Average Revenue per User (or ARPU, the most fun acronym to say) is the measure of how much revenue you’re generating for each active customer. To calculate it, divide your MRR by the total number of active users that month.
MRR ÷ Active Customers = ARPU
Measuring ARPU helps startups scale. If your ARPU is low, you’ll be more affected by support and infrastructure issues. For example, if each customer is only paying $5 per month, you don’t have much extra revenue to grow. The cost of that customer calling into support will consume their entire monthly fee.
ARPU dictates your growth strategy in many ways. Low ARPU means you’ll need to acquire a ton of customers to hit $1M ARR. It also means you won’t be able to offer expensive phone support or spend a lot of money on customer acquisition. If you spend more money on the customer than they pay you, you will go broke.
Tracking your ARPU also helps you understand your customer’s preferences. If more customers choose your higher priced plans, you’ll see your ARPU increase.
Increasing your ARPU
There’s two ways you can increase your ARPU. Either increase the average plan size customers sign up for (ie. upgrade customers to a higher tier) or upsell them with add-ons and expansions.
Higher Plans – as you continue to add features to your product, you’ll want to continually analyze your plan packages. Can you put together a higher price point plan that will entice more customers? Are you giving away too much with your lower end packages? Customer interviews can be really helpful in determining why they chose one plan over another.
Add-ons – you may also choose to make some features available on their own, outside of plans. Whitelisting, additional storage, premium support are all examples of great upselling opportunities. Even a few extra dollars a month per customer gives you additional revenue to support them better.
Churn will also affect your ARPU. If you tend to lose more bigger customers than smaller customers, you’ll see your ARPU decline. Perhaps that’s a sign that you need to focus on providing more value to higher priced account.
ARPU and Buyer Personas
We’ve talked before about the different ways you can get to $1 Million ARR through difference Average Contract Value strategies. You can either acquire 100 Elephants or 100,000 Mice.
Knowing your buyer personas and the type of customer you’re hunting for informs your pricing strategy. In order to upsell effectively and increase your ARPU, you need to know what your customers value.
In this case, ARPU is more of a trailing metric. When you know your customers well, price correctly and sell effectively, ARPU increases. To understand the “why,” you need to talk to prospects and customers to learn more about their decision making process.