A Detailed discussion on Average Revenue Per User
The business metric known as Average Revenue Per User (ARPU) is primarily used to determine how much money a company makes per user or customer over a given period. A lot of organizations utilize ARPU to analyze their revenue, especially when they offer a digital product, app, platform, or subscription-like service.
Suppose that in one month a music streaming app generated $10,000 in revenue and that company had 1,000 users. In that scenario, $10 would be the average revenue per user. Knowing what your ARPU is, gives an organization an idea of how much revenue they generate on average per user.
How does “Average Revenue Per User” Play a Significant Role?
Understanding average revenue per user is valuable to businesses in several ways:
- Measure Growth: If ARPU is increasing, that means that each customer is spending more, which is good.
- Determine Pricing: A business can decide based on ARPU whether to increase its prices or if it is now in a position to add more features.
- Benchmark Against Competitors: If one company has a higher ARPU than another, its likely they are better at making money from its users.
- Allow for Marketing Campaign Planning: When companies understand the value of each respective user, they can decide how much they should spend to acquire new users.
In essence, ARPU serves as a health check of a business’s revenue per customer.
Easiest Way to Calculate Average Revenue Per User?
Now we will look at the easiest method of “how to calculate average revenue per user?”
The equation:
Average Revenue Per User = Total Revenue / Total Number of Users
Let’s say that a mobile game brought in $5,000 over a month, and there were 500 active players. Here’s how the equation works:
ARPU = 5,000 / 500 = $10
So the ARPU is $10.
That’s it! It’s that easy! You just divide the total dollars the company makes by the number of users.
Real-Life Examples
- Streaming Services: Netflix may well monitor its average revenue per user in the United States, Europe, and various other regions to determine where users pay a premium for the service.
- Mobile Apps: A free game may sponsor itself through in-app acquisitions and ads, as the ARPU is the only metric that tells developers how much each user pays to play the game.
- Telecom Companies: Mobile carriers like Verizon or AT&T, would look at ARPU to measure how each customer spends monthly on calls, texts, and data.
Different Types of ARPU
Depending on the business, ARPU can be thought about in a couple of different ways:
Monthly ARPU: This tells how much on average each user brings in each month.
Annual ARPU: This tells how much revenue a user is generating for the business on average in a year.
Per Product ARPU: If a business is selling multiple product lines, it can calculate standalone ARPU for each of its products to identify which one generates the most revenue and compare profits generated by each.
Regardless of the type of ARPU, once a business knows what is taking place, it is an exercise based on reasoning about customer value.
ARPU vs. Other Metrics
You might ask yourself how average revenue per user differs, if at all, from other metrics that companies use. Here’s a quick guide for comparison:
- ARPU vs. Total Revenue: Total revenue is the total money earned. ARPU gives an average amount of that total that is coming from one user.
- ARPU vs. Customer Lifetime Value (CLTV): CLTV represents how much money a customer earns over their entire relationship with the service. Average revenue measures that money earned over a much shorter time frame, like a month or a year.
- ARPU vs. CPA (Cost Per Acquisition): To describe, CPA is simply the price that a brand pays to acquire a new user. Average revenue is how much you earn from a user. By comparing the two metrics, you determine if you’re making enough profit to cover CPA.
Easiest Ways to Increase Average Revenue Per User
All businesses desire growth, and increasing ARPU is one way to achieve it. Here are several simple ways to raise ARPU:
- Provide premium plans to let customers pay more for additional features.
- In-app add microtransactions so that small purchases inside apps or games raise your ARPU.
- Sell up and sell across by recommending more products/services to that same customer.
- Improve user experience by ensuring customers are happy: Happy customers stay longer and will often pay more
- Ad monetization can generate revenue per user too, even if users don’t pay you directly.
Overall, companies use these strategies to create a more valuable customer.
Challenges in Using ARPU
Although Average Revenue Per User is very useful, it does have some drawbacks.
- It’s an Average: Some users spend lots of money and others spend nothing. ARPU won’t tell you this.
- It Can Be Misleading: A high ARPU does not automatically mean that a company is healthy if the number of users is declining.
- It Ignores Costs: ARPU only shows earnings, not profits. A company may earn more per user but still have a loss if the costs are too high.
Nonetheless, it is a valuable tool in combination with other metrics.
Conclusion
Average revenue per user is one of the simplest numbers a business can track but one of the most powerful. It shows the average amount of money each user generates with your company and helps businesses make informed decisions about pricing, marketing, product updates, etc.
The actual calculation of average revenue per user is simple, and once you wrap your head around it, you’ll understand why companies value this number.