What is ARPU?

ARPU (definition)

ARPU (average revenue per user) measures the revenue generated by each customer over a specified period.

What ARPU means

ARPU stands for average revenue per user in a subscription business, or average revenue per unit for a seller of goods.

  • In subscription businesses, it shows how much revenue each of your customers generates
  • For sellers of goods, it shows how much revenue each sale generates

A high ARPU suggests each customer or purchase is valuable, which may mean the business can thrive with fewer sales. High ARPU is a sign of an efficient business model or strong market positioning.

A low ARPU indicates each user or sale contributes less revenue, which could signal the need for a larger customer base to sustain operations.

How to calculate ARPU

Revenue / Number of users (or units) = ARPU

Here are the equation’s components:

  • Revenue is the total income from sales over a certain time, such as monthly or annually.
  • Number of users reflects how many have paid for your services or products during the period. This could be the total number of active users at the period's end or an average number over the entire period.
  • Number of units is the total number of items sold during a period.

Example ARPU calculation

Let's say you run a subscription-based content platform. In March, your platform earned $10,000 and you averaged 500 users during that period.

Your ARPU for March is $10,000 / 500 = $20

Each subscriber, on average, brought in $20 in March.

Why ARPU matters

Knowing your ARPU can help you fine-tune your business decisions.

  • Pricing: You can use ARPU to better understand the cost-benefit ratio you’re delivering for your customer.
  • Customer segmentation and targeting: ARPU clarifies which customer segments are the most profitable.
  • Existing and new customers: ARPU helps you find the right balance between retaining existing customers and acquiring new ones.
  • Upselling and cross selling: Use ARPU to measure the success of your complementary product offers.
  • Resource allocation: ARPU can help you identify where to invest in your business.

Real-life applications of ARPU

A subscription gym service finds its ARPU is trending upwards. This suggests its premium offering is becoming more popular, which may encourage it to promote that level of service more widely.

A shoe retailer’s steady ARPU as its customer numbers grow suggests it’s succeeding in meeting its customers’ needs, and there’s potential for the retailer to introduce higher-margin products.

What ARPU doesn’t tell you

While ARPU provides a solid snapshot of revenue, it won't directly indicate:

  • Customer or revenue growth: ARPU can remain stable or even rise as customers leave the business.
  • Profit per user: ARPU doesn’t account for the servicing cost of each customer.
  • Cost of acquisition: ARPU won’t show you how much each new customer cost.
  • Lifetime revenue: ARPU only shows customers’ average revenue for a defined period, not their long-term value to the business.
  • Churn: ARPU doesn’t capture churn, which is the rate at which customers unsubscribe from a service.
  • Customer loyalty: Just because each customer pays a lot doesn’t mean they’re delighted with the product or service. Attempts to increase ARPU further could lead to churn.

Consider combining ARPU with other ecommerce metrics like the customer lifetime value (CLV), customer acquisition cost (CAC) and net promoter score (NPS) for a broader understanding of your business’s financial and customer relationship health.

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.