ARPU explained: How to calculate and improve it in SaaS

In SaaS, it's easy to get lost in a sea of vanity metrics. But there's one metric that stands out for its simplicity: Average Revenue Per User (ARPU).

In this post, we’ll explain all about it and what you can do to boost it. 

You’ll also learn: 

• A simple formula to calculate ARPU
• Proven strategies to increase your ARPU
• How usage-based billing platforms can help you manage and optimize ARPU

First, let’s define ARPU. 

What is the Average Revenue Per User (ARPU) metric?

ARPU is the average amount of revenue generated per user or unit over a specific period. Think of it as the financial pulse of your user base. It's typically calculated on a monthly basis, giving you a snapshot of how much each customer spends on your service.

Why does ARPU matter so much in SaaS?

ARPU is a key indicator of your business's health and potential for growth. It’s a metric that sheds light on your SaaS company’s:

• Profitability: A healthy ARPU means you're generating enough revenue from each customer to drive profit.
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• Growth: Increasing your ARPU can greatly impact your bottom line. This increase in profits allows you to invest in customer acquisition and product development. A higher ARPU might mean you can consider scaling your operations.
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• Customer value: ARPU can reveal how much value customers perceive in your service. A higher ARPU often suggests that customers find your product valuable and are willing to pay for it.
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• Pricing strategy: ARPU can help you assess the effectiveness of your pricing strategy. Are you attracting the right kind of customers? Are your pricing tiers optimized for maximum revenue generation? Your ARPU can clue you in to find answers. 
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• Customer segmentation: By analyzing ARPU across different customer segments, you can spot your most valuable users and tailor your offerings to their needs.

In the context of usage-based billing, ARPU takes on an even more nuanced role. It can help you understand how customers are using your platform. As a consequence, you can identify opportunities to optimize pricing based on usage patterns.

By keeping a close eye on ARPU, you can gain valuable insights into your business performance. You can also identify areas for improvement and ultimately drive sustainable growth. In the next section, we’ll take a look at the formula to calculate this metric. 

How to calculate ARPU

Calculating ARPU is surprisingly straightforward. It boils down to a simple division:

ARPU = Total Revenue / Number of Active Users

Let's break down the elements of this formula:

• Total revenue: This refers to the total revenue generated from your users within a specific period. This could be your Monthly Recurring Revenue (MRR), annual revenue, or revenue from any other period you choose to measure.
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• Number of active users: This is the total number of users who are actively using your service during the same period. It's important to only include active users, as inactive or churned users won't contribute to your current revenue.  

Here's an example to illustrate:

Imagine you're running a SaaS business that provides project management software. In October, you generated $50,000 in revenue, and you had 2,000 active users.

To calculate your ARPU for October, you would simply divide your total revenue by the number of active users:

ARPU = $50,000 / 2,000 = $25

Therefore, your ARPU for October is $25. This means that, on average, each active user contributed $25 to your revenue during that month.

How to improve ARPU in SaaS

Now that you understand what ARPU is and how to calculate it, let's explore some proven strategies to give it a boost:

1. Upselling and cross-selling

Think of upselling and cross-selling as gentle nudges towards greater value. Upselling encourages customers to upgrade to a higher-tier plan with more features or a higher usage limit. Cross-selling involves offering complementary products or services that improve their existing subscription.

Actionable insights

• Identify power users: Analyze user behavior to pinpoint those who are already heavily engaged with your platform. They're prime candidates for upselling.
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• Highlight premium features: Showcase the benefits of your higher-tier plans and how they can better solve pain points.
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• Offer bundles: Package complementary products together at a discounted price to incentivize cross-selling.

2. Enhancing product value

The more value your product delivers, the more customers will be willing to pay. Improve your service by adding features and integrations that address particular customer needs. The idea is to encourage greater, continuous usage.

Actionable insights

• Gather customer feedback: Ask for feedback through surveys, reviews, and support interactions. Doing so will help you understand what customers want and need.
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• Prioritize feature development: Focus on developing features that align with customer requests. You should concentrate on those that have the potential to drive increased usage and engagement.
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• Offer educational resources: Create tutorials and knowledge bases to help customers get the most out of your product.

3. Personalized pricing plans

Offering personalized pricing plans based on usage patterns can significantly impact your ARPU. Doing so helps ensure customers pay for what they use and are incentivized to upgrade as their needs grow.

Actionable insights

• Segment your audience: Group customers based on their usage behavior, company size, or industry.
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• Create tiered pricing: Offer different pricing tiers with varying levels of usage, features, or support.
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• Usage-based billing: Put in place a usage-based billing model where customers pay based on the resources they consume.

Example: A cloud storage provider could offer pricing tiers based on storage capacity, with the option to pay for extra storage as needed.

4. Reducing churn

Customer churn is the silent killer of ARPU. Every customer you lose takes a bite out of your revenue. By focusing on retention, you can protect your ARPU and increase it over time.

Actionable insights

• Proactive customer support: Provide exceptional support to address customer issues and prevent frustration.
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• Onboarding and education: Ensure customers have a slick onboarding experience and know how to use your product.
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• Loyalty programs: Reward loyal customers with discounts or early access to new features

Example: A CRM software company could use a customer success program to provide custom guidance and support to their users.

Ways that usage-based billing platforms help manage your ARPU

Did you know usage-based billing platforms can be a powerful tool for managing and improving your ARPU? Let's dive into how these platforms can help you gain greater control over your revenue stream:

Accurate revenue capture

Subscription models often rely on fixed pricing tiers. The issue is that fixed pricing strategies can leave money on the table if some users consume more resources than others. 

Usage-based billing platforms allow you to capture revenue based on actual consumption. They help make certain you're fairly compensated for the value you provide. This is particularly crucial when your ARPU is highly variable and can fluctuate wildly based on customer activity.

Example: Imagine a cloud storage provider with a fixed monthly price for 1TB of storage. A user who only uses 100GB essentially pays the same as a user who utilizes the full 1TB. 

With usage-based billing, the first user would pay less, while the second user, who consumes more resources, would pay more. Using this strategy results in fairer pricing and potentially higher overall revenue.

More and better customer insights

Usage-based billing platforms give you insights into how customers are using your solution. This granular data allows you to identify trends and understand consumption patterns. Then, you can segment your audience based on their needs and behaviors. 

With this knowledge, you can tailor your pricing and offerings to maximize ARPU.

Example: A communication platform might discover that a segment of its users consistently sends a high volume of messages. With this insight, they can introduce a new pricing tier specifically designed for high-volume users. The result is a higher ARPU from those customers.

Flexible pricing models

Usage-based billing platforms often let you create pricing models beyond simple tiered subscriptions. You can use volume discounts, tiered pricing based on usage, or even hybrid models that combine fixed fees with usage-based charges. 

The correct billing platform allows you to cater to various customer preferences, driving higher ARPU.

Example: An API provider could offer a freemium model with a limited number of free API calls per month, then charge based on usage beyond that limit. This strategy encourages wider adoption while ensuring heavy users contribute more to revenue.

Reduced churn

Usage-based billing can lower churn rates because customers only pay for what they use. This perceived fairness can increase customer satisfaction and loyalty. 

Plus, the ability to scale usage up or down lets customers adjust their spending based on their needs. Giving users this agency reduces the likelihood of them churning due to fixed costs they can't control.

Example: A project management tool could offer a base subscription with core features. Then, they can allow users to add on specific features or user seats as needed. Customers can start with a lower-cost plan and gradually scale up as their team or project requirements grow. 

The result is the company reduces the pressure to churn when customers are faced with large upfront fees. 

Improved forecasting

Usage-based billing platforms often provide tools for forecasting revenue based on historical usage patterns and projected growth. Access to these forecasts allows you to make informed business decisions and plan for future investments.

Example: A data analytics platform can analyze historical usage trends to predict future demand for its services. This allows them to scale their infrastructure accordingly and optimize pricing to ensure profitability even during periods of peak demand.

Let Orb's usage-based billing boost your ARPU metrics

We've already explored what ARPU is and how usage-based billing platforms can be instrumental in boosting it. Fortunately, there’s a platform that can make it happen: Orb.

Orb is the go-to billing platform for hybrid and usage-based pricing, designed to empower developers and finance teams. We handle massive amounts of usage data, speed up product launches, and deliver detailed reporting.

Innovative companies like Perplexity and Vercel trust Orb to power their billing infrastructure. With Orb, they've been able to implement refined pricing strategies that align with their product offerings and drive notable revenue growth.

Here's how Orb helps you unlock the full potential of usage-based billing to boost your ARPU:

• Effortless usage-based billing: Orb tracks and records every billable event, ensuring accurate invoices and fostering transparency with your customers. We help build trust and reduce friction, contributing to higher customer lifetime value and ARPU.
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• Pricing that scales: Our flexible plan management allows you to create and adjust pricing tiers quickly and easily. We also help you experiment with different pricing models and optimize them for specific customer segments so your ARPU metric can soar.
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• Valuable usage insights: Orb transforms raw usage data into insightful reports, revealing valuable patterns and trends. Consequently, our platform helps you to find chances for upselling and cross-selling and tailor your pricing for optimal ARPU.
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• Customizable metrics: Define your own unique usage metrics and pricing models with Orb's intuitive interface and custom SQL editor. This level of granularity allows you to capture the true value of your service and adjust pricing for maximum ARPU.
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• Real-time data integration: Orb processes product usage data at scale and provides real-time financial reporting. We empower you to make data-driven decisions, identify areas for ARPU improvement, and monitor the impact of pricing changes in real time.

Ready to experience the Orb advantage? Sign up for a free 30-day trial and see how our usage-based billing platform can help you boost your ARPU. Take a look at our flexible pricing options to find a plan that works for your specific needs.