In the SaaS market, getting to know your customer separates the losers from the winners. When you look at successful firms, you’ll discover that 99.9% of the time, they understand who their consumers’ needs are. And how the clients gain value from their products.

Understanding your Average Revenue Per User (ARPU) is the secret to understanding your customers. This indicator helps you spot trends and make changes. Which will help your company move closer to the vast pool of SaaS and earn what we all desire.

To better understand ARPU, let’s look at what it is, why it’s essential, and how you can use it to boost the performance of your SaaS business.

What is ARPU?

ARPU stands for Average Revenue Per User. ARPU is a formula that calculates the average revenue per user, or unit, over a given period.

This process enables firms to conduct an in-depth examination according to per-customer growth potential and forecast revenue generation capacity. ARPU is one of the most critical revenue metrics for SaaS subscription firms.

Why Should You Care About ARPU Calculation?

To put it another way, ARPU is the average monthly income you receive per user.

Some consider ARPU a “vanity statistic” (a metric that isn’t useful). But, those people are misusing ARPU. It isn’t the most in-depth measure but comes in handy when calculated and broken down.

It may help you spot trends in a group of consumers booked within a month across different cohorts and categories. For example, when you graph these calculations, you see which price points consumers prefer more than others. On top of that, you can observe upsell/downsell tendencies – all of which are essential factors in the efficacy of your SaaS business model.

ARPU tracking allows you to forecast and plan for both the long and short term. It is a foundation for increasing your Monthly Recurring Revenue (MRR) by attracting higher-paying clients. In addition, higher ARPU is the source of fuel for your customer LTV or Lifetime value goals, which guarantees that your SaaS company is on the right track for long-term success.

Importance of Understanding ARPU?

Understanding ARPU statistics gives you the whole picture of your SaaS business and its performance. Especially with the help of your split-down segment and cohort. Thus the higher the ARPU there is higher the prospects of income growth. If the company’s payment or the value you provide is less than the ARPU, you should know that the product has a superior value ratio. In summary, here’s why APRU is significant:

Shows how strong your business is

You will have a hard time building a sound business in case your ARPU drops below $100. This means, you will need more consumers to buy your products. 

ARPU gives you a bird’s eye view of the type of business model and what value you can provide against your pricing. If you have a high ARPU, it means you are thriving in the market.

One of the most common problems is product validation for businesses when their ARPU isn’t high enough to deliver their targeted business. For example, if you’re selling a product to Disney and providing $1 million in time, cost, and other efficiencies, you should charge at least $100,000. ARPU helps your product team decide if the product’s value parallels the appropriate customer.

Considering that your marketing and sales teams are pursuing the appropriate opportunities.

ARPU should increase over time, especially if you’re new to the SaaS business. The rationale for this ongoing improvement need is that your sales and marketing value propositions and targeting are improving quarterly. In other words, you’re improving your efficiency.

What ARPU says about your SaaS Business?

ARPU provides vital information about your business and shows how stable it is in the short and long term. Here are some of the benefits of understanding this important metric:

Increase in MRR and LTV

ARPU has a direct impact on MRR in the short term. The more revenue that individual consumers contribute each month, the more revenue your organization receives every month. ARPU also influences the long-term expansion of your customers’ lifetime values. The money a single client gives each month adds up throughout their

the whole relationship with the company, resulting in a lifetime value—in other words, rising ARPU raises LTV.

Your business’s financial viability

If your ARPU is low, you’ll need a lot of consumers to meet your monthly MRR targets. However, if your ARPU is high, you don’t need as many consumers to meet your goals and proliferate. Therefore, low ARPU in a limited market could indicate that your company isn’t set up for long-term success. In contrast, high ARPU in a vast market shows strong revenue growth potential.

Right product at the right price

Low ARPU could indicate that you’re not deriving enough value from specific customer personas for your service. For example, enterprise clients are likely looking for many deals from your product, which you could capitalize on by pricing it in an appropriate manner.

As sales pitches improve and value propositions become more precise and targeted, your sales and marketing team’s ARPU efficiency should rise. By increasing ARPU, you’ll be able to enroll more of the correct consumers and sell them on the value they want.

This aids in the development of a more effective sales and marketing system.

The efficiency of your Marketing Team

As sales pitches improve and value propositions become more straightforward and targeted, your sales and marketing team’s ARPU efficiency should rise. By increasing ARPU, you’ll be able to enroll more of the correct consumers and sell them on the value they want. This aids in the development of a more effective sales and marketing system.

What Should You include in ARPU?

Calculate the average revenue per user (ARPU) by dividing all income from active users by the total number of customers. Take into account the following factors:

1. Monthly Recurring Revenue: The entire recurring revenue that your business generated for that month.
2. Account Upgrades: this is a part of MRR that represents the upgrade revenues from your existing customer base.
3. Downgraded Accounts: This covers the total dollar amount of consumers that have had their service downgraded. Downgrades reflect money lost from customers who haven’t churned; thus, this is critical.
4. MRR lost from churned customers: This component of MRR counts the MRR you lost from customers who churned, not those who canceled.
5. Total Paying Consumers: Include all customers with active accounts who have paid for your service within the last month. Do not include “free users” in ARPU calculation, as they do not generate income for your firm.

What You Shouldn’t Put In Your ARPU

The key to acquiring accurate ARPU stats is understanding that it’s a tally of your current client base and the money they’ve spent with you over the previous month. It’s also worth noting that ARPU, like MRR/ARR, is a “momentum statistic” that thrives on purity.

• Exclude Items that are “free”.
• Exclude Customers who are no longer active

Include items such as “free” or “inactive” customers from which you are not producing any cash as one of the simplest ways to make this up.

Including them will dilute your monthly revenue average and give investors/stakeholders a skewed picture of the company’s performance.

How to Work Out ARPU?

The ARPU calculation is simple: divide your total MRR by the number of clients you have. You can do this for each month.

• Divide the total number of customers by the SUM of all your active customer MRR. Remember you need to do this calculation every month.

Three Methods for Increasing ARPU

ARPU is a trend-identifying measure that allows you to get to know your clients in a personal manner. Your SaaS business will do better if you can create a higher ARPU. ARPU provides the information you need to propel your organization forward by raising MRR/ARR and growing customer LTV.

Here are some practical strategies for increasing ARPU in your SaaS firm.

Upgrades, Value Metrics, and Add-Ons

If you are upselling or using any method to raise income from recurring customers, make it a part of ARPU calculation.

To bake in expansionary revenue, the simplest solution is to guarantee that a value metric is integral to your pricing plan. Make sure you have a straightforward add-on and upgrade strategy as an alternative to this technique.

Ensure customer retention is up to par, especially if you have many.

MRR churn has a direct link with ARPU because leaking customers reduce the total revenue. So make sure you have a robust retention plan in place.

Make sure you’re focusing on the correct customer personas.

By focusing on too many small, distracting (and expensive) low-revenue clients, you may be completely inflating your ARPU. If you’re not in the consumer space or a market with hundreds of thousands (if not millions) of prospective customers, you shouldn’t pursue customers for less than $100 a month. Make sure to quantify your buyer personas to focus on the right ones for growth.

Is there a link between ARPU and client churn?

Customers with a high ARPU are valuable to your SaaS business for various reasons, including that they contribute to your MRR. High ARPU clients constitute a significant value for your organization.

User churn is a sneaky drag on your SaaS business. It reduces your user base, forcing you to work harder to replace lost users and gain new ones to expand. That’s why loyal customers that don’t churn are so valuable to a business, and SaaS businesses place such a high value on client retention.

Lower user churn means clients are more likely to stay. This can result in greater LTVs and more potential to monetize these consumers through cross-sells and up-sells for your business. In addition, customers with a higher ARPU stay longer than those with a lower ARPU.

How can a company that caters to small and medium-sized businesses raise ARPU?

If your organization offers a low-cost solution to small enterprises, don’t worry. A growing SaaS company should start by focusing on the SMB market, as there are chances to monetize your consumers even if supplying a high-cost service isn’t feasible.

The key to monetizing these clients is to provide value and gradual price increases. Catering to the SMB market might help you access a customer’s business. Then, over time, you can raise your part of their pocketbook by:

1. Upgrades to marketing features
2. Additional services are cross-sold.
3. Encouraging the extension of plans based on a value metric

If all of this sounds perplexing to you, Let Numberly determine how to get your foot in the door for your SMB customers with low ARPU.

Then, as your clients grow and require more value from your offering, cross-sell and up-sell to them. This allows you to gain consumers at a pricing range that works for them in the early phases of your business and then boost their ARPU as their demands expand and your company evolves.

Meta description: As time passes and the firm expands, this begins with measuring your client personas and progresses to deeper SaaS metrics. Understanding your Average Revenue Per User is the authentic secret sauce to understanding your customer (ARPU).