As the SaaS market becomes more crowded and the cost of paid advertising increases, startups are beginning to think about the different ways they can achieve a desirable growth curve without relying on the ongoing expense of chasing down new customers.
In this article, we’re taking a look at some of the ways to increase the ARPU of any SaaS product, how to calculate ARPU, and why this metric can be effective as a growth tool.
What does ARPU stand for?
If you are a SaaS startup, there are many important metrics you need to know like the back of your hand, one of which is ARPU. ARPU stands for Average Revenue Per User (typically per month or per year), and it means exactly what it sounds like. It’s a measurement of how much revenue each user of your SaaS product generates for your business on a monthly or yearly basis.
This metric is sometimes called Average Revenue Per Account (ARPA) or Average Revenue Per Customer (ARPC), and it is important to know these three acronyms all mean the same thing and are used interchangeably across the SaaS industry.
How to calculate ARPU
ARPU is one of the key metrics that yearly or monthly subscription based businesses need to track, and it’s a simple calculation. First, you need to define a standard time period. Typically, ARPU is calculated on a per month basis, but sometimes it can make more sense to calculate ARPU on a yearly or quarterly basis. Assuming a monthly basis, you only need to know how to calculate MRR (monthly recurring revenue) and how many active users your product has in a given time frame.
To calculate your average revenue per user, use the following formula:
ARPU = MRR ÷ Total number of users
ARPU is an essential SaaS metric
While some may view average revenue per user as nothing more than a “vanity metric” that doesn’t hold much sway in terms of success, it is considered an essential metric in SaaS growth.
It’s useful to help your company gauge the popularity of its pricing tiers, together with any trends you might notice in terms of upgrades and add-ons. It also helps you keep an eye on overall customer engagement with your product.
ARPU is not a stand alone metric
Generally speaking, a higher average revenue per user is ideal, but like other SaaS metrics, it doesn’t always paint an entire picture all on its own. Instead, it needs to be analyzed in context to other important factors and metrics, such as your customer churn rate (CCR) and customer acquisition cost (CAC). To put it simply, a high ARPU figure can be misleading if you also have a high customer churn rate and a high customer acquisition cost that you fail to recognize.
ARPU should also be looked at in context with your customer lifetime value (CLTV) metrics and goals, which are an indicator of the health and trajectory of your startup.
Without considering other important metrics, measuring your average revenue generated per user can not only give you a false sense of growth but it can also contribute to an inaccurate assessment of the overall health of your SaaS product.
How to increase ARPU
1. Design your product for growth
As a startup, you should be continually looking at the growth potential of your product. Can you add new features? Can you increase your market share with different products? Or expand into new markets by adding extra services over time?
Every opportunity you can see for building added value into your existing product is a way for you to increase users or ARPU as your business progresses.
For example, we’ve recently seen MailChimp evolve from a purely email-focused platform into a fully fledged CRM. Loyal, long-term customers now have a built-in value add that can help them grow their own businesses, without needing to subscribe to a separate CRM system. For MailChimp, this means a huge increase in the ARPU for customers who need the features and value that the newly evolved platform provides.
2. Optimize your pricing structure
Adjusting your product pricing is the most obvious and straightforward way to increase your average revenue per user. However, this needs to be strategically planned and keep your customers’ best interests in mind.
Price increases
Obviously if you put your prices up, your ARPU will follow suit. But if you’re increasing prices, it needs to be done strategically and with a thought to the possible consequences. Your users should be given plenty of notice, pricing transparency, and some insights into your decision.
A recent example of a SaaS price increase gone awry was from Drip, who announced significant price hikes (up to double the current pricing per tier) with only a few days notice. This prompted widespread outrage from loyal users of their email platform, who flooded social media for weeks to voice their annoyance.
When customers lose trust and respect in a SaaS product, you can bet they will immediately start looking for an alternative, especially if switching costs are low. For instance, Drip’s competitors took full advantage of this pricing situation to increase their own customer base.
For everyone considering the move away from Drip after the deliverability issues and price increase, my team is here to help! Just reply here or email me (nathan@convertkit.com) and we'll get you setup with a concierge migration to @ConvertKit. — Nathan Barry (@nathanbarry) January 3, 2019
While customers will understand that you might need to increase your subscription fees to grow your business, or reflect the value of any new features that you’ve released, sudden and substantial changes to your pricing will leave loyal users feeling disrespected and angry.
Variable and scalable pricing models
A flat pricing model is a great start for a new SaaS looking to attract users. Once your startup is more established and looking at increasing its ARPU, it’s time to think about variable pricing structures that allow your company to grow along with your customers and their teams. You need to look at which product features are most relevant to your different user segments, and then price them accordingly.
Lighter Capital reached out to Nigel Stevens, CEO and Growth Lead at Organic Growth Marketing, for his thoughts. He believes the key to SaaS companies increasing their ARPU is aligning a customer’s willingness to pay with value metrics. For example:
“I use a tool to share videos internally with my team. I literally WANT to pay for it, but the pricing tiers do not align to my use case. So I keep using the free version. On the other hand, I use Monday.com and their pricing has scaled with my team, since they do it by user. Same with Slack.com.”
Scalable pricing allows SaaS startups to increase their ARPU, but only from customers who can afford it. Individuals and smaller teams might not have the budget, so remain on the free or basic plans, but if you nurture them and their businesses grow, you have a good chance of retaining these customers and increasing your ARPU over time.
3. Upselling and cross-selling
Upsells, cross-sells, add-ons, upgrades – whatever your SaaS product is, it’s likely you can figure out a way to add more value to base subscriptions that encourage people to increase their spend, and in turn, increase your ARPU.
Each of your customers will use your product in different ways. Some will require only basic features, while others might want your full range of product features and be excited to upgrade every time you announce a new release.
Happy, existing customers already have built in trust with your company and product and are often more willing to subscribe to premium features than brand new users.
4. Product bundles
Bundling products to offer maximum value at a great price is a marketing tactic we see every day in the world of e-commerce and B2C.
For SaaS, looking at creating packages that include a range of add-ons can be a great way to subscribe new users at a higher ARPU than they would by merely opting into a standard plan.
It can also be an effective way to increase the ARPU of existing customers, such as being introduced as a special offer when subscription renewal time rolls around.
5. Reduce customer churn
When you actively work to reduce customer churn, you’re working to ensure your customers stick around longer. This can also mean a higher CLTV, more opportunities to upsell and cross-sell, and a better chance to increase your ARPU in the process. Loyal customers who won’t churn are an extremely valuable asset to your company, especially when it comes to increasing your ARPU.
By focusing on retention and reducing churn, you are able to keep paying customers you otherwise would have lost, which in turn should increase your MRR and therefore your ARPU as well.
Final thoughts on increasing ARPU
Acquisition isn’t everything when it comes to growing your startup. Retaining existing customers and decreasing churn by looking at ways to increase loyalty and ARPU can be highly effective as a growth tool.
Treating your users like people and finding different ways to engage with them, offer value, and help them get the most out of your product at every stage of their journey can help you increase the ARPU for your SaaS product and ensure your company grows sustainably over the long term.
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