A Deep Dive on Average Revenue Per User (ARPU)

👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.

This strange statistic highlights the inherent flaw of averages: they often gloss over crucial context. The same issue occurs in the world of SaaS metrics, particularly with Average Revenue Per User (ARPU), a number that can seem useful at first glance but often provides a misleading view of a company’s financial health.

The metric "ARPU" originated in the telecom industry in the early 2000’s. Companies needed a way to measure the average revenue generated by each individual subscriber, particularly during the early days of mobile phone subscriptions when companies were heavily reliant on user fees. It became a key indicator of the value each customer brought to the business, allowing them to compare performance across different subscriber groups and market segments. The first time I heard the metric I was a valuation analyst at a PE shop, responsible for monitoring three telecom companies - one in Brazil, one in Ukraine, and one in India. Change in ARPU was the front page metric we reported on each quarter. Full stop.

As our lives increasingly moved online, and we turned everything under the sun into a subscription (including your local car wash), the concept of ARPU migrated to other industries like online gaming, streaming services, and Software-as-a-Service (SaaS) companies, allowing them to measure the average revenue generated from each active user on their platforms. 

Every SaaS company I know tracks ARPU almost religiously.

But I find this trend misguided.

In the words of my friend and data scientist Olga Berezovsky:

Let's dive into five critical considerations for ARPU before you average yourself out of a job.