The Ultimate Guide to Average Revenue Per User (ARPU) for Marketers

As a marketer in today‘s data-driven world, you‘re constantly searching for metrics that give you a pulse on the health and potential of your business. One of the most powerful of these metrics is Average Revenue Per User, or ARPU.

ARPU provides a clear, quantifiable measure of how much value you‘re generating from each customer. It‘s a number that directly ties marketing efforts to revenue outcomes. And when tracked and analyzed properly, it can unlock key insights to optimize your pricing, packaging, and promotion strategies.

In this comprehensive guide, we‘ll take a deep dive into all things ARPU. You‘ll learn exactly what this metric means, why it‘s critical to understand, and how you can leverage it to take your marketing and your business to the next level.

Defining Average Revenue Per User

At its core, ARPU is a measure of the average revenue generated by each active user of your product or service over a defined time period. It‘s calculated by taking your total revenue for a given period and dividing it by the number of active users during that same time frame.

Here‘s the basic formula:

ARPU = Total Revenue / Number of Active Users

Let‘s walk through an example to illustrate. Imagine you‘re the marketing director for a subscription-based fitness app. Last month, the app generated $500,000 in total revenue and had an average of 50,000 active users. To calculate your ARPU, you would divide $500,000 by 50,000:

$500,000 / 50,000 = $10 ARPU

This means that, on average, each active user generated $10 in revenue for the business last month.

It‘s important to note that ARPU is an average, meaning it doesn‘t reflect the actual revenue contribution of any one specific user. Some users may generate significantly more revenue, while others generate less or even none at all. But as an aggregate measure, ARPU provides a clear and concise way to track the overall value of your user base.

The Importance of ARPU for Subscription and Recurring Revenue Businesses

While ARPU can be a relevant metric for any business, it‘s especially critical for companies with subscription-based or recurring revenue models. For these businesses, the ongoing relationship with the customer is the core driver of revenue and growth.

Consider some of today‘s most successful and well-known subscription companies – Netflix, Spotify, Adobe Creative Cloud, Microsoft Office 365. For each of these businesses, the key to success isn‘t just acquiring new users, but maximizing the ongoing revenue generated from each user over time.

This is where ARPU comes in. By tracking and working to improve ARPU, subscription businesses can:

Measure the health of their recurring revenue stream. Is revenue per user growing, declining, or staying steady? ARPU provides a clear, quantifiable answer.
Identify opportunities to upsell and cross-sell. Which user segments have the highest ARPU? What characteristics do they share? This can guide targeted campaigns to move more users into higher-value tiers.
Optimize pricing and packaging. How does ARPU vary across different subscription plans? Are there opportunities to adjust pricing to maximize total revenue?
Evaluate the ROI of marketing campaigns. By tying marketing efforts directly to changes in ARPU, subscription businesses can see the true revenue impact of their campaigns.

As Eric Siu, CEO of SingleGrain and host of the Leveling Up podcast put it:

"For any recurring revenue business, ARPU is one of the most important metrics to track and optimize. It‘s a direct reflection of the value you‘re providing to your customers and the revenue you‘re generating from each one."

ARPU Benchmarks and Trends by Industry

To put ARPU numbers in context, it‘s helpful to look at some real-world benchmarks and trends across different industries. While a "good" ARPU will vary based on factors like business model, pricing strategy, and target market, these examples provide a starting point for comparison.

Streaming Media

Netflix: In Q1 2023, Netflix‘s global streaming ARPU was $12.13, up 3% year-over-year. (Source: Netflix Investor Relations)
Spotify: Spotify‘s global Premium ARPU was €4.66 ($5.14) in Q1 2023, down 6% year-over-year due primarily to foreign exchange rates. (Source: Spotify Newsroom)

Software-as-a-Service (SaaS)

Average SaaS ARPU: A 2022 KeyBanc Capital Markets report found an average ARPU of $1,116 per month across private SaaS companies and $4,524 for public companies. (Source: KeyBanc 2022 SaaS Survey)
Salesforce: Salesforce reported an ARPU of $4,337 for its Sales Cloud product in FY 2023, up 12% year-over-year. (Source: Salesforce Q4 FY23 Earnings Release)

Mobile Apps

Average App ARPU: According to Statista, the average ARPU for mobile apps worldwide is $0.60 per user per month, with gaming apps averaging over $1. (Source: Statista Global App ARPU 2023)
Tinder: Match Group reported an ARPU of $0.65 for its flagship Tinder app in Q4 2022, up 2% year-over-year. (Source: Match Group Q4 2022 Earnings Release)

E-commerce

Average E-commerce ARPU: Digital Commerce 360‘s survey of Top 1000 online retailers found a median ARPU of $152 per customer per year. (Source: Digital Commerce 360 Top 1000 Analysis)
Amazon: Amazon reported an ARPU of $431 per Prime member in FY 2022, up 5% year-over-year. (Source: Amazon Q4 2022 Earnings Release)

These benchmarks highlight the wide range of ARPU across different business models and industries. However, the key takeaway isn‘t the absolute numbers themselves, but the trends they reveal. In most cases, we see ARPU growing year-over-year, reflecting the focus businesses are placing on maximizing the value of each user.

Advanced ARPU Concepts and Analyses

While the basic ARPU calculation is straightforward, there are several more advanced concepts and analyses that can provide even deeper insights. Here are a few to consider:

ARPU by Customer Acquisition Channel

Not all users are acquired in the same way or at the same cost. By calculating ARPU separately for each of your major acquisition channels (e.g. organic search, paid social, affiliate partnerships), you can assess the relative value of users from each source. This can guide decisions about where to focus your marketing budget for maximum ROI.

ARPU by Cohort

Cohort analysis looks at ARPU trends for groups of users acquired at the same time (e.g. all users who signed up in January 2022). This can reveal how ARPU changes as users mature over their lifecycle. Do users become more valuable over time as they upgrade and expand their usage? Or does ARPU tend to decline due to churn or downgrades? Cohort analysis provides the answers.

Predictive ARPU Modeling

By using techniques like machine learning and predictive analytics, it‘s possible to build models that predict future ARPU based on user characteristics and behaviors. This can be incredibly valuable for forecasting revenue, setting marketing budgets, and proactively identifying at-risk users for retention campaigns.

As Wes Bush, founder of the Product-Led Institute explains:

"The most sophisticated companies don‘t just track ARPU as a static metric. They use it as a key input into predictive models and machine learning algorithms to make real-time decisions about everything from ad spend to product recommendations to dynamic pricing. That‘s the future of ARPU as a growth lever."

Strategies for Improving ARPU

Tracking and benchmarking ARPU is a start, but the real value comes from actively working to improve it. Here are some proven strategies for driving up revenue per user:

Implement a value-based pricing strategy. Align your pricing tiers and packaging with the value users receive at each level. This encourages upgrades and reduces downgrade and churn risk.
Develop upgrade paths and prompts. Analyze usage patterns to identify users who are reaching the limits of their current plan, and proactively suggest upgrades at the right moments.
Expand your product offering. Introduce new features, add-ons, or entirely new products that provide additional value to users and open up new revenue streams.
Personalize your user experience. Use data and analytics to tailor onboarding, product recommendations, and messaging to each user‘s unique needs and interests.
Invest in customer success. Proactively help users get maximum value from your product through education, support, and consultation. This boosts retention and upsell opportunities.
Offer annual pricing. Incentivize users to sign up for annual contracts at a discount to monthly pricing. This boosts ARPU and provides more predictable revenue.
Test and optimize your pricing. Continuously experiment with different pricing strategies, bundles, and promotions to find the sweet spot for each user segment.

The most effective ARPU growth strategies will vary based on your specific product, audience, and market. But by making ARPU improvement a core focus and consistently testing and iterating, any business can unlock significant revenue growth.

The Limitations and Watch-Outs of ARPU

While ARPU is a powerful and valuable metric, it‘s important to be aware of its limitations and potential pitfalls. No single number can tell the whole story of a business‘s health and growth potential.

One key limitation of ARPU is that it‘s an average, which can mask important underlying variations. A high overall ARPU could be hiding a small subset of power users who generate the lion‘s share of revenue. Segmented and cohorted ARPU analysis is essential to truly understand the dynamics at play.

ARPU also doesn‘t account for the costs associated with serving each user. A user might have a high ARPU but actually be unprofitable if their associated costs (e.g. customer support, infrastructure) are even higher. That‘s why it‘s important to look at ARPU in conjunction with profitability metrics like Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC).

Finally, an obsessive focus on ARPU can sometimes come at the expense of user experience and long-term brand health. Tactics like aggressive upselling or nickel-and-diming users with add-on fees might boost ARPU in the short term, but damage customer goodwill and loyalty in the process.

As with any metric, ARPU is best used as one important input into a holistic, customer-centric growth strategy – not as the sole end goal in itself. As growth expert Casey Armstrong puts it:

"ARPU is a crucial metric, but it‘s not the only one that matters. The best businesses balance ARPU optimization with delivering true value and an exceptional experience to every user. That‘s the winning formula for long-term, sustainable growth."

Conclusion

We‘ve covered a lot of ground in this deep dive into Average Revenue Per User. To recap, ARPU is:

A core top-line metric that measures the average revenue contribution of each active user
Especially critical for subscription and recurring revenue businesses
A key tool for pricing optimization, marketing ROI assessment, and revenue forecasting
Best analyzed through segmentation, cohort analysis, and predictive modeling
Able to be improved through pricing, packaging, upselling, and personalization strategies

But beyond the tactical details, the key takeaway is this: In today‘s customer-centric, subscription-driven world, the businesses that win are those that maximize the ongoing value exchange with each and every user. ARPU is the metric that measures the strength of that value exchange.

By understanding, tracking, and optimizing ARPU, marketers and growth leaders can unlock the insights and strategies needed to build enduring, profitable customer relationships at scale. And that, in the end, is what business growth is all about.