is interpreted correctly, it can bring several benefits to a company:

1. Understand how you compare to your competition. All things being equal, similar companies will run similar business operations in terms of revenue and costs to acquire a new customer (or retain an existing one). ARPU, therefore, allows you to understand how you are performing in comparison to your competitors. Are you extracting more value from your customers, or are you leaving money on the table? If your competitors have better metrics, investigate what they are doing so that you can mimic their strategies and increase the monetary value generated by your customers. It might be hard to get the data directly from your competitors, but you can search databases such as statista to view aggregated data across industries. 
2. Keep track of your performance. Tracking ARPU month over month enables you to spot trends in your business operations. Increasing ARPU shows that your marketing and sales teams are doing a good job of selling and upselling your customer base. A decrease in ARPU is a sign of concern. Investigate where your operations are failing before those flags turn red.
3. Segment your customer base into buyer personas for success. Based on their ARPU, divide your customers into two categories: high-value customers and low-value customers. Analyze the high-value users to understand what they have in common, so that you can attract more customers like them. You also need to devote more resources to the premium users (dedicated support, prioritized feature development wishes, etc.). They’re likely to bring more revenue in the long-run.
4. Optimize your revenue. Run pricing experiments to determine what is successful in generating more revenue. For example, you might realize that the average ‘middle-tier’ subscriber generates 2x the value of their subscription month over month. So, if their monthly subscription plan is $50, their ARPU is $100. That’s a clear sign that you should either (a) develop a higher-priced plan (there’s a demand for it), (b) make the ‘middle-tiered’ upselling strategies used to generate the $100 ARPU an integral part of your sales operations, or (3) simply increase the pricing of the middle-tier plan. Run those pricing and growth experiments to see what increases ARPU the most.

Common mistakes when interpreting ARPU

There are two common mistakes that you should avoid when interpreting ARPU:

1. Viewing it as an absolute (not relative) metric. ARPU is great for relative comparisons. For example, is your competitor better than you? Is a customer segment underperforming compared to another customer segment? But ARPU should not be taken in its absolute form (check the next mistake).
2. Using it as a proxy for financial success without other (profitability) metrics. ARPU is often used as a ‘vanity metric’. But what can you conclude from your average customer having an ARPU of $500 last month? Actually, for the business’s bottom line, not a lot. You need to look at incoming revenue as well as costs to acquire and retain a customer. Only when you include all of the marketing, labor, sales, support, infrastructure, and other costs can you understand whether or not you are running a successful business. Do not mistake ARPU for a one-stop-shop for all your analytic needs.

What is a good ARPU?

A good ARPU depends on the industry that you’re in. For e-commerce companies, it’s anything above $252, while in gaming, a figure north of $66 is satisfactory. Telecommunications companies will be looking for an ARPU of more than $30, while only $1.7 is a good result for non-paying mobile app users (e.g. ad revenue generated by serving ads to mobile users with freemium accounts). 

Finding the benchmark for your specific industry can be challenging because companies are very secretive about their financial metrics and performance. Search databases like statista with the query “ARPU [industry]” to find the numbers relevant to your business.

ARPU is extremely useful for gaining an understanding of how other businesses are performing. Just be careful when interpreting it. ARPU varies between companies in the same verticals, between industries, and across geographical locations. Keep in mind that a higher ARPU is not necessarily a sign of a better business. Unless you know the additional costs associated with customer acquisition and retention, it’s impossible to paint a full picture of your business’s performance.
‍

Three ways to optimize ARPU 

There are three things that you can do to increase your ARPU:

1. Upsell and cross-sell. You should both upsell and cross-sell more items to your current paying customers. This could include anything from physical products to add-ons and plan upgrades.
2. Prevent user churn. Losing customers means that you also lose incoming revenue. Analyze the reason for churn, then establish retention and re-acquiring growth strategies. These should either prevent users from churning or bring them back into your customer base. 
3. Acquire the right customers. Segmenting your users based on higher and lower ARPU allows you to understand who your premium users are. Target these people so that you’re more likely to acquire higher ARPU customers in the future.

Keboola can help you to set up the infrastructure needed to track and interpret ARPU

Keboola is an all-in-one data platform built for the data-driven decision-maker.

With a couple of clicks, Keboola can:

1. Connect all of your internal and external sources into a single customer database.
2. Analyze data and extract valuable metrics, such as ARPU.
3. Automate the process from data collection to analysis, so that your metrics are always fresh.
   

Curious about the other features that Keboola has to offer? Check out its rich feature offering today.

‍

If you'd like to download our FREE Marketing Metrics Calculator, fill in the form below.