What does ARPU tell you about your SaaS business?
As a standalone metric, ARPU can be misleading. It can rise - a seemingly positive indicator - even if you are losing customers and overall revenue is falling. To see the full picture, you need to look at ARPU alongside other SaaS metrics, notably customer and revenue numbers in real terms.
ARPU matters more to some SaaS businesses than others. For example, a startup using discounting to attract customers may be OK with a falling ARPU if it’s as a result of new signups (i.e. more customers, each paying less). But at some point, they will want to rebalance from subscriber growth to revenue growth. Here, ARPU becomes more important, and if they aren’t able to grow it (or at least keep it stable) the business will not be sustainable.
ARPU for different segments of your customer base gives you feedback on how current processes are working and helps you make decisions for the future of your company. Understanding ARPU will tell you about:
Growth of your MRR and LTV
In the short term, ARPU directly affects MRR. The more revenue individual customers contribute each month, the more monthly revenue intake for your company. ARPU also affects the long-term growth of your customers' lifetime values. The revenue a single customer contributes each month sums over their entire lifetime with the company to add up to their lifetime value—so increasing ARPU increases LTV.
The financial viability of your business
If you have low ARPU, you need a lot of customers to reach MRR goals each month. If you have high ARPU, you don't need as many customers to reach goals and grow quickly. Low ARPU in a small market might be a warning sign that your company is not set up for long-term success, while high ARPU in a large market means excellent opportunities for revenue growth.
Price alignment and product validation
if your business keeps attracting new subscribers and revenue is growing, but ARPU is stable, it may point to your product being underpriced. Low ARPU might be a sign that you're not adequately extracting value from certain buyer personas for the service that you're providing to them. For example, enterprise clients are likely seeking a lot of value from your product, which you should monetize by pricing according to the value they're receiving.
The efficiency of your sales and marketing team
ARPU should be increasing over time as sales pitches improve and value propositions get clearer and more targeted. Increasing ARPU means that you're onboarding more of the right customers and selling them on the value they're interested in. This helps you create a more efficient sales and marketing system.
Segmented ARPU can also give you concrete information about popular plans and trends in cross-selling and up-selling. Imagine you offer 4 plans: a $15/month plan, a $45/month plan, a $75/month plan, and a $150/month enterprise plan. In calculating the ARPU for each group of customers on each plan and comparing the number of customers at each ARPU level, you can see which plan is most popular.
Your $45/month plan is your most popular plan, with 500 customers paying $45 in ARPU each month. You can look at the value that's included in that plan to understand what makes this plan popular with customers.
This graph also shows that while 300 customers on your $75 plan are indeed paying $75 each month, 75 customers on the $75 plan are actually paying $90 because they were cross-sold an additional feature. This would help you conclude that you can add another tier in between your $75 tier and your $150 tier to better monetize these mid- to upper-market customers.