Software Growth

ARPU (Average revenue per user)

ARPU is the average recurring revenue you earn per paying user in a period, found by dividing MRR by the number of paying users.

ARPU tells you what the typical paying user is worth to you each month. It feeds directly into customer lifetime value, pricing decisions and how much you can afford to spend to acquire someone.

How to calculate ARPU

Baremetrics defines it as MRR divided by the number of active paying customers, and gives the example of $3,459 across 146 customers, about $23.69.

Take a product with $20,000 of MRR and 500 paying users across all accounts. ARPU is 20,000 / 500 = $40 per user per month. Over a year that is $480, which you can also express as ARR per user.

ARPU vs ARPA

The only difference is the denominator. ARPU divides by individual users. ARPA divides by accounts, meaning the paying customer entity, which might be a company with many users. In the example above, if those 500 users sit in 250 accounts, ARPA is $80 while ARPU is $40.

For a consumer product where one person is one account, the two are the same number. For team software with per-seat pricing, they diverge as accounts add seats. If you sell to companies, ARPA is usually the more useful number, and ARPU shows the price per seat in practice.

What to include and exclude

  • Exclude free users and trials. Baremetrics warns they drag the average down. If you want the figure across everyone, call it blended ARPU and label it as such.
  • Use normalized recurring revenue, not total cash received, so one-time fees and annual prepayments do not distort it.
  • Account for mix. A mid-month plan change or a shift toward cheaper plans moves ARPU without any change in customer count.

Reading ARPU

There is no good ARPU in general. It depends on your market and pricing. Use it to compare your own cohorts over time. Rising ARPU with stable churn means your pricing or expansion is working. Falling ARPU while customer count grows often means you are winning smaller customers, which may be fine or may signal a pricing problem. Baremetrics also notes that losing high-paying customers hurts ARPU more than losing low-paying ones.

Small SaaS angle

ARPU is the quickest way to sanity check an acquisition plan. If ARPU is $15 and you want to pay back an acquisition cost within six months, you can spend at most about $90 per customer. A lot of indie products sit at a low ARPU and compensate with low-cost channels such as search and word of mouth. If your channels cost real money, raising ARPU is usually easier than finding cheaper customers.

Sources

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