ARPU: what it is, how and why to calculate it

Average Revenue Per User (ARPU) is a key metric that measures the average amount a user spends on your product over a period of time, whether it's a day, a month or a year. This metric is an important tool for forecasting revenue, making informed decisions about the effectiveness of advertising strategies, optimising the user interface and user experience (UI/UX), and segmenting your audience.

How to calculate ARPU

To calculate average monthly revenue per user, it is important to take the total revenue generated in a month and divide it by the number of users who actively used the services during that period.

Formula: ARPU = Total revenue for the period / N users for the period

Let's look at an example: 500 users are registered within the first month of using the service. This figure includes all users, from those who are still using the free trial period, to regular customers who have been subscribed to the service for five years, and even those who have chosen the highest tariff plans. The total revenue for that month was $2,500. So the calculation of ARPU for this month will be as follows: $2500 divided by 500 users, which gives an average revenue per user of $5.

For which period should I calculate ARPU?

The choice of period for calculating ARPU (average revenue per user) depends on the specifics of your business and user behaviour. For subscription-based services, the monthly ARPU calculation, known as ARPMAU (Average Revenue Per Monthly Active User), is particularly convenient and informative as it allows you to track revenue from active users over a month.

In cases where the average time users spend on a service is short, such as mobile applications, it can be useful to calculate ARPU on a daily basis, or ARPDAU (Average Revenue Per Daily Active User). This gives you a more accurate picture of the revenue generated from daily user activity.

For businesses that do not operate on a subscription model, it is important to take into account the frequency with which customers typically use your services. In such cases, ARPU can be calculated for different periods, depending on the cyclical nature of customer acquisition and service usage.

In addition, you can calculate cumulative ARPU to assess the quality of traffic and the effectiveness of attracting new users. This is done by tracking the revenue generated by a particular cohort of registered users over a period of time (for example, a day). The formula for cumulative ARPU is similar to the standard formula, but it takes into account the total revenue generated by a specific group of users over time, allowing you to see how the value of this cohort to your business grows over time.

Cumulative ARPU (X days) = Revenue from the selected cohort for X days / Number of users in that cohort

What kind of ARPU is good?

Average revenue per user (ARPU) is not a universally ideal metric. It is important to recognise that if ARPU is falling, you need to focus on attracting additional customers.

As ARPU is closely related to the size of your customer base, it is impossible to estimate it accurately without taking this into account. For example, if you are considering two similar services with a target monthly revenue of $7,000, it is important to compare ARPU between companies or products with similar characteristics. Suppose both services have an ARPU of $10. However, the first service attracted 700 users this month, 100 of whom used the free trial, so the revenue is above the target. For the second service, the situation looks worse with 400 customers, of which 100 were on the free plan, and revenue of $4,000. So the same ARPU does not always reflect the same performance for different companies with the same revenue targets.

Therefore, ARPU is best evaluated in the context of your own business or by comparing it to companies with similar audience size and characteristics.

Why calculate ARPU?

Calculating average revenue per user (ARPU) is an important tool for assessing the financial prospects of a business. It provides useful insights in several key areas:

• Determining the financial potential of the business: A high ARPU, especially if it is close to the average revenue per paying user (ARPPU), indicates that many users are willing to invest in the product. This in turn indicates a strong market position.
• Attract investors: ARPU is often used as a metric to demonstrate a company's growth and profitability potential to potential investors. Higher ARPU makes a business more attractive for investment than its competitors.
• Evaluating changes in pricing policy: By analysing ARPU before and after tariff changes, you can understand whether changes in pricing policy have been profitable. ARPU growth indicates that the company is on the right track, but it is important to focus not only on increasing prices, but also on increasing the number of paying users.
• Analyse the effectiveness of advertising campaigns: ARPU allows you to assess how effective an advertising campaign has been, particularly through contextual or targeted advertising. A decline in ARPU for users acquired through a particular channel may indicate poor traffic quality.
• Tracking revenue trends: Monitoring ARPU dynamics helps marketers identify trends in cash flow and understand how the introduction of new products, changes in tariff plans or other factors affect profitability.

As such, ARPU is a multifaceted indicator that provides valuable information for strategic planning and informed decision making in various aspects of business management.

Frequently asked questions about ARPU

What is ARPU?

ARPU, or average revenue per user, is a financial metric that indicates the average revenue a company receives from each user over a given period of time. This metric allows you to evaluate the overall efficiency of monetising the customer base.

How is ARPU calculated?

To calculate ARPU, first determine the total revenue the company received from its users over a given period. Then divide this amount by the total number of users who contributed to this revenue during the same period. ARPU formula: total revenue divided by the number of users.

How can ARPU be used for business analysis?

ARPU helps companies assess the effectiveness of their products and services and understand how well they are monetised. By analysing ARPU over time, you can identify trends affecting revenue and opportunities to optimise pricing strategies, product mix and marketing campaigns.

How do you increase ARPU?

Increasing ARPU can be achieved by increasing revenue from existing users or by attracting new users. To increase revenue from each user, you can introduce premium services, increase the price of products or services while improving the quality of service. Attracting new users can involve increasing investment in marketing, improving the quality of products and services, and developing partnership programmes to expand the customer base.