Do you know what the secret of creating a successful SaaS company is? We do: getting to know your customers and their needs. Knowing what they demand, which problems they want to solve, and how or which tools they currently use will lead you to heaps of information that you can use when developing your SaaS product.
There are many ways to analyze your customers and potential users. Through market search, marketing strategies, or reports. However, a key strategy will help you a lot at the beginning: understanding your average revenue per use (ARPU). But what is ARPU? How to calculate? How can I improve the metric? Why is this metric important?
To better understand ARPU, today we’ll cover:
- What is ARPU?
- How to calculate ARPU?
- Is it important to measure ARPU?
- How to increase the Average Revenue Per User
- ARPU in SaaS
Let’s get started!
What is ARPU?
The average revenue per user (ARPU) is a metric that shows the average amount of revenue generated by each user of your company over a period of time. In most cases, this metric is calculated on a monthly basis and enables businesses to deepen their analysis of growth potential on a per-customer basis.
How to calculate ARPU?
To calculate ARPU, you must collect your monthly recurring revenue (MRR) and divide it by the total number of active users. Here is the correct formula:
Average Revenue Per User (ARPU) = Total Revenue (MRR) ÷ Total Number of Customers
For the ones who don’t know what MRR is, here’s a quick refresh: MRR is a metric that shows how much income is generated per month. By using MRR, you can assess the current financial health of the business and project future earnings.
Let’s get back to the ARPU formula. It looks pretty easy, right? To better understand this, we’ve created an example of how to apply this formula. Let’s say a SaaS business has achieved a$50 million MRR, and it has 50,000 active users. The ARPU result will be $1000.
50,000,000 MRR ÷ 50,000 Active users = 1000 ARPU
As easy as stealing candy from a baby, right? Now that you already know what ARPU is and how to calculate it, let’s learn why it’s important to measure it.
Is it important to measure ARPU?
Measuring the ARPU of your company is a strategy to understand how well your SaaS business is doing. The higher the metric, the better. Think about it: if you have a high ARPU concerning the value you provide or the company’s revenue, you know you have a value product. Here are different reasons why measuring it is crucial:
The validation that your sales and marketing teams are generating the right leads
An increase in your ARPU can give you an insight into how your sales and marketing strategies are working and if these are improving over time. In other words, it can assist you in identifying if your marketing teams are being efficient and evolving successfully.
The validation that you are extracting enough value from your personas in your product
Through the results of ARPU, your product teams can validate if the product’s value is aligned with the right customer target. For example, if you’re targeting the wrong customers, they won’t see the value of your product. On the contrary, if you put your efforts into the right personas, your ARPU will be higher.
A measure of how well your business is doing financially
Depending on the results of your average revenue per user, you can identify if your company is growing sustainably. For example, a lower ARPU might show that the pricing of your product is too low in your market. On the contrary, a high ARPU in a large market indicates prosperity and growth.
Analyzing the ARPU results of your company can provide you with many insights about your business health. Once you’ve measured and investigated your results, it’s time to invest in increasing the average revenue per user, but how? Let’s discover it in our next section.
How to increase the Average Revenue Per User
Increasing your ARPU can benefit your business in many ways, such as increasing your customer satisfaction and reducing churn. Let’s explore how to do it.
Increase the average selling price
One of the most common ways to increase your ARPU is by increasing the selling price of your product or service. Increasing prices, however, requires strategic planning and considering the possible consequences. It’s essential to give your users plenty of notice, pricing transparency, and insight into your decision.
Cross-selling and upselling
Bringing new customers is challenging. So, starting to sell to your actual customers so they upsell and cross-sell, can be a successful strategy to increase ARPU. Happy customers are more likely to subscribe to premium features than brand-new ones because of their trust in your company and product.
Maintain a high retention rate
You should focus on retaining your customers when you’re looking to improve your revenue. Doing this will prevent churn and create a solid customer base. After, you’ll see your ARPU improve over time.
Identify the right buyer personas
Make sure you’re targeting the right buyer personas. If you know your customers well, price correctly, and sell effectively, your ARPU will increase. Getting to know customers and plans will help you understand what makes your service so valuable.
Concentrate on high-paying customers
Concentrate on the customers who pay more and adapt your messaging and marketing strategies. In contrast to focusing all your resources on free offers, providing speedy, one-to-one service to these accounts can positively impact ARPU.
Make your pricing more effective
Adjusting your product pricing is the easiest and most straightforward way to increase your average revenue per user. The pricing strategy must, however, be strategic and in the best interest of your customers. Including FAQs on your pricing page can help users solve all their questions and concerns efficiently.
Did you know that an Overview Partner’s report in 2020 found that freemium products convert customers without sales 25% more often than a free trial model? Especially in the SaaS market, freemium models are super effective in expanding your business.
Offering incentives and add-ons can differentiate your company from others and make your customers pay more. Providing a range of add-ons in a SaaS package can be a great way to acquire new users and increase ARPU than opting into a standard plan.
What is ARPU in SaaS
When it comes to growing your startup, the acquisition isn’t everything. Growth can be achieved by increasing customer loyalty and ARPU by retaining existing customers and decreasing churn.
To do so, find different ways to engage with your users, offer incentives, increase the average selling price with the correct strategy, concentrate on high-paying customers, identify the right buyer personas, maintain a high retention rate, invest in cross-selling and upselling, and offer freemium plans. Get ready to skyrocket your business and increase your average revenue per user!
Are you interested in improving your metrics? Book a demo to learn more about how FROGED can improve your product’s Engagement and Retention metrics, or discover our retention features today!