The more revenue and profits you can generate as a startup, the more fuel you’ll have to drive business growth. Two metrics stand out when it comes to staying on top of revenue and profits. These metrics are the ARPU and ARPA. And they’re essential for keeping in touch with how much money you’re making during a specific timeframe.
What is ARPU & ARPA?
One of the profitability metrics you can track as a startup is the ARPU, short for average revenue per user. ARPU tells you how much sales, on average, you can get from a single customer over a period, like a month or a year.
You might’ve also come across the metric ARPA, which stands for average revenue per account. This KPI is practically the same as the ARPU. It measures the average revenue you generate for every active customer account in a given timeframe.
How to Calculate ARPU or ARPA
You calculate both metrics by dividing two variables. Simply divide your monthly recurring revenue (MRR) by the number of active customers/accounts your business has.
ARPU or ARPA = Total MRR / Total Active Users (Accounts)
Of course, you’ll have to tie this calculation to a specific timeframe. The typical period most companies use is monthly and annually.
What’s So Important About ARPU and ARPA?
Whether you’re a subscription-based business or not, knowing how much a customer spends on your company tells a lot of valuable insights.
- ARPU provides a clear view of your company’s financial health. Track it period-over-period, and see how well your business’s day-to-day activities fall into place.
- Tracking ARPU shows you the efficiency of your sales and marketing efforts. ARPU that increases over time tells you’re getting the most out of these investments.
- Keeping in touch with your ARPU lets you align your pricing according to the value of your product.
Monitoring your ARPU and ARPA over periods essentially allows you to improve them. The insights you get the help you develop strategies to boost revenue performance. In this post, we’ve put together eleven proven strategies for enhancing your ARPU/ARPA, taking your startup to the next level.
1. Use Upsell Techniques
One of the ways you can improve ARPU is by using upselling strategies. These strategies get your customers to opt for an upgrade, a premium version, or any other variation of a product that costs more but provides more value.
How It Works
- Say you’re using a SaaS e-commerce business model. There are bound to be many ways to add more value to your basic subscription. Many businesses employ tiered pricing, where customers get more perks when choosing a higher-priced plan.
- Assure customers that choosing an upgraded version is totally worth their buck. Freemium companies like Spotify, Freshbooks, and Kindle do these so well that their revenues thrive from successful upsells.
- Focus on your basic products that already sell well. See how you can provide them with upgrades, features, or brand-new experiences. Get these figured out, then position your upsell offers where customers can take action, like a pricing, check-out pages or through automated email nurture campaigns.
Why It Works
- Upselling, when done right, not only boosts ARPU. It also increases average order volume while promoting customer loyalty (or lifetime value). After all, product “upgrades” always aim to make your customer’s life much easier.
- 70-95% of SaaS revenue comes from upsells and renewals. If you provide enough value and make the upsell worth it for your customers, expect them to come back repeatedly. It’s no wonder why you keep letting Spotify renew your monthly premium subscription.
Examples in action
- Airtable uses automated email sequences once a user signs up. I got this email from them highlighting some awesome pro features.
- Another good example is from Dropbox, where they have a pop-up when you log into the app after a period of time, as well as a simple "upgrade" button to remind customers that they can unlock more value with upgrading.
- Slack also does a wonderful job at this with their in-app notifications, around the infamous 10,000 word limit. To see the rest or archive of messages, as well as more file storage, you need to visit the pricing plans.
2. Use Cross-Sell Techniques
Like upselling, you can increase ARPU using cross-selling techniques that provide more value. But unlike upsells, cross-sells aim to persuade customers to buy similar products rather than upgrades.
How It Works
- You can offer customers similar, complementary products to those they’re already buying. Say a customer just opted for a subscription. There’s no stopping you from providing additional services to make that subscription even better.
- These paid “add-ons” could be anything. They can be smaller but compatible products, premium support, or some form of product training.
- This strategy is perfect since many customers prefer customisations apart from your established pricing plans.
Why It Works
- Cross-selling amounts to 10-30% of general e-commerce revenue. These include product recommendations, bundles, and subscription “add-ons.” By offering additional or similar products or services, you can personalise customer experiences.
- This strategy works because of the added value it provides. Your B2B client might not even know they’ll need that additional premium support unless you suggest them. It alerts customers about the other things you offer that can satisfy their complementary needs.
Example of cross-selling in action
- A smart way is to highlight "locked" epic features for customers on a free trial period or for those who are paying for a lower-tier subscription is this one by Ahrefs.
- As a paying user who loves the product, I know the value of wanting this feature. Hence, this is a great way to increase the % of existing sticky users to pay for a higher tier.
3. Incorporate a Flexible Pricing Model
Consumers are becoming savvier about how they choose to spend on a product or service. While you can always put customers first by providing competitive prices, why not offer something flexible? Flexible pricing, when done right, can increase your startup revenue and profits.
How It Works
- Flexible pricing allows your business to adjust accordingly to customer demand or changing business landscapes. It may even give your customers negotiating power over your prices.
- Say that your SaaS startup already offers a wide range of solutions in varying price tiers. But some customers may need to use a combination of different features not found in your pricing plans. A flexible pricing option means they can get a tailored price quote.
- Another example of a flexible model is the sliding-scale pricing, where your products are available at different price points. A customer can avail of a price point based on their income level.
Why It Works
- This pricing model allows your company to provide services that cater to a broader range of needs. By widening options, you make your products more accessible, thus increasing your sales.
- Offering tailored pricing gives you better insights into the needs of your target customers. You can then align your products, features, strategies, and pricing based on those needs.
- Pricing strategies affect customer satisfaction. By providing flexibility, you give customers exactly what they need, increasing customer retention and ARPA.
- I really like this pricing slider by Chartmogul.
4. Consider Split-Test on Pricing Pages
There are pros and cons to split-testing pricing pages. According to a study by ProfitWell, A/B testing different price ranges could backfire in the long run. But it could provide a significant boost in startup revenues if you’re willing to take the risk. Still, the prices themselves aren’t the only elements you can split-test on a pricing page.
How It Works
- Split-testing allows you to determine the best prices that prospects are willing to pay for your products. If you’re eager to test different prices live, you can get valuable data on customer demand.
- You can split-test two almost-similar products within the same category. This way, you’re not putting out multiple prices for the same product. Ensure to track relevant data for both the control and the B copy.
- Apart from the prices themselves, you can test different page content. For example, see which way of presenting your price tiers garners more conversions. Would your potential prospects be attracted to a tabled layout? Or something where the tiers are self-contained?
Why It Works
- A/B testing is a great way to learn about your users. Are they attracted to a particular type of pricing page CTA? Most importantly, which prices are they willing and ready to pay?
- Getting this data puts you in a better position to determine which prices to go for. Should you raise your prices? Or maybe you could lower them a bit to improve conversions.
- Here are a couple of awesome layouts to get inspired by (on top of the great layout by Chartmogul above).
This is a nice design by Juno.
Another pricing page design I love is by Mojo for their pro yearly plan.
5. Bundle Products and Features
Product bundling is a time-tested pricing strategy for boosting sales and profits. Essentially, some products are just made for each other. You can see it in action in B2B, B2C, or any other model.
How It Works
- The concept behind product (or feature) bundling is simple. Take individual but similar products and offer them as a single package. The resulting package is set to a lower price than buying all products separately.
- Bundling allows you to sell more by attracting new customers looking to gain more by paying less. You see this strategy often in fast food and retail businesses.
- Even if you’re a SaaS company, a bundling strategy can still make sense. It’s actually practical for digital products and services. It persuades people/customers to opt for several features instead of just one.
Why It Works
- Product bundling increases your ARPU since it allows you to get several product purchases from a single customer. Often, your customers require more than one item to satisfy their needs.
- Besides increasing revenue, bundling also reduces your customer acquisition cost (CAC) and other overhead expenses. Discounted bundles are so attractive that they continue to withstand the test of time.
- One of the most famous companies that highlights the bundling of their products has to be Hubspot. If you've got bundles you can sell, Hubspot sets the standard in terms of presentation and communication in my eyes.
6. Gamify by Offering Rewards Based on User Actions
Want to keep your customers engaged in your business? Gamify their experience and offer rewards. Adding gamification elements makes it more fun for customers to use your products or services or spend time on your platform.
How It Works
- Turning an activity into a game can hook those using your mobile or web app. Gamification involves applying game elements, like point scoring, competition, and rewards to keep people engaged.
- Companies from various niches use gamification elements to keep users interested since it makes their apps more entertaining and provides a sense of user accomplishment. I love these fantastic examples.
- Consider adding a scoring system based on user actions in-app, and offer some sort of rewards. Rewards could be raffle entries, vouchers, or points that can redeem certain items in your store or particular features in your app.
Why It Works
- Gamification has a positive effect on user engagement. Making your platform fun to use will attract more of your target audience while retaining your existing users. It can make your app stand out from the competition.
- With increased reach and customer retention, you can implement techniques to get a boost in revenue and profits. The more entertaining you make your platform, the more motivated users are to spend time in it, and hopefully upgrade.
- This is an incredible use case by the team at Prodpad. Not only is it great learnings for startups looking to improve activation and onboarding, but it's great inspiration for using gamification to encourage users to use features that can lead to upgrading.
Pretty smart to have the prompts of the "points" sign for using certain features. Consider including this in-app to get users to try certain features for a certain period of time. Then, they will have to pay after a trial period.
By the way, they also have one of the best onboarding experiences I've seen where you can increase the amount of days you can get as part of the free trial, with ticking off certain user actions. Honestly, kudos to their marketing and product teams. It's worth signing up and checking out. It's also an awesome tool.
- A cool app I came across to help you incorporate gamification strategies is Hoversignal. Consider adding widget elements within the app, and promote further through automated emails, to encourage users to check out key features that are part of a higher-tiered plan.
7. Run Personalised Email Sequences for Lower-Tier Users
Using a tiered-pricing model sets you up for tons of opportunities for upselling. Lower tier prices are perfect entry points for customers to test your waters. As we all know, the higher the tier goes, the more value a customer gets. One way to get them to upgrade to a higher level is through personalised email.
How It Works
- Upgrade emails are tools you can use to convince your existing customer base to opt for a higher-tiered plan. To make it even more convincing, make sure to personalise your email. Use the correct details, like their name and their current subscription status.
- Personalised upgrade emails point out what your customers are missing out on by not upgrading to a higher tier. It also showcases what they’ll gain once they upgrade. You don’t have to do all of that in a single email. Persuade your customers through a series of tailored promotions.
- Optimise your upgrade emails by adding different marketing elements. You can provide social proof, discounts, and perks to convince your customers.
Why It Works
- Your lower revenue customers are already using your app’s paid version, which means they’re already experiencing value. All they might need is a little nudge to get the most out of your product. That’s when personalised emails come in.
- This is a nicely designed product upgrade email from Restream.
- Loom does a good job with their email nudges when you get close to capacity.
8. Run Personalised Email Sequences for Free Users
If a free user finds value in your products, you’re going to have to convert them to a paid user at some point. For that, you can also leverage personalised upgrade emails.
How It Works
- Offering a free version of your product lowers the barrier for users to sign up. Once they sign up, you’ll have them in your funnel, walking them carefully through to conversion.
- Personalised email sequences can fast-track your customer’s journey towards your paid version. You get to convince a user that’s already finding value in a free version to go for the paid. Make sure to create compelling pitches and CTAs in your series of emails.
- You might also want to consider the timing when sending out your emails. Consider time and behaviour triggers, like when a free trial is about to expire. Or when a user has spent a certain amount of time in the free version.
Why It Works
- Compelling upgrade emails can convince those who are on the fence to upgrade. If they spend a lot of time using your service for free, they’re bound to find a lot of benefits from the paid version.
- You can increase your conversions by making it worth your customer’s while even more. Sprinkle your emails with special offers, like a three month-discount or a free add-on, to secure that upgrade.
- One of my favourite products who does a brilliant job with their emails is Grammarly.
- You can even see in this email below it includes my name, a great offer price, CTA with "redeem offer", as well as stating the differences between 'free' and 'premium'.
- Mailerlite also does a great job with their emails for free-tier users to highlight premium features.
9. Reduce User Churn Through Incentives
According to Recurly, the average annual churn rate across SaaS companies is 4.79%. There’s no possible way to completely avoid churn, whether in tech or ecommerce. However, you can reduce your churn rate to a very small percentage. One tried-and-true tactic is using incentives.
How It Works
- There are many ways to reduce customer churn, but offering incentives stands out in a big way. Why? It’s easier to win back customers when you provide them with measurable and clear value.
- So instead of just using repetitively automated “we miss you” emails to those who stopped using your products, make it worth their while to come back. Offer them attractive rewards and discounts.
- Incentives could be as simple as offering an anniversary present to make them feel valued. You could also offer a time-sensitive discount, like a 3-month subscription for 50% less if the customer avails of the offer soon.
Why It Works
- Quality incentives are an attractive invitation for inactive customers to engage once again in your business. It revives your relationships, turning quiet churns back into active customers.
- Existing users bring in the biggest chunk of revenue for subscription-based companies. Reducing churns through incentives is a surefire way to maintain an exceptional ARPU.
What's the best way to execute incentives to reduce churn and reduce account downgrades?
There are three primary tactics you can do that can really help.
- Have a great cancellation flow.
- Offer people the ability to pause subscriptions. All major players like Chargebee, Stripe and Fastspring should have this option for you to incorporate.
- Run promotions offers for those who are less active.
With cancellation, here's what Zapier does when people want to downgrade. They provide the option to downgrade to their free-tier, rather than get the user to cancel all together.
A good pause subscription example that Recurly highlights is from Hulu.
10. Run Reactivation Campaigns To Win Back Customers
Nobody wants to say goodbye to a customer, but that doesn’t mean you can’t convince them anymore to come back. Companies use reactivation campaigns to encourage those who’ve lost interest to re-engage once more.
How It Works
- Reactivation campaigns involve a well-planned series of marketing emails to reignite the spark your customers had when they first used your product.
- Before you send your first in a series of promotions and follow-ups, understand the reason for the loss of your customer’s interest.
- Knowing the reason for the churn is key to an excellent strategy. It will determine the type of content you’ll create for your emails. Will you need to get visitors back over to your blog? Should you show off some new sweet features? Will an attractive incentive work?
Why It Works
- A reactivation campaign is a reliable technique for winning back your customers. When done right (maybe paired with a special offer), you not only just win them back, you also make them feel appreciated, strengthening your relationships. Which means they will less likely churn in the future.
- Reactivation campaigns provide many insights into why people lose interest in your service. You gain data on the most prevalent reasons, whether it’s competitors or some faulty service features. In any case, it allows you to improve your product.
- This is one of the best reactivation campaigns I've seen by ActiveCampaign.
- You can see they've incorporated a product feature update, and a CTA to "lock in your price" for 2 years if I decide to come back. Really smart reactivation in my opinion, that's more than just a discount code. Relevant and highlighting great value.
11. Reward top revenue-generating customers and accounts with special offers, new feature releases, events & more
This strategy is a bit more skewed towards retention and increasing CLTV, but does play a role when it comes to nurturing customers to spend more over time.
Make your customers feel loved. I’m sure you already do this, but the more value you can provide in addition to the value you provide with your product offering or services, helps sustain that trust and credibility affiliation with your brand.
How It Works
- Share special offers for new product offerings or features that can be applied for them. Make it more ‘exclusive’ (at first anyway), so they feel they’re getting special treatment overs. Whether this is entirely accurate is up to you.
- Offer them additional “credits” or certain perks. For example, apps that have a credit-based system can offer extra credits to those who perform certain actions, or perhaps are paying the largest-tiered plan.
- Run invite-only events with other major high ARPU customers and accounts you have. Everyone loves canapes and drinks.
Why it works
- Rewarding top accounts with exclusive offers or feature releases helps them feel more connected with your brand. It helps them feel ‘special’ and ensures that they feel valued.
- Rewarding customers with some extra perks, such as credits or extra ‘usage’, makes them feel they are getting more value than what they’re currently paying for. This also reduces the chances of potential churn, as well as potentially upgrading to other plans.
- Events are awesome and are a popular strategy used by many SaaS companies. Running invite-only events with your main high-tier accounts is great for numerous reasons. Firstly, meeting them in person on multiple occasions helps remind them why you’re the authority in the space. Second, it helps them network with other like-minded folk and create relationships with other companies they meet. They will certainly remember your product and brand if they were to meet another company and set up a potential partnership. Thirdly, you build a trusting relationship with them. They will feel more comfortable to give honest feedback around your product/services, which in turn helps retain them longer.
- Webflow does a good job with their quarterly updates for their existing user base, which includes special webinars.
In summary, if you're a SaaS business or have a subscription business model, keep these things in mind;
- If you have a decent level of MRR/ARR, you should measure MoM, or YoY. If you're relatively early-stage, it's still good to check quarterly. It's good to show off to investors that you know, as well as share the applicable strategies to help increase.
- Implementing some of these strategies I've talked about aren't too difficult, nor costly. There are definitely some quick wins here worth testing.
- With going about testing a particular strategy/tactic, run the test for a decent period of time, such as 3 months. Compare growth % over the two periods. Regardless of whether or not you have high volume of turnover.
- Don't overcomplicate or over obsess with this metric, nor worry too much around wondering how high ARPU is for other competitors in your industry. If you're growth rate MoM or YoY is increasing, that's a good thing. If it's decreasing or static, then it needs to become more of a focus.