Ever wonder if your current monetization efforts are actually working?

Understanding customer value is a great place to start, and that means figuring out your average revenue per user (ARPU).

Let’s dive into the ins and outs of ARPU, including what it is and why you should care about it.

Average revenue per user: what it is, how to calculate it, and ways to improve

So, what is ARPU?

It’s a key metric used by all kinds of businesses, particularly those in subscription-based, SaaS, and telecom industries. Simply put, it measures the amount of revenue generated by a customer over a certain period.

ARPU is beneficial because it helps you better understand customer value, which allows you to refine your pricing strategies and evaluate your overall performance.

This metric is a great way to assess how effectively you’re monetizing your user base. A good pricing strategy can drive higher ARPU by making sure your pricing is accurate, customized, and reflects the true value of your product/service.

When you track ARPU over time, you’ll see trends in your customers’ spending behavior, which helps you adjust prices and offers based on data that matters.

What is a good average revenue per user?

Unfortunately, there’s no universal magic benchmark for a “good” ARPU, since it’s highly unique to each industry, business model, and target market.

The good news is that there is a way to determine if your ARPU is working for you.

Focus on consistent year-over-year growth in this metric, as a rising ARPU can mean that you’re successfully increasing the customer value. This can be done through pricing adjustments, upsells, improved products, etc.

Your goal should be maximizing ARPU while maintaining customer satisfaction and retention rates. Regularly analyzing your pricing strategies and product value will make sure you’re optimizing revenue per user.

If you consistently increase ARPU over time, you’ll know that your pricing, product-market fit, and revenue scalability are solid.

Speaking of pricing, a good strategy can make or break your bottom line: Learn how to master your pricing strategy with CPQ (configure, price, quote) here.

CPQ software is a tool that automates the process of creating sales quotes, starting with configuring the right product at the right price. This makes it easier and faster for your sales team to create quotes for customers.

Why is ARPU important?

Here are the top reasons tracking ARPU is essential to your success:

• Optimized revenue: It helps you see who your highest-value customers are, allowing you to adjust pricing accordingly. When you know which customer groups generate the most revenue, you can better target your marketing and sales efforts.
• Refined pricing strategy: ARPU is a great way to see if your pricing model and/or subscription tiers are working for you, and it will show you if there are opportunities for upselling. Experiment with different pricing strategies to see how they impact ARPU and overall profitability. You can also implement a configure, price, quote (CPQ) solution that will handle pricing adjustments and make sure your customers receive the best plans at the right price. 
• Growth tracking: A rising ARPU means your monetization strategies are successful, whereas a declining ARPU can mean there are issues with your pricing or customer engagement. It’s a great indicator of your company’s overall financial health and ability to scale.
• Investor insights: Investors often use ARPU to see if your business is profitable and sustainable. This means it’s a crucial metric when it comes to securing funding and showing your growth potential to stakeholders.
• Customer lifetime value (CLV) analysis: A higher ARPU likely means you have a more valuable customer base and greater long-term profitability.

Calculating ARPU

You can calculate your average revenue per user using this simple formula:

• ARPU = total revenue/total active customers

Here’s a basic example:

If you’re a SaaS company earning $500,000 in revenue over a month and you have 10,000 active customers, the formula would look like this:

• ARPU = 500,000/10,000 = 50

This means that each customer contributes about $50 in revenue per month.

Pretty simple, right?

In the next section, we’ll go over ways you can improve this number.

How to improve ARPU

Now that you know what it is and why it matters, let’s talk about how you can improve your ARPU.

Here are some proven methods you can implement:

1. Upsell and cross-sell

Put your energy where you’ve already had success: your existing customers.

An effective way to do this is encouraging them to upgrade to higher-tier plans or even purchase additional products based on their needs. Make sure to personalize recommendations, bundle products/services, and offer incentives for them to make the upgrade.

Upselling and cross-selling is all about driving more revenue from your current user base.

The right CPQ software can simplify the upselling process through the power of automation, which can make personalized pricing recommendations and help your sales team offer the most relevant add-ons for each prospect/existing customer.

With PandaDoc CPQ software, you can make the quoting process seamless. Set pricing rules, get approvals fast, and send for signatures—all without leaving your CRM.

“Leveraging PandaDoc has revolutionized our business operations by automating proposal generation and delivery, making the entire process more efficient and smooth,” says Patrick Murphy, Senior VP of Sales at Interlace Health. “As a senior VP of Sales, I appreciate how seamlessly it integrates with our Salesforce CRM, ensuring our proposals are consistently formatted and professional. Highly recommend it for any sales-driven organization.”

Want to see what else PandaDoc can do? Read the case study on how Interlace Health cut down their proposal creation time by 85%.

2. Enhance your customer experience

It might seem like a no-brainer, but giving your customers top-notch service—plus an intuitive user experience—will increase retention and encourage your customers to spend more.

Think about it: if your customers feel satisfied and valued, they’ll be more likely to renew their subscriptions, opt for extra features, and recommend your service/product to people they know. All of this will contribute to a higher ARPU.

3. Optimize your pricing strategy

Try experimenting with different pricing models like ramp pricing or penetration pricing to maximize revenue per user.

This is something you can regularly assess to make sure your pricing aligns with customer expectations and the perceived value of the product or service. If it does, that means more spending and a higher ARPU.

4. Introduce add-ons and premium features

Who doesn’t like bonus features once you fall in love with a product?

By offering extras like exclusive content or one-time add-ons, you can boost revenue from your existing users, or even new users during signup. You can successfully raise your ARPU with tiered memberships or extra services that your users can purchase alongside their existing plans.

5. Target high-value customers

One ARPU-boosting method is rooted in refined marketing and sales strategies. You want to attract customers that are willing to spend more than the average user.

Segment your customer base to see the higher-value users and create targeted campaigns designed to encourage more spending.

Offering incentives, loyalty rewards, and customized pricing can make premium customers more likely to invest in additional services.

6. Reduce churn and increase retention

Finally, focus on retaining your existing customers, as it’s usually more cost-effective than acquiring new ones. How do you do that? Focus on customer satisfaction, engagement, and offering proactive support to prevent churn.

The longer a customer stays, the more revenue they’ll generate for your business. This will directly impact your ARPU.

Final thoughts

Remember, ARPU is a valuable metric for understanding and optimizing your business revenue. Tracking it and implementing strategies to increase that number will help you maximize profit.

Want to learn more about how PandaDoc can work for your business? Request a demo today.