ARPU gives marketing and customer service departments the ability to make their delivery more effective and efficient. By understanding the average contribution to revenue per user, businesses can identify opportunities to increase revenue and efficiency. By working out the ARPU for your business, managers understand how users interact with their company. Show
Why ARPU is ImportantService-based companies commonly use ARPU (Average Revenue per User) to understand how much revenue is generated per user of the service. This calculation allows managers to better understand the effect of their promotional activities during a specific time period. ARPU is beneficial for businesses with a recurring revenue model that is mostly service-based instead of product-focused. The calculation is similar to the Lifetime Value of a Customer but looks at a specific period with a start and end date. How to Calculate ARPUCalculating ARPU is a simple mathematical operation. The total revenue for a user base for a time period is divided by the total number of users for that period. ARPU = Revenue ($) / Users (n) The formula above specifies users instead of customers. The reason is that some business models don’t have users who are paying customers, such as social media platforms that have users who use their features for free. For example, ARPU is used by some social media companies such as Facebook. A platform such as Facebook can use ARPU to calculate operational costs and assess profitability based on the number of users who use its advertising features. Choosing a Time PeriodThe period used in the calculation will be different for each business. The key when it comes to choosing the period for ARPU is relevance. By calculating the average revenue on a monthly basis, managers can identify times of the year when revenue per user is higher than others. By identifying periods of higher revenue per user, the business understands when and why demand is higher during these periods. However, monthly monitoring might not be useful if the company runs an annual subscription service and vice versa. ARPU analysis using the entire year as the time period will not give management enough information if their business model is based on monthly revenue. Average Revenue Per UnitA similar calculation is Average Revenue per Unit (also ARPU) used in businesses where a user is less relevant, and a product unit is more important. It is the same calculation; only users are replaced with the number of products in the market. The Average Revenue per Unit calculation is especially relevant for business models where revenue is linked to the use of a product in the market. Vending machines are an example of a product where per-unit revenue is relevant and measurable. ARPU = Revenue ($) / Units (n) 30 Customer Satisfaction Survey Questions How to Decide Between Unit and UserDeciding on whether to interpret revenue per user or unit is based on two questions: which one is measurable and which is linked to revenue. If your business is a service-based organization, then ARPU must be calculated per user. Some firms use both the number of units and users to calculate ARPU. For example, telecommunications companies have clients paying for phone contracts (users) as well as hardware parts such as phones and phone booths (units).
There is no need to calculate average revenue per user if it’s impossible to measure the number of users . An eCommerce website can measure both since they can quantify both users and products, and that is where revenue comes into the decision.
The purpose of calculating average revenue by user or unit is to analyze and understand how to increase revenue and manage service capacity. In the case of eCommerce, the goal is to increase sales per user to get the most effective use of marketing. How to Define a UserThe definition of a user will vary depending on your business. Defining a user for your ARPU calculation comes back to its relevance for your business and how you would like to track your user base.
How to Interpret ARPUTracking and reporting performance metrics is useful for streamlining business operations. This is an opportunity for operations to reduce costs and for marketing to increase revenue during busy or quiet periods. Increasing RevenueLet’s take a look at a simplified example. There are many ways for a company to generate a million dollars in revenue. Some businesses will achieve this with one big client, and other companies will find one million users to make one dollar from each. This varies from business to business, depending on customer acquisition costs and the business model. One quick way to increase revenue is to increase the existing spend of your customer base. By doubling the ARPU, a business can earn higher revenue with little increase to the costs of doing business. There are a few ways to increase revenue:
Track ARPU Over TimeBusinesses’ service delivery and customer perceptions change over time. It is worth tracking ARPU over time to look for trends. By consistently tracking metrics and identifying changes to the business operations, management can understand what is or is not working well. Increases and decreases in customer spending can be tracked and linked to events over time. Tracking trends over time helps companies make well-informed decisions. Criticisms of ARPUSome managers might rely on ARPU without taking into account other important metrics. ARPU should be assessed in addition to changes in business operations such as new products launches or changes to business strategy. ARPU is also a high-level calculation made to examine the market and interpret major shifts and trends. The calculation of average revenue should be assessed in comparison to other metrics such as the total number of users for the period, prices of products or services, customer acquisition costs, and lifetime customer value. Quick SummaryFor business managers, efficiency is key. When it comes to working out your Average Revenue Per User:
Other Resources: CustomersFirst Academy offers comprehensive customer service training designed to help you grow your skills and advance your career. To keep learning and developing your knowledge of customer service, we highly recommend the additional resources below: How to Quit Your Job (FREE Resignation Letter Samples) 30 Customer Satisfaction Survey Questions What refers to the average revenue generated per customer over a certain period of time?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 refers to the average revenue generated?Average revenue is referred to as the revenue that is earned per unit of output. In other words, it is the revenue that is obtained by the seller on selling each unit of the commodity. Average revenue of a business is obtained by dividing the total revenue with the total output.
Why is average revenue per customer important?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.
What is included in ARPU?To sum up ARPU in one sentence: it's the average monthly revenue that you receive per user. People say ARPU is a "vanity metric" (a metric that isn't actually useful).
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