What is Average Revenue Per User (ARPU)?
Take your total revenue divided by your active users (customers) over a month long time period. This helps you generate your ARPU.
For example, if you had 1,500 customers paying last month, and your total revenue was $100,000, your ARPU would be:
ARPU Calculation: $100,000/1500 = $66.67 is the average revenue you make per user (paying customer).
ARPU usually refers to a month long period in SaaS. If you wanted to figure out how much customers pay you on average per year, you can take ARPUx12 months or measure average annual contract value (ACV).
ARPU is sometimes called ARPA (average revenue per account), ARPC (average revenue per customer), or ARPPU (average revenue per paying user)
What is a “Good” ARPU?
If you have 10 customers with an ARPU of $100, thats not so good: $1000 in monthly revenue.
If you have 50,000 customers with an ARPU of $100, thats pretty good: $5m in monthly revenue.
As you can tell, ARPU is relative. Here’s how to think about it:
If your goal is to build a profitable company, you need a customer to pay you an amount each month that quickly makes up for any amount of money you spent to acquire the customer. We call this payback period.
By looking at payback period, you can figure out if your current ARPU will allow you to make money or not as a business.
For example, if you spend $300 to get a customer that pays you $10/mo on average (their ARPU), your payback period is 30 months. Way too long. In fact, the more customers you get, the more money you lose in the short term.
Sign up 1,000 customers next month and spend $300 on each, means you spent $300,000 to get $10,000 in new monthly revenue. Unless you have a rich uncle, you’ll go out of business before you make your money back.
Examples of Bootstrapped SaaS Companies With Very High ARPU Compared to CAC
For any company to grow their monthly recurring revenue (MRR), they have to be able to spend money to get new customers profitably. If you haven’t raised money and your preference is to stay bootstrapped, you can’t afford to spend more than 10x what a new customer pays you per month. You need to make that money back, fast.
Here are some examples of bootstrapped SaaS companies that have a higher arpu relative to their CAC which enables them to grow a profitable customer base.
1. JustCall did $2.4m in revenues in 2019 and spends $200 to get customers with a $150 ARPU. This means JustCall gets their money back in under 2 months.
3. Shipedge spends $500 to get customers who pay $750/mo meaning their payback period is in the first 30 days. The company is completely bootstrapped and broke $2m in revenue in 2019.
Here are 2 examples of funded companies that have kept very short payback periods:
1. Moz is and SEO tool that spends $290 to acquire customers that pay $150/mo. They get their money back in under 2 months and broke revenues of $60m in 2019. https://getlatka.com/saas-companies/moz
2. GetOutlaw spends $2,000 to acquire get customers with an ARPU of $1,000. They get their money back in 2 months and broke $720,000 in revenues in 2019. https://getlatka.com/saas-companies/getoutlaw
Examples of Funded SaaS Companies With Very Long Payback Periods
When a company raises funding, they can afford to invest in future growth. Many times this means they’ll pay more now to get a customer who will have a very long customer lifetime value (LTV). They time frame they have to make money from customers can be much longer than bootstrapped CEOs.
Here are a few examples:
1. Animoto pays $500 to get a customer who pays $240 in the first year on average (ACV). They can afford to wait 2 years to get paid back because they’ve raised $30m.
2. 247Office has raised $5m and spends $800 to get a customer who pays $400 per year. Today they have 40,000 customers and $16m in revenues.
3. Centrify has raised $90m and spends $100,000 to get customers who pay $20,000 per year. They are playing a long game by spending a lot to get the customer and not making money until 5+ years out.
3 Ways to Increase ARPU Fast
If you have 1,000 customers, getting each one to pay $5 more per month is another $5k/mo in revenue. This is why thinking about ARPU expansion can be worthwhile. Many public companies increase their margin per user and monthly arpus by simply upselling their current customer base.
1. The best way to increase ARPU is to measure key value KPIs that show how your customers use your platform, and upsell them more of that usage.
For example, if you help companies manage their support tickets, you might create pricing tiers based off how many support tickets they answer with your software each month. This is a great way to increase your ARPU figure and drive your company’s revenue up.
2. In addition to usage based upsells other revenue generation strategies include upselling based off number of users or seats
3. Lastly, upsell feature add-ons, or upsell based off number of active users if your tool is a freemium tool. Track your conversion rate of free users to paid closely to make sure you maximize revenue growth. A good conversion rate from free to paid is somewhere between 5-8% for most freemium SaaS tools.
In Summary, High ARPUs and Low CACs are Better
Regardless if you’re bootstrapped or not, you want to acquire high paying customers for as little as you possible can. In highly competitive markets you may have to spend more, or potentially raise capital to help you compete.
If you’re looking to build a profitable, cash flow positive company that you own 100% of, keep your payback periods under 2 or 3 months so you never have to rely on anyone else’s money to scale your business.