What is Average Revenue Per Customer (ARPU)? How to Calculate it
Learn what Average Revenue Per Customer (ARPU) is and how to calculate and increase it. Dive into the essential metric for business success in our guide.
What is average revenue per user (ARPU)?
ARPU shows how much money a company makes on average from each customer within a specific period, usually monthly or yearly.
It helps businesses see how efficient their pricing models, revenue, and customer engagement strategies are and how well they monetize their customer base.
With these insights, companies can make informed decisions to:
- Increase revenue: Businesses can boost their overall revenue by spotting opportunities to increase customer spending or attract high-value customers.
- Adjust pricing: Analyzing ARPU helps fine-tune pricing strategy. Companies can ensure their pricing tiers align with customer expectations and market demands.
- Introduce new services: Businesses can find potential gaps by noticing customer spending patterns. Introducing new services that meet customer needs can increase revenue.
- Improve customer satisfaction to retain existing customers: Happy customers spend more and remain loyal. Focusing on ARPU encourages companies to invest in customer satisfaction, retain existing customers, and ensure consistent revenue flow.
ARPU vs. LTV
ARPU and customer lifetime value (LTV) are bothcrucial metrics for businesses; however,they measure different aspects of customer value and are used for various purposes.
As mentioned, ARPU helps companies understand how much revenue they generate per customer, in a given time. It helps evaluate short-term income and pricing strategies.
In contrast, LTV is the total revenue a company expects to earn from a customer throughout their entire relationship (lifetime) with the business.
LTV can be more complex to calculate, as it involves predicting future customer behavior. You’ll need to consider the average purchase value, purchase frequency, customer retention rate, and the average lifespan of the customer relationship.
LTV helps businesses assess the long-term value of a customer. You can use it to create informed and strategic customer acquisition and retention plans.
What is a good average ARPU?
It depends. Defining a “good” ARPU can vary widely depending on the industry, business type, and market conditions—a good ARPU for one company might not be the same for another.
However, a higher ARPU generally indicates a business effectively monetizes its customer base.
Companies often compare ARPU to historical data and industry benchmarks to determine whether the metric is healthy. They’ll also look at it in the context of their operating and customer acquisition costs and profit margins.
A good ARPU covers the cost of acquiring and serving customers and contributes to the company’s profitability and growth. Finding a happy balance is important for businessese. ARPU should be high enough to generate substantial revenue but not so high that it discourages customer acquisition or retention.
The goals of ARPU also depend on the company’s business model, target market, and financial objectives. Comparing the metric to industry norms and analyzing its impact on profits can help you see whether your ARPU is reasonable.
ARPU calculation: How to calculate ARPU
Now you understand the meaning and significance of ARPU, you’ll want to know how to calculate it.
Thankfully, the formula is relatively straightforward.
The ARPU formula explained
The ARPU formula is as follows:
ARPU = Total Revenue / Total Number of Customers or Users
Let’s break down the components in more detail.
- Total revenue: This refers to the company’s overall income from its products and services within a time frame. You can calculate it monthly, quarterly, annually, or for any specific period you choose.
- Total number of customers or users: This is the total count of customers or users the company has during the same period used to calculate total revenue.
The time frame you select for calculating ARPU is vital, as it gives context to the metric.
- Monthly ARPU: If you calculate ARPU every month, you’ll get insight into the average revenue generated from each customer per month. This is common in subscription-based services, like streaming platforms or SaaS companies.
- Quarterly ARPU: Calculating ARPU quarterly gives a broader view of customer spending habits over three months. This longer frame can help you identify seasonal trends or changes in customer behavior.
- Annual ARPU: Annual ARPU provides a yearly average, giving a comprehensive overview of customer value over an entire year. A long-term perspective is useful for evaluating customer loyalty and the productivity of your retention strategies.
Suppose an ecommerce company generated a monthly revenue of $100,000 and had 10,000 customers making purchases in that same month.
In this case, we’d calculate ARPU by dividing $100,000 by 10,000. The ARPU for this business comes to $10—or each customer spent $10 on average during that specific time frame.
How to increase ARPU
The key to increasing your ARPU is to provide genuine value. You want to make customers feel the additional cost is worthwhile from the experience or benefits they get.
Keeping a keen eye on user responses and market trends is a part of this. Through analyzing this information, you can develop effective strategies that encourage customers to boost their spending.
Here are some ways that you can achieve this.
Add value through add-ons
Additional services and product features can elevate the customer experience and encourage them to spend more.
Introduce optional extras, premium features, or multiple plan levels that customers can choose from to enhance their basic package. Clearly articulate the value these enhancements bring when you upsell, motivating users to invest in the upgrades.
Create tailored experiences
Understand your customer base and tailor your offerings based on their needs and wants. Personalized services or products can justify higher prices.
It is important to analyze customer data to create segments, using these to create bespoke packages and exclusive deals that entice your audience.
Offer subscription models and tiered pricing
Subscriptions provide a consistent revenue stream, while tiered pricing lets customers choose plans based on their needs and circumstances. If customers aren’t forced into a costly option, they’re more likely to opt for the higher-priced plan—especially if it’s deemed valuable.
Offer different subscription levels with varying features. Make sure each tier offers clear value so customers can pick the plan that suits them best.
Engaged and loyal customers spend more. Loyalty programs incentivize customers to stick with your brand and invest higher amounts.
Regularly engage with customers through newsletters, personalized offers, and exclusive content. Implement a loyalty program offering discounts, rewards, or early access to new products.
Listen to feedback
Listening to customer feedback helps you understand their needs and concerns. Addressing issues and continuously improving your offerings can boost customer satisfaction and spending.
Gather feedback through surveys, reviews, or direct communication and act on constructive comments to improve your product and justify the higher price point.
Shape your strategies with data-driven insights
ARPU shows how well a company’s prices, customer engagement, and overall performance are working. It helps businesses make their customers happier while generating more money—the ultimate aim of the game.
At Amplitude, we recognize how important actionable data insights are in shaping successful strategies.
Our cutting-edge analytics platform provides you with the tools to delve deep into customer behavior so you can make clued-up decisions that drive revenue growth.
With Amplitude, you can realize the full potential of your user data, leading to higher ARPU, improved customer experiences, and sustainable success.
Experience the power of data-driven decision-making. Start your journey with Amplitude today.