What is ARPU?
ARPU is a metric that defines the average revenue per user. It is calculated by dividing the total revenue by the number of users in a given period, usually monthly recurring revenue (MRR).
Formula: MRR/Number of users
What is ARPU used for?
This metric is commonly used to assess the performance of digital products and marketing strategies, which allows for a better understanding of how well a product or marketing strategy is working on an individual level and at an aggregated level.
ARPU is most often used to determine how profitable specific users are and can then be used to calculate prices, spending habits, and other information. ARPU can also be calculated for segments or groups of customers with similar behaviors and attributes, allowing companies to make more informed decisions about how to allocate marketing resources.
Examples of ARPU
Assume a company has a website selling mobile phones and a service contract. The monthly recurring revenue (MRR) for this company is $33,000. The number of regular customers is 100. Therefore, the average revenue per user is calculated as $33,000/100 = 330 dollars per user per month.
Assume a company has a website selling different types of products to people around the world. The monthly recurring revenue (MRR) for this company is $1,500,000. The number of regular customers is 1,000. Therefore, the average revenue per user is $1,500,000/1000 = 150 dollars per user per month.
Related terms to ARPU
1. Customer lifetime value (LTV)
LTV is a metric that describes the average revenue generated by repeat purchases from an individual customer. This metric is very similar to ARPU but stresses the long-term, or lifetime value of an individual customer instead of just monthly revenue.
2. Average revenue per paying user (ARPPU)
The ARPPU, another similar metric to ARPU, illustrates the average monthly revenue generated by a paying customer. This metric comprises two components: revenue and the number of paying customers.
3. Monthly recurring revenue (MRR)
MRR is the total amount of recurring revenue generated over a specific time. In other words, it is the amount of money made month after month.
How to optimize for ARPU on eCommerce stores?
1. Target the right customers
Because ARPU is calculated based on the number of users and revenue, you must ensure that you are targeting the right customers to reduce the effort required to generate revenue.
Not all users are created equal, so when analyzing ARPU, you should also consider user demographics and other factors such as engagement level, shopping frequency, and order size.
When targeting your promotions and marketing efforts, look not just at the number of users, but at how engaged they are and if they match your business goals.
2. Compare your ARPU with market averages
Comparing your ARPU with the markets can be difficult because different companies have different business models and strategies. However, you can make your sample size large enough to represent the market. If a direct comparison is not possible, use ratios based on similar segments to gauge how well your product or marketing strategy performs to industry standards.
3. Make sure to optimize your website for mobile
Your website likely has a large number of mobile users. Optimizing your website to work better on mobile means making sure it loads quickly and that touch functionality is easy to use. This can be done by making your site responsive and creating a user-friendly design. Also, segment users based on their mobile usage, so the business can focus resources on those users who are more profitable overall.
4. Offer promotion codes
One effective way to increase ARPU is to give your users a promotion code. This code can be used in exchange for a discount on a specific product, which then turns into more revenue for your business.
However, you may ensure that you set up rules for using the promotion code to ensure that the product does not reach scalability issues. The use of promotion codes also requires an updated infrastructure and customer support strategy as well as tools like referral programs or social media integration.
5. Implement marketing analytics
As you create your digital marketing strategy, keep track of how customers interact with your site. This includes how often they interact with certain information, what pages they go to, how much time they spend on the site, and more. The data helps you understand the audience better and adjust future marketing strategies accordingly.