Learn how to calculate average revenue per user as well how to improve this important metric
One of the metrics that you can calculate via our Lido app is the average revenue per user (ARPU). While ARPU is not used solely to measure the health of your business, it is an important and straightforward metric that you should calculate. In this article, you will learn how it is calculated, the reasons for using ARPU, and even some tips in improving your ARPU.
What is average revenue per user (ARPU)?
Most businesses, from the biggest multinational companies down to your favorite restaurants, need to track how much they earn from their clients and customers. One metric you can use is the average revenue per user, or ARPU. ARPU is a relatively simple metric you can use to calculate how much you earn per customer or user for a given time period. It can be calculated as follows:
Where total revenue is the total revenue for a given time period and the number of units or clients is the total number of clients served during the given time period. Often, there are clients who are active during a given time period but are dormant in another one; they need to be carefully filtered out when calculating the ARPU for a given time period as it can artificially lower the value, giving you an inaccurate picture of the performance of your business.
ARPU is mostly used by mobile network operators, social networks, and other Internet-based services to measure the success and sustainability of their businesses.
Why should you use ARPU?
One objection to using ARPU is that it calculates revenue per unit instead of profit per unit. But ARPU is still a useful metric! Here are some reasons:
ARPU helps you quickly assess whether you are pricing the product or service correctly. A low ARPU means you are undervaluing your product or service.
ARPU also gives you an idea whether your business is sustainable. A low ARPU can mean that you need to expand
ARPU can be used to measure the relative success of your current marketing and sales strategies. Similarly, an increase in ARPU after the start of a new marketing campaign signals its relative success.
Analyzing ARPU requires some context. The next section discusses this further.
What is the ideal ARPU?
Unlike other percentage-based quantities, ARPU needs to be contextualized in order to interpret whether the ARPU is high enough or still too low. The first thing you need to consider is the size of your customer or user base. A relatively high ARPU while having a small customer or user base means that there is a potential to expand your business to capture more customers or users. If, instead, you have a massive customer or user base, a relatively small increase in ARPU means a potential gain of upwards of hundreds of thousands of dollars per month or any time period set in your calculations.
ARPU can even differ by region. For example, Netflix’s ARPU in 2020 differs per region. The US&Canada region has an ARPU of $13.51 while the Asia-Pacific region only has $9.32.
How can you improve your ARPU?
There are several ways to improve your ARPU, and all of them involve improving how your business works. Some of them are listed below.
Make sure your product or service allows future improvements
Designing your product or a service such that it is relatively easy to expand and improve in the future is one of the main ways to improve your ARPU. Users would prefer to subscribe to a product or a service that is continuously improved over time.
Besides increasing your ARPU, a product or service that allows future improvements also reduces the costs on your side, which will allow you to gain more profit and perhaps even offer some of these improvements for free, which your users will surely appreciate. This simply helps your business in general.
Adjust your product pricing
A relatively low ARPU can mean that your product is sold at a price too low to reflect the value it brings. You should consider increasing the pricing of your products and services, but you should do so with due consideration to your current customer or user base. An improperly-handled price increase will backfire!
If you need to adjust your product pricing by increasing its price, you may consider the following:
Offer add-ons that increase the price a little but will be found useful by your current customer or user base. Users want flexibility when upgrading their current plans, and a main way to do so is to offer them add-ons that they can choose from.
Implement a variable and scalable pricing model so the users can opt for a product or service that matches their needs and their budget.
Offer product bundles that customers or users can choose from and even mix-and match. Users want flexibility right from the start.
Only implementing the price increase to new customers or users. This will help ensure your current user base will not jump ship to your competitors especially when the cost of changing the service provider is very low.
Retain your current users
If you can make your customers or users stick to your product or service, it will reflect in an increasing ARPU over time. These are some of the ways you can retain more users over time:
Continuously improve your product or service over time while minimizing disruption on the side of your users.
Target the right audience. A low retention rate can be due to your short-term users realizing your service is not fit for their purpose. Chances are, it is due to simply targeting the wrong audience. Realigning your marketing campaigns to target the right audience will help improve your retention rate, and thus also your ARPU.
Improve your customer service. One surefire way to lose your current customers or users is to have a fail-tier customer service worthy of memes on Facebook. An investment in excellent customer service is a good counter to that. In fact, excellent customer service has a substantial effect in retaining your user base.
While it’s easy to calculate and create graphs for your ARPU, it’s just one metric. To maximize your overall revenue, you still need to compute the other metrics. Lido can help you with that! It can build dashboards to monitor your data and compute different metrics like ARPU. Try Lido by signing up here for free!