What is ARPU?
ARPU stands for average revenue per user or average revenue per unit. The ARPU formula is used to calculate the average revenue received per user or unit over a fixed period of time. It is a particularly useful calculation tool for businesses and companies in the telecommunication and media industries which rely on subscribers or users. The ARPU helps to deepen their analysis of growth potential and allows them to compare ARPU numbers from rivals in the same industry.
It also points to other companies and brands to see which is doing the best job of increasing revenue from its users. You can also use the ARPUD number to see which products or business segments are performing the best or worst, similar to the BCG Matrix.
How to calculate ARPU?
The first step to accurately calculating ARPU is to define a fixed standard period. Many service providers and operators in the telecom industry calculate ARPU on a monthly basis.
Next, the total revenue generated during this standard time period is divided by the number of units, subscribers or users. In order to get the most accurate result, estimate the number of units/units for a given period instead of inputting a fixed amount. The number of users tends to fluctuate throughout any given time in telecommunication industries especially.
There are also a couple of things not to include when calculating the ARPU — a tabulation of your current customer base and the money they’ve spent with you for a fixed period. Therefore, avoid including free or inactive customers that generate 0 revenue. Such customers water down your revenue average for the month and make it seem as if you have an abundance of customers but not a lot of revenue which is an inaccurate representation of how the company is performing.
Why is ARPU so important for operators and service providers?
Calculating and understanding your ARPU figure and understanding it is crucial for software-as-a-service companies and service providers. More than a ‘vanity metric’, the ARPU number gives you an accurate insight into how well your company is doing. The higher the ARPU for a company, the better the potential for the company to increase revenue and cash inflow in the future.
ARPU figures help to indicate the health of your business financially. Lower ARPU numbers might mean that you need more customers to grow a sustainable company. It also aids in setting prices according to their value. ARPU often allows businesses to see their ‘canary in the mine’ products, indicating that their price may be too cheap in a small market. A high ARPU value in a large market is a good sign, predicting substantial growth.
Product validation and extracting value is another crucial concept for many service providers and SaaS. Many companies charge too little when they’re targeting small or enormous customers, and consequently, the ARPU tends to be low for the provided value. ARPU helps validate products, determine their true value, and set the prices accordingly, so you’ll never be under-compensated.
ARPU figures also show how effective your marketing and sales teams are in driving the right deals and promoting your products. High values of ARPU indicate that your sales and marketing propositions are consistently improving, leading to increased revenue and efficiency.
Is ARPU linked to customer churn rate?
Customer churn rate, also simply known as churn, refers to the percentage of your customers that leave your service over a given period. Churn rates, along with subscriber growth rates, are also metrics that evaluate the financials of a telecom company. If your company is generating high churn rates and losing customers over a period of time, subsequentially, you will have a low ARPU value and retention rate.
Customer churn rates can leave a huge dent in a company’s revenue if left unchecked. Similarly, they also affect the ARPU and the company’s ability to expand and grow. Here are a few ways you can increase and improve your ARPU value to achieve high retention rates and curb the dreaded customer churn.
Three ways to optimize your ARPU
The more ARPU you can generate, the better your SaaS business is doing. Implement these three effective ways to ensure your ARPU achieves its highest potential while keeping customer churn at bay.
1. Product evolution: Add-ons, value metrics and upgrades are key
One of the easiest ways to increase ARPU instantaneously is product evolution: keep your products interesting and fresh by integrating updates, add-ons and value-added services. For example, many service providers and operators can introduce premium plans or premium-only features, including a free trial period.
This is a great way to target existing customers who have already proven their loyalty to your company. By up-selling/cross-selling, you already have the advantage of customers who love your product — low-hanging fruit. All you need is a little more data and insight into what else they’re expecting out of your product/service. Once you have all the information, you can transform and upgrade your product/service accordingly.
As a result of adding new features and services, SaaS companies can also change pricing plans and upgrade existing customers while also attracting new ones.
However, one fundamental factor is to ensure that the quality of the product/service isn’t compromised and retains incredible value.
2. Ensure your retention rate is stable and on point
As mentioned previously, customer churn, retention rates and ARPU values are all interlinked. Without a high retention rate, achieving a high ARPU becomes very difficult. Focusing relentlessly on increasing your retention rate directly decreases your churn rate as well.
A decrease in the churn rate leads to more time for developing marketing, up-selling and cross-selling strategies. There are many ways to increase retention and curb customer churn, such as engaging in email marketing, offering personalized deals or plans, and creating great content reminding users of your value.
It’s important to note that the customer churn rate can never be 0. Many customers leave for reasons service providers, operators and SaaS businesses are never sure about. However, there are chances of winning them back through reactivation —understanding why they left and how you can change their mind.
3. Collect data and target the right customer personas
Collecting data on market trends, new technology, existing customers and how they react to new product releases, upgrades on existing products, changes in the pricing plans, etc., is crucial in making future effective decisions and targeting new customers. Your ARPU value might be stunted because you’re focusing on too many small, low-profit, distracting customers. Learn which customers are worth investing in by quantifying your buyer personas properly and targeting the most profitable ones.