A million downloads sounds impressive—until you realize none of those users are paying. Fifty percent user growth means nothing if each new customer generates pennies in revenue.

An ecommerce business with thousands of high-paying, loyal customers has the potential to be more profitable than one with millions of free users. The challenge for any growing company is to shift focus from quantity to quality by examining ARPU—average revenue per user. This critical key performance indicator (KPI) measures the monetary value attached to each person who engages with your business. 

Keep reading to learn why ARPU matters for your business, how to calculate it, and strategies for managing and improving this metric to drive sustainable growth.

What is ARPU?

ARPU stands for average revenue per user. It is a KPI that shows the average revenue generated from an individual user or subscriber over a specific period. ARPU is a direct measure of a company’s ability to monetize its user base and provides a solid foundation for projecting total revenue generated. By calculating and tracking this figure, businesses can gain insights into customer value, the effectiveness of their pricing, and the financial health of their operations.

One method for determining whether your ARPU is adequate is weighing it against your customer acquisition costs (CAC). An ARPU that’s significantly higher than the CAC indicates a profitable business model, and a consistently rising ARPU is a sign of a healthy, growing business.

Knowing the average revenue per user is especially important for businesses that rely on recurring revenue, such as software-as-a-service (SaaS) companies, telecommunication providers, and media services. Think about mobile apps, where ARPU can reveal the financial impact of a casual user versus a dedicated paying user who makes frequent in-app purchases. For a gaming app that uses a freemium business model, ARPU can tell mobile marketers exactly how successful the business is at turning its active users into revenue.

Importance of tracking ARPU

Here’s why tracking your ARPU is so important for maintaining business success:

• Measures monetization efficiency. A high or rising ARPU suggests that your pricing strategies are effective, while a stagnant or declining ARPU signals that your product isn’t resonating or you need to re-evaluate your pricing.

• Informs business strategy. Use user segments and ARPU to customize campaigns, focusing retention efforts on high-value users and conversion strategies to encourage customers who spend less to upgrade.

• Drives financial forecasting. Combining ARPU with data on user growth and subscriber growth lets you create models for future earnings, which are important for budgeting, investment, and projecting sum totals for financial statements.

• Provides competitive insight. What counts as a good ARPU is hard to determine in isolation, but comparing your ARPU to direct competitors or industry benchmarks offers valuable context. For example, if your competitor has a higher ARPU, it might indicate more successful pricing models, savvier upselling tactics, or a target market that perceives greater value in its services.

How to calculate ARPU

It’s simple to calculate ARPU, but first you must know the total revenue of your users and the total number of your users over the same period.

The ARPU formula is:

ARPU = Total revenue / Total number of users

Let’s examine these components:

Total revenue is everything you’ve earned from your users within the designated period. For software-as-a-service (SaaS) businesses, this is typically the monthly recurring revenue (MRR). For mobile apps, this figure includes subscription fees plus revenue from ads or in-app purchases. It’s the sum of all the money your users have paid you.

Total number of active users who subscribe to your service. It’s important to define “user” consistently. For subscription models, this is the number of paying customers rather than those on a free trial.

ARPU example

For example, a hypothetical mobile gaming app wants to calculate average revenue for the third quarter. 

First, it collects its customer data:

• Monthly recurring revenue from subscriptions: $150,000

• Revenue from in-app purchases: $75,000

• Revenue from in-game ads: $25,000

Next, it adds up the total revenue for the quarter:

Total revenue = $150,000 + $75,000 + $25,000 = $250,000

Now, it determines the number of active users during that same three-month period, which was 50,000.

Using the ARPU formula, the quarterly ARPU would be:

ARPU = $250,000 / 50,000 = $5

This ARPU figure tells the mobile gaming app it generated an average of $5 from each active user during the third quarter. Tracking this metric each quarter will help it to see if its strategies for increasing ARPU are working.

Strategies to manage and improve ARPU

• Introduce tiered pricing and upselling
• Focus on cross-selling and add-on features
• Deepen customer engagement
• Segment your user base for targeted offers
• Optimize your freemium and trial-to-paid conversion

Your expenses tend to rise over time, which means generating higher revenue growth becomes necessary. Here are strategies for delivering value to your customer base and increasing your average revenue per user:

Introduce tiered pricing and upselling

Adopting tiered pricing lets you target different customers so they can choose the plan that best fits their budget. Use a basic tier to attract new users and upsell premium tiers with advanced features to your most engaged and loyal customers. The goal is to encourage existing customers to upgrade as their needs increase, directly boosting your average revenue generated.

Focus on cross-selling and add-on features

Cross-selling involves offering products that are complementary to your core subscriptions, while add-ons provide optional features for an additional fee. For instance, a project management tool might feature an add-on for advanced time tracking, or an ecommerce platform could cross-sell personalized services like a custom theme setup. Cross-selling can augment revenue streams that increase your customer base’s spending patterns without altering your core subscription price.

Deepen customer engagement 

Evaluating customer loyalty through customer feedback is a direct path to a higher ARPU. Highly engaged users are far more likely to become high-value, long-term customers who are receptive to upsells and new features. Using analytics tools will also help you understand customer behavior, discern which features are most popular, and identify where users might be reluctant to convert. Act on this data to enhance the user experience and offer support.

Segment your user base for targeted offers

Some users will derive a great deal of value from your product, while others may be more casual users. Use your customer data to establish user segments related to behavior, usage, and spending. Once segmentation is complete, you can create targeted campaigns. You might offer a power user early access to a new feature or send a special discount for an annual plan to an engaged but price-sensitive segment. This makes your offers more effective at driving revenue.

Optimize your freemium and trial-to-paid conversion

For businesses with a freemium model, the key to increasing ARPU is converting users into paying customers. Look at the journey from free to paid. Ask yourself: Is the value of the paid plan clear? Are you demonstrating the upgrade benefits? You may need to adjust what features you include in the free plan to create a stronger incentive to pay. Improving this conversion rate is one of the fastest ways to generate revenue and lift your overall ARPU.