ARPU explained: How to calculate + improve it in your company

In the SaaS industry, teams use the ARPU metric to see how much revenue each user or account generates in a period. This guide explains ARPU's meaning, shows how to calculate ARPU with a simple formula, and lists concrete plays for how to increase ARPU without annoying customers.

What is the Average Revenue Per User (ARPU) metric?

The ARPU metric is a measurement of how much revenue each user generates in a period, usually monthly. Calculate it by dividing your revenue by active users for the same timeframe.

SaaS teams track ARPU to measure pricing power, packaging fit, and customer value. When ARPU rises, customers see more value in your product, and your monetization is working.

Why ARPU matters

ARPU is a key indicator of your business's health and potential for growth. It’s a metric that sheds light on your SaaS company’s:

• Pricing fit: ARPU trends tell you if tiers, add-ons, and minimums align with usage.
• Growth quality: Rising ARPU can offset slower logo growth and fund acquisition.
• Customer value: Higher ARPU often maps to deeper adoption and broader use cases.

By keeping a close eye on ARPU, you can gain valuable insights into your business performance. You can also identify areas for improvement and ultimately drive sustainable growth.

Note: Want a fuller KPI map? Read our guide to SaaS metrics.

How do you calculate ARPU?

Calculating ARPU boils down to a simple division:

ARPU = Revenue in period ÷ Active users in the same period

Let's break down the elements of this formula:

• Revenue: Use recurring revenue for the period you choose. For monthly analysis, use monthly recurring revenue.
• Active users: Count only active users (or active accounts if you track ARPA).

Here's an example to illustrate:

Your product brings in $50,000 in monthly recurring revenue from 2,000 active users in October.

ARPU = 50,000 ÷ 2,000 = $25.

Tip: Keep revenue and user count on the same time basis. Do not mix monthly revenue with quarterly users.

Note: If you report monthly versus annual, this explainer on MRR vs. ARR helps you stay consistent.

ARPU vs. ARPA (per user vs. per account)

ARPU averages revenue per user. ARPA averages revenue per account (company). 

If you sell seats, ARPU is useful. If most contracts are multi-seat or usage-based at the account level, ARPA may tell the story better.

Here’s how to choose:

• Use ARPU when seat count drives price.
• Use ARPA when pricing follows usage metrics or company size more than seat count.

Extra tip: Track both if you sell seat-plus-usage plans.

What is a good ARPU?

A “good” ARPU depends on your market, pricing model, and buyer size. 

For example, enterprise products command higher ARPU than SMB tools because they solve more complex problems at scale.

The absolute number matters less than the direction and what's driving it. If ARPU climbs because customers upgrade and expand usage, you're capturing real value. If it climbs because discounts expired, the bump is temporary. 

Segment your ARPU by plan and cohort to build a benchmark that fits your business.

Note: If you watch profitability signals too, the SaaS quick ratio is a useful companion metric.

How to increase ARPU: 9 practical tactics

Now that you understand what ARPU is and how to calculate it, let's explore some proven strategies to give it a boost:

1. Tighten plan packaging: Make the “next plan up” clearly better. Put high-value features, higher limits, or faster support in paid tiers with a clear reason to upgrade.
2. Offer add-ons, not only tiers: Sell focused add-ons (advanced reporting, extra environments, premium support) so customers expand without jumping a full tier.
3. Use fair usage metrics: Choose metrics that map to value (API calls, seats, data processed). Avoid metrics that customers cannot predict.
4. Set price floors and minimums: Minimum monthly commitments protect ARPU when usage drops. Communicate the value that the minimum covers.
5. Create annual plans with incentives: Annual prepay reduces churn and raises effective average revenue per user via longer commitments.
6. Improve onboarding and adoption: Good onboarding increases feature use, which increases upgrade odds. Measure time-to-value and fix slow steps.
7. Run targeted upsell paths: Guide heavy users to higher limits. Show usage in-product, warn early about caps, and surface a one-click upgrade.
8. Reduce discount bloat: Time-box discounts and review them. Remove permanent custom cuts that drag ARPU down without a clear ROI.
9. Segment and experiment: Test price points, bundles, and usage thresholds by segment. Keep what lifts SaaS ARPU without hurting activation.

Note: If leadership watches the Rule of 40, link your ARPU work back to growth and margin.

Ways that usage-based billing platforms help manage your ARPU

Did you know that usage-based billing platforms can be a powerful tool for managing and improving your ARPU? Let's dive into how these platforms can help you gain greater control over your revenue stream.

Accurate revenue capture

Subscription models often rely on fixed pricing tiers. The issue is that fixed pricing strategies can leave money on the table if some users consume more resources than others. 

Usage-based billing platforms allow you to capture revenue based on actual consumption. They help make certain you're fairly compensated for the value you provide. This is particularly crucial when your ARPU is highly variable and can fluctuate wildly based on customer activity.

Example: Imagine a cloud storage provider with a fixed monthly price for 1TB of storage. A user who only uses 100GB essentially pays the same as a user who utilizes the full 1TB. 

With usage-based billing, the first user would pay less, while the second user, who consumes more resources, would pay more. Using this strategy results in fairer pricing and potentially higher overall revenue.

More and better customer insights

Usage-based billing platforms give you insights into how customers are using your solution. This granular data allows you to identify trends and understand consumption patterns. Then, you can segment your audience based on their needs and behaviors. 

With this knowledge, you can tailor your pricing and offerings to maximize ARPU.

Example: A communication platform might discover that a segment of its users consistently sends a high volume of messages. With this insight, they can introduce a new pricing tier specifically designed for high-volume users. The result is a higher ARPU from those customers.

Flexible pricing models

Usage-based billing platforms often let you create pricing models beyond simple tiered subscriptions. You can use volume discounts, tiered pricing based on usage, or even hybrid models that combine fixed fees with usage-based charges. 

The correct billing platform allows you to cater to various customer preferences, driving higher ARPU.

Example: An API provider could offer a freemium model with a limited number of free API calls per month, then charge based on usage beyond that limit. This strategy encourages wider adoption while ensuring heavy users contribute more to revenue.

Reduced churn

Usage-based billing can lower churn rates because customers only pay for what they use. This perceived fairness can increase customer satisfaction and loyalty. 

Plus, the ability to scale usage up or down lets customers adjust their spending based on their needs. Giving users this agency reduces the likelihood of them churning due to fixed costs they can't control.

Example: A project management tool could offer a base subscription with core features. Then, they can allow users to add on specific features or user seats as needed. Customers can start with a lower-cost plan and gradually scale up as their team or project requirements grow. 

The result is that the company reduces the pressure to churn when customers are faced with large upfront fees. 

Improved forecasting

Usage-based billing platforms often provide tools for forecasting revenue based on historical usage patterns and projected growth. Access to these forecasts allows you to make informed business decisions and plan for future investments.

Example: A data analytics platform can analyze historical usage trends to predict future demand for its services. This allows them to scale their infrastructure accordingly and optimize pricing to ensure profitability even during periods of peak demand.

Note: When you discuss retention, this NRR vs. GRR primer clarifies definitions for your board and team.

FAQs

1. What does the ARPU acronym mean?

The ARPU acronym means “average revenue per user.” The ARPU metric shows how much revenue the average user or account generates in a period. SaaS teams use ARPU to evaluate pricing power, packaging fit, and adoption.

2. How do you calculate ARPU?

You calculate ARPU by dividing revenue for the period by active users in the same period. 

Formula: ARPU = Revenue in period ÷ Active users in period.

Match your time bases. Use monthly recurring revenue with monthly active users, or annual recurring revenue with annual active users.

3. Should ARPU include one-time fees, credits, or refunds?

ARPU should not include those extra fees. It’s only counting regular monthly payments from customers. 

Don't include:

• One-time setup fees
• Special service charges
• Credits given to customers
• Money refunded to customers

These extras can mess up your numbers and make it hard to compare different months. Just use the regular monthly payments divided by the number of active users that month. This gives you a clean, simple number you can track over time.

Let Orb's usage-based billing boost your ARPU metrics

We've already explored what ARPU is and how usage-based billing platforms can be instrumental in boosting it. Fortunately, there’s a platform that can make it happen: Orb.

Orb is the go-to billing platform for hybrid and usage-based pricing, designed to help engineering, product, and finance teams. We handle massive amounts of usage data, speed up product launches, and deliver detailed reporting.

Innovative companies like Perplexity and Vercel trust Orb to power their billing infrastructure. With Orb, they've been able to implement refined pricing strategies that align with their product offerings and drive notable revenue growth. Here's why teams use Orb to grow ARPU:

• Define billable metrics from raw usage: Orb ingests raw usage events so that you can define your own billable metrics. Use Orb SQL Editor or a visual editor to do this without engineering.
• Simulate changes before launch: Orb Simulations uses your historical data to preview revenue and usage outcomes before launch. Orb enables forecasting so that finance and product can make more informed decisions together.
• Accurate invoices at scale: Orb ingests and tracks every raw event at scale and with high accuracy. Get a full audit trail for every invoice.
• Pricing that keeps pace with product: With Orb RevGraph, usage data is decoupled from pricing logic, so invoices remain accurate and up-to-date even as you evolve pricing.
• Built for volume: Its scalable API is equipped to ingest vast amounts of event data.

Ready to experience the Orb advantage? Take a look at our flexible pricing options to find a plan that works for your specific needs.