What is Average Revenue Per User?
Average revenue per user (ARPU) measures the revenue generated by each customer. Companies typically calculate ARPU on a monthly basis.
For ecommerce stores, this shows how much the average customer spends per month. And for subscription services, it measures how much an average customer spends per monthly subscription period.
How to calculate ARPU?
Calculating your average revenue per user with the ARPU formula is simple: just divide your monthly recurring revenue (MRR) by the total number of active users in a particular month.
ARPU = Total Revenue Generated / Number of Users
Let’s see an example!
Imagine that a company has $30 million in total revenue generated during the month of April, and they had 30,000 active users.
Here’s what the formula looks like filled in:
$30,000,000 (Total Revenue Generated) / 30,000 (Users) = $1,000 (ARPU)
This means that each customer contributed, on average, $1,000 in revenue during the month of April.
Why is ARPU important?
ARPU is one of the most important metrics for ecommerce companies.
It’s crucial to track how much money each of your customers is bringing into your business on a monthly basis.
This can help you figure out whether you’re starting to experience a downturn, whether your marketing campaigns are working, and whether your pricing creates loyal customers.
Keeping an eye on your ARPU makes it easier to plan over both the short term and the long term. An accurate ARPU calculation helps you identify trends, find the best price points for your customers, and discover upsell or down-sell opportunities.
High vs. low ARPU
In simplistic terms, there are two approaches an ecommerce business can take when it comes to their average revenue per user.
You can either pursue a high average revenue per user by selling higher-priced items to fewer people, or you can shoot for a low ARPU by selling lots of lower-priced items to many more customers.
In general, you should try to have as high an average revenue per user as possible. That’s because a high ARPU means you can grow quickly without acquiring lots more customers.
If your ARPU is low, it will be hard for your business to achieve long-term success. A low ARPU could mean that you’re either targeting the wrong market or you’re in a small market that doesn’t offer much growth potential.
How to increase ARPU?
As we’ve seen, increasing your average revenue per user is typically an important goal for online stores.
The higher your average revenue per user, the more value you’re getting from your customer base. This means more revenue for you without having to spend money on customer acquisition costs.
Here are three great ways to boost your average revenue per user:
1. Adjust pricing plans
There are a number of ways to change up your pricing strategy in order to maximize ARPU.
This is often an excellent idea since it’s important to adjust your pricing from time to time whether you’re running a SaaS company or an ecommerce business.
Raising your subscription price (or the prices of your products) is one sure way to increase how much each customer tends to pay. However, you generally don’t want to raise prices too quickly or you could end up losing customers.
2. Prioritize retention
Keeping your existing customers happy and coming back for more is another surefire method of boosting your ARPU. It’s also very profitable, since retaining existing customers is cheaper than winning new customers (as mentioned above).
The better you are at retaining customers, the higher your customer lifetime value will be. Let’s see what you can do to retain your customers.
- Personalize their experience while they’re browsing your website.
- Offer rewards or loyalty programs where customers can collect points to exchange for discounts
- Offer special delivery or return options
- Delight your customers with free samples or gifts
3. Upselling and cross-selling
Upselling is a sales technique that persuades a customer to spend more, either on a more expensive alternative to the product they’re considering (with better features or specs) or by choosing add-ons.
ProFlowers does this by suggesting vases that would look great with their flowers:
Cross-selling means selling additional services or products to customers who have already made a purchase (or already have something in their cart). It involves encouraging them to buy related or complementary products, like in the example below where the shop recommends several outfit options to a user who has added a yoga bra to their cart.
Both upselling and cross-selling lead to higher order values each time a customer makes a purchase.