Average Revenue Per User (ARPU), or Average Revenue Per Customer (ARPC), is an essential metric to understand your ecommerce customers. Average Revenue Per User will help you identify trends against different time periods and segments of customers. To fully understand ARPU, it is best to calculate it for all of your customer segments, so you can identify and address any disparity between types of customers.
The dream is to have a high ARPU, and if you have a subscription business, it's a metric that increases over time. If your ARPU is too low, it could mean you aren’t targeting the right customer or your product is too cheap, so you need to find a way to extract more value (revenue) from your product — whether it is different value add on products, or targeting more valuable customers.
Calculating your ARPU metric can give you a critical window into the way your customer base is responding to your products and services. If you see a particularly high churn rate when you make certain changes to your products, offers, or even your check out process, you may see your ARPU. This may result in a real blow to your monthly recurring revenue (MRR) and overall profitability.
It's important that you have a handle on how to calculate your average revenue per customer and have the right tools in place to help you make incisive business decisions.
How to Calculate Average Revenue Per User (ARPU):
($) Total revenue generated of the TimePeriod /(#) Customers during the same period = ($) Average Revenue Per User
ARPU is calculated by dividing the total revenue generated during a specific time period (e.g. week, month, quarter) by the total number of customers during that same time. It is important to note that you only want to include active customers in this calculation.
For example, check out this ARPU calculation. If you generated $20,000 last month and had 4000 customers during that month, your
Average Revenue Per User would be $5.00
$200 / 4000 = $5.00 ARPU
- Create a top line calculation for Average Revenue Per User (ARPU) during the time periods.
- Create a calculation for each customer segment in your data, so you can have a more detailed understanding of how your segments operate.
- Repeat every month or your desired timeframe.
The Difference between ARPU and Lifetime Value (LTV)
There's often confusion among ecommerce marketers about the difference between ARPU and customer lifetime value, or "LTV." Somehow along the way, these metrics have seen their lines blurred with people confusing one for the other.
There are some key distinctions between the two metrics that are relevant for you to note. LTV represents the amount of revenue you can expect a customer to bring to your ecommerce site over the entirety of their relationship with your business.
Businesses use this to measure, forecast, and benchmark their company's revenue and create plans for marketing, promotions, and pricing.
Average Revenue Per User simply tells you the average amount your customers are spending month over month. If you have a consistently high ARPU that you work on increasing via promotions and advertising, you can expect your customer LTV to benefit.
Check out our article on customer lifetime value and other important ecommerce metrics that can help you drive your decisions with data.
How Does ARPU Help Set Benchmarks?
Calculating your Average Revenue Per User can often be the first step in setting benchmarks and KPIs for your business. Setting and monitoring your average revenue KPIs on a monthly basis can help you discover new ways to get the most out of individual customers.
How do you do this? By testing changes and new benefits for your strongest customer cohorts. By looking at a combination of metrics like LTV and ARPU for your customer cohorts, you can get an idea of new pricing for bundles or special promotions that you can test for a period of time.
For example, let's say you have a great organic snacks and treats brand and you sell your product on your own DTC site. You have plenty of loyal customers who make repeat purchases on a monthly basis. After months of tracking their ARPU and digging into their customer cohort data to find that they consistently buy your chocolate covered coconut cookies (say that five times fast...) in two different flavors.
But, in looking at your data from last year, you notice a boost in revenue generation and a spike in ARPU, with customers consistently checking out with those 2 flavors, during the last quarter of the year: holiday time. By leveraging all that data, you can now make holiday bundle, combining 2 cookie flavors in a higher quantity at a special price.
From there, it's all about blasting the campaign our on social media, email, and whatever engagement methods work for you. Many of your customer will be active users on social media and flock to get special pricing on their favorite healthy treats.
By testing out new promotions and new pricing for your strongest products and most loyal customers, you'll consistently have strong ARPU data to help you set benchmarks for any given period of time - monthly, quarterly, or yearly. Check out our guide on ecommerce growth strategies for more ideas on how to leverage your data.
Driving Down Customer Acquisition Cost (CAC) with ARPU
This one might not seem so straightforward, but a byproduct of improved ARPU and emphasis on building customer loyalty should be lowered customer acquisition cost (CAC). This matters greatly for ecommerce brands as studies show that acquiring a new customer can be up to 5x more costly than retaining a customer.
Focusing on increasing ARPU is directly correlated with customer retention. The more customers you retain, the more opportunities you have in your sales funnel to build a better customer journey. With your marketing efforts centered on reengaging existing customers, you can drive down your customer acquisition cost as long as you are hitting your revenue benchmarks.
Generally speaking, you can think of ARPU and CAC as having a loose inverse correlation. The more resources you put into driving up ARPU month over month, the less you will need to spend on acquiring new customers.
Automate Your Average Revenue Per Customer (ARPU)
Connect to Peel, which will automate the calculation of your Average Revenue Per User for the past 30 days.
Every Friday morning via Slack, Peel will send you a report of:
- Top line Average Revenue Per User for the previous 30 day period
- Top line your Average Revenue Per User change from the previous 30 day period
- Average Revenue Per User per segment
- Average Revenue Per User change per segment
🌟Plus a deep dive analysis of your revenue, revenue growth rate and customer retention.🌟
If you don’t want to calculate ARPU across all your customer segments every week, give Peel a try. You can also find us in the Slack App Directory.