Hey there, revenue leaders! If you’re running a business or responsible for leading revenue teams, you know that there’s nothing more important than creating predictable and sustainable revenue growth. And one of the best ways to track your revenue success is by keeping an eye on your Average Revenue Per Unit (ARPU). But what exactly is ARPU, and why is it so important? Don’t worry, I’m here to break it down for you in a way that’s easy to understand and, dare I say, even a little bit fun…
What is ARPU?
ARPU is a metric that measures the amount of money your business is making per unit of your product or service. It’s like a report card for your pricing strategy. Are you charging too much? Not enough? ARPU can help you figure that out. It’s also a great way to identify your most profitable customer segments and target them with specific marketing or sales campaigns.
How To Calculate ARPU
To calculate your ARPU, all you have to do is take your total revenue and divide it by the number of units you’ve sold. So, if you made $100,000 and sold 10,000 units, your ARPU would be $10. Easy peasy, right? And the best part is, you can calculate your ARPU for different time periods, like monthly or quarterly, to see how your revenue is changing over time.
Here is another example:
A subscription-based service has a revenue of $1 million and 2,500 paying subscribers.
ARPU = $1,000,000 / 2,500
Therefore, every customer contributes $400.
The ARPU is $400.
The Connection To ARPU and Customer Success
When it comes to customer success teams, the main goal is to retain your customers and help them grow. So, it’s super important that our ARPU (average revenue per unit) keeps increasing steadily over time. Think of it like a scoreboard for your CS team, the more your customers spend, the higher the score goes. And the higher the score, the better your customer success team is doing. You want to make sure that your team’s efforts are worth it, so you want to see your ARPU growing at a rate that is higher than the cost of our customer success team and the cost to acquire those customers.
Connecting ARPU and Payback Period
When it comes to customer acquisition, it’s all about time and money. And, that’s where ARPU and payback period come into play. Payback period is just the balancing act of recouping the cost of acquiring a customer with the revenue they bring in. For example, let’s say you spend $200 to bring a new customer on board and they pay you $10 per month (ARPU), it would take 20 months to get that $200 back. And that’s a long time to wait. But, if you can get them to pay more, you will recoup that cost faster and that’s a win for you and your customer success team. But, If the payback period is too long, it may not be worth it for your company to continue acquiring customers at that cost. By understanding the relationship between ARPU and the payback period, you can make informed decisions about your customer acquisition strategies and ensure that they are profitable in the long run.
Let’s State The Obvious…
But here’s the thing: ARPU is only useful if you use it. It’s like having a fancy sports car sitting in your garage – it’s great to have, but it’s not going to get you anywhere if you don’t put the key in the ignition and hit the gas. So make sure you’re looking at your ARPU regularly and using the information to make informed decisions about your sales and marketing strategies. In short, ARPU is one important metric to track so you can unlock your business’s financial success. By understanding and utilizing this metric, you’ll be well on your way to boosting your revenue and maximizing predictability on your P&L.
Happy Metric Monday!