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Average revenue per user (ARPU)
Average revenue per user (or unit), aka ARPU, is a measurement that helps all types of companies understand how much money, on average, they are generating from a single customer over a set period of time.
What is ARPU?
ARPU, as it’s generally known, is a ratio calculated by dividing the total revenue of a business for a given period by the number of users in that same period.
This shows you how much money the average user (or customer) is bringing in.
Note: In mobile app lingo, the “user” mentioned above is most often referred to as an “active user”.
Why ARPU is important
ARPU is one of the most important metrics for any business as it tells you how much money you’re earning, on average, from each user in a given time frame.
Armed with that information, you can take steps to make your business even more successful — here’s how:
- Optimize your marketing activity. Once you’re clear on your average revenue, you can start to identify higher- and lower-value users. Then, re-examine your channels, networks, and campaigns to discover where the best users come from. That way, you can focus your resources on the activities that bring in the most revenue, and ditch the underperformers.
- Boost your ROAS. Comparing your ARPU with your acquisition costs — like cost per install (CPI) and or cost per action (CPA) — helps you determine your marketing bottom line, or return on ad spend (ROAS). You’ll see if you’re spending your marketing dollars wisely and, if not, where you could sharpen things up.
- Identify revenue opportunities. Look at your highest-value users, and see if you could nudge more people into that bracket — for example, by highlighting the benefits of a higher subscription tier. You may also be able to raise your prices or bundle services together, if enough people see value in your offering.
- Fine-tune your strategy. ARPU can show you how well you’re meeting your customers’ needs. For example, a falling ARPU could mean users are getting bored and preparing to churn: time to switch up your product range. If acquisition is going well but ARPU stays flat, maybe you’re undercharging? Check that you’re staying competitive, and effectively communicating the benefits of your service to users.
- Run a business health check. Business leaders like ARPU because it provides a quick overview of performance. They can use it to understand how much money the business is making, how it compares to the competition, and what future performance might look like.
How to calculate ARPU
There’s a simple formula for calculating ARPU:
As ARPU shows revenue, it’s expressed in monetary terms.
The time period you focus on depends on your business, but for many mobile businesses and apps, it makes sense to calculate ARPU monthly. This is particularly true if you operate a monthly subscription model (like Netflix or Spotify), where you’re measuring monthly recurring revenue (MRR).
Let’s say your subscription business generated $10,000 between June 1st and June 30th, and you calculate that 5,000 users engaged with your brand at least once in the same time period: 10,000 revenue divided by 5,000 users gives us an ARPU of $2.
Businesses with more sporadic usage, like those in the travel or eCommerce industries, may opt for quarterly time periods, as their users tend to buy when they need or want a product rather than at set intervals.
For all businesses, remember that the total revenue includes new users, existing users, upsells, and cross-sells.
Advanced calculation: cohort ARPU
So far, we’ve looked at activity-based ARPU: revenue generated by all users in a specified period of time.
But for mobile marketers, it’s often helpful to break things down further. Enter: cohort-based ARPU.
A cohort is a group of users who share similar traits, such as the date of install, geo-location, device type, and so on.
Cohort-based ARPU refers to revenue generated by new users in a set period of time. This can help you determine your return on investment (ROI) and how your mobile user acquisition (UA) efforts are going.
You can calculate it as follows:
For example, you could measure the average revenue per user generated within 30 days (known as Day 30 ARPU) for all users acquired in May.
Remember that in this scenario, even if a user installed your app or visited your website for the first time on May 30, the revenue they generated over the next 30 days (in June) would still count towards your May cohort ARPU.
What’s a good ARPU?
As is often the case in marketing, “good” depends on your business and industry. For example, a gaming app may rely on small, regular, in-app purchases — whereas an eCommerce app may bring in high-value orders, less frequently. A streaming or wellbeing app with a monthly subscription fee will be different again.
What matters is that your customers bring in enough revenue to make your business profitable, once you deduct all your running costs. If not, you need to look at how you could increase ARPU and/or reduce your expenses.
What factors affect ARPU?
ARPU can be affected by various factors. Understanding these will help you interpret your number and take the right action.
Pricing model
Charging a set monthly fee is an easy way to stay on top of your ARPU. But you can’t just set a price and forget about it: you should review your prices regularly to ensure you’re offering value and staying profitable. Premium subscription tiers, with added benefits, are a way to keep ARPU trending up.
Churn rate
If your business has a high churn rate — in other words, customers don’t stay for long — you’re missing out on revenue. And if it’s high spenders who leave, your ARPU could really take a hit.
By keeping users engaged with your brand and constantly improving your offering, you should see lower churn and higher ARPU.
User base
If most of your users spend very little, it’ll drag your ARPU down. Keeping your higher spenders happy — and growing their number — will make sure it’s heading in the right direction. Likewise, a small number of high-value users could skew your figure upwards. Digging into the details will stop you being lulled into a false sense of security.
Account set-up
For professional services, one paid account often includes multiple seats (users). That translates into lower ARPU, so it’s important to factor this into your pricing.
Business strategy
ARPU can vary depending on where your business is at, and what your goals are. When you’re starting out, you’re focused on awareness and acquisition: you might offer discounts and free trials, and your product may still be evolving. Further down the line, with a solid customer base and an established reputation, you can focus on growing revenue by offering additional features and upgrades.
ARPU for mobile
In the competitive mobile ecosystem, where the majority of apps are free to download, app owners rely heavily on in-app events to generate revenue.
Revenue from in-app events can be generated in one of four ways, outlined below. If you have multiple income streams, calculating the ARPU for each one and comparing them will help you get the balance right.
In-app advertising
With in-app advertising (IAA), advertisers pay app owners to display their messages within the app.
It’s a fast-growing market, as more app owners recognize the value of their in-app real estate.
Done right — with relevant, well-designed, and timely ads that don’t breach privacy regs — IAA can be a win-win, bringing in significant revenue that grows with every view.
In-app purchases
Getting users to spend money in your app sounds like a fast track to improving your ARPU. But it’s easier said than done: typically, only a small proportion of users (we’ve found around 5%) actually make in-app purchases (IAP).
Work out who’s spending, where, when, and why to get your numbers up.
Subscriptions
Regular app subscriptions are a good way to bring in a steady income, provided users feel they’re getting value for money.
You can use ARPU to help you understand which pricing models get the best response from customers. Perhaps there is a specific bundle that is attractive to a particular cohort.
Offering a tiered subscription model also provides good opportunities to grow your ARPU through upselling.
Paid apps
Statista reports that around 97% of apps in the Google Play Store are now free, while for Apple, it’s just over 95%.
Users who download a paid app tend to be loyal, but they’ll also have high expectations — they might not want to see ads or pay for additional content, for example.
So, while your ARPU may be stable with a paid app, it could be hard to shift the dial on it.
ARPU vs other metrics: what’s the difference?
ARPU vs ARPPU
With just one extra letter, you’d be forgiven for confusing these acronyms. But ARPPU refers to average revenue per paying customer over a given time period.
This metric is popular with app marketers operating a freemium model: the app is free to access, but generates revenue through in-app purchases or advertising. While many users won’t engage with these features, a certain proportion will be lucrative. ARPPU enables you to isolate these users (sometimes known as whales) and identify which strategies bring the best results.
ARPPU is also useful where you’re offering a free trial, for instance, as you can exclude those non-paying users from your calculation.
ARPU vs LTV
ARPU and LTV (lifetime value) are very similar metrics, and are sometimes used interchangeably. But there is a difference, and it’s to do with timeframes.
While ARPU focuses on a set time period with a clear start and finish, LTV looks at the entire time a user spends with you, from initial interaction with your brand right up until they churn.
Where it gets confusing is that the time periods could be equal. For example, say you’re measuring May ARPU, but a user purchases and then churns within the month of May. That means if you measure their LTV, it’ll be the same.
LTV does offer a bit more depth than ARPU: for example, it can help you measure how valuable a user was before they churned, or how well you’re retaining customers. LTV is also the true north when it comes to optimizing your ROAS and reaching that magic state where revenue per user is greater than cost per user (read: you’re making $!).
ARPU vs ARPA
ARPA stands for average revenue per account, and is a metric primarily used by SaaS businesses. It’s similar to ARPU, but reflects the fact that one account can often have multiple users.
It’s useful to split out new and existing ARPA, so you can see how accounts perform over time and address any issues. Further segmentation — by industry, client size, or onboarding date, for example — can provide deeper insights into what clients value, how to keep them engaged, and where you could increase revenue.
ARPU vs ARPDAU
Whereas ARPU can show revenue over any given time period, ARPDAU refers to active revenue per daily active user.
By its nature, ARPDAU is a short-term metric, but it’s great for seeing results in real time. For example, if you’re running a time-limited campaign offering a discount on paid subscriptions, you can immediately see the impact on your bottom line.
However, ARPU gives you a broader overview of your channels and platforms over time, making it a better indicator of long-term performance.
Potential pitfalls of ARPU
ARPU is undoubtedly a useful metric, but it does have some limitations. Here are a few to watch out for:
- ARPU only shows revenue. Your ARPU could be way ahead of the competition, but if you’ve spent a fortune acquiring those users, your business is no better off. For a true picture of your success, consider ARPU in conjunction with your acquisition costs.
- ARPU covers a limited timeframe. Unlike LTV, ARPU only provides a snapshot in time. It doesn’t show how long a particular customer stays, or how their value changes over the longer term. It’s also sensitive to temporary changes: if your customer numbers go up or down for any reason, that will skew your average for the period.
- ARPU is an average. Focusing on average revenue means ARPU can be something of a blunt instrument. Who even is your “average” user? It may be that you have a lot of low-value users and just a handful of big spenders. By zooming in on your highest-revenue users, you can boost retention and aim to replicate that success with other cohorts.
Six ways to improve your ARPU
The good news is that there’s a variety of ways to improve your ARPU. Here are some of the top ones.
1. Adjust your pricing plans
If you run a subscription-based service, you may find that adjusting your pricing plans will improve your ARPU.
This could include adding in extra features to attract users to more premium plans, or lowering the monthly rate if a user pays upfront for the year.
2. Optimize UA campaigns
Measuring your ARPU based on your user acquisition efforts will highlight which channels, creatives, or campaigns are delivering high value users. For mobile, you can also assess the value of the different advertising networks.
Once you identify a trend you can double down on your investment and grow your ARPU further. Equally, if you notice a campaign or channel is delivering a lower-performing ARPU, then you can drop it and focus your resources elsewhere.
3. Focus on retention
We all know retention is much cheaper than acquisition — so it makes sense to work hard on retaining your most valuable users.
Analyze whether there is a trend for users churning and launch a remarketing campaign at that point to keep them interested. Loyalty plans can be effective at encouraging users to stay with you: consider free boosters for regular gamers, or discounts for frequent shoppers.
4. Boost engagement
If you can keep your brand top of mind, users are more likely to choose you when they want to make a purchase. You can do this in various ways, for example:
- Send push notifications to alert users to new or improved features (keep them timely and personalized)
- Use your owned media channels to share regular, relevant content that delights your users and starts a conversation
- Experiment with gamification techniques, such as leaderboards and badges, to reward users for logging in regularly
5. Know your customer
We’ve said it before, and we’ll say it again: nothing beats building up in-depth user personas to help you really connect with your customers.
With your ideal user in mind, you can shape your product or service to meet their specific needs. You can also identify the marketing messages, channels, and timing that resonate most with them — helping you to step up your ARPU game at both acquisition and retention stage.
6. Explore cross-selling and upselling
One obvious way to increase your ARPU is through upselling, aka encouraging existing users to upgrade. That could mean moving to a subscription plan with added benefits, or treating themselves to a more premium product.
Cross-selling is another easy win: if you’re enjoying our fitness app, why not try our healthy recipes app too?
Key takeaways
ARPU is one of the most relied-upon metrics in marketing as it gives an overall picture of how well you’re doing at generating revenues.
Remember that:
- ARPU is your total revenue divided by the number of users over a set time period. It shows how much revenue, on average, you make from each user, and helps you identify your most effective channels. Cohort-based ARPU shows the average revenue from new users, which is useful in evaluating your UA efforts.
- ARPU can indicate the health of your business and help you shape your strategy, for example by optimizing your marketing activity and identifying revenue opportunities.
- ARPU is different from ARPPU, which looks at the revenue of a paying user in a particular period. Other similar metrics include ARPA (popular with account-based SaaS businesses) and ARPDAU (useful for mobile apps).
- ARPU and LTV are sometimes used interchangeably, but LTV covers a customer’s entire journey with you, rather than a set timeframe.
- Mobile businesses generate revenue from IAA, IAP, subscriptions, and paid apps: ARPU can help you see what’s most effective for you.
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