As a business owner, you’re always looking for ways to increase revenue and grow your business. One way to do this is by calculating your average revenue. This will give you an idea of how much money you can expect to bring in on a monthly or yearly basis. But how do you calculate average revenue?
There are a few different ways that you can do this, but the most common method is to take the total revenue for a specific period and divide it by the number of units sold during that same period.
How Do You Calculate Average Revenue?
Before we discuss how you calculate average revenue, let us first define what Average Revenue Per User (ARPU) is.
At its most basic, ARPU is your total revenue divided by the number of active users you had during that same period.
Now, what should you include when calculating revenue?
- First-time buyers
- Subscribers who pay an upfront fee
- Recurring revenue such as monthly payments
- Upsells
- Cross-sells
This works for SaaS companies that make money through subscription packages and pay-per-view and streaming services.
Many media companies, however, generate the majority of their revenue from advertising. They make money from revenue-sharing deals or premium services.
All of these factors would impact their ARPU.
What does ARPU stand for?
ARPU is short for average revenue per user. This term is used to measure the overall contribution that users make to an organization’s total revenue.
Comparing your ARPU to competitors can help you see how well your business is doing.
Tracking your ARPU is a great way to measure your annual business growth. For example, SaaS businesses can monitor the monetary worth of each new customer with ARPU.
They can figure out which of their paid subscriptions is most successful in generating revenues.
In today’s blog post, we will explain exactly what the ARPU is, how to calculate the metric, and how to use that information to grow your business.
ARPU is a fairly simple, yet powerful, business metric. It’s commonly used for analyzing subscription services, but can be applied to any business.
What is Marginal Revenue?
As the holidays approach, you prepare to launch your Etsy shop and market your handmade goods.
Inspired by your desire to gift your buddies with fancy, artisanal, dog sweaters this holiday season, you wonder, “How should I price each of these cuties to maximize my revenue?”.
Your instinct might be to set your price higher, but you know that offering your sweater at a lower price will probably get you more buyers.
Let’s say that you knit 10 pet sweaters and sold five for $50 each. Your total sales revenue was $250.
This year, you knit 10 more to increase your revenue.
If you sell 15 sweaters at the same price as you did the previous year, you’ll only end up selling 5 of them. This will leave you 10 more (of the same) stock, which will take up more space in your warehouse – and not increase your revenue.
If you lower your price to $45 and sold one more sweater than last year, would you make an extra $45 in revenue?
Nope.
By lowering your price, you would lose $5 on each of the 5 other sweaters. By selling 6 sweaters at $45, you would earn $270.
By simply making one extra sale, you would generate $20 more than you did the previous year. This is called marginal revenue.
Average Revenue Calculator
This equation is used to calculate the average revenue of a product.
AR = TR / Q
Let’s break down the three elements:
- AR: average dollar revenue per unit
- TR: total dollar revenue
- Q: total quantity of units sold
After looking at the formula more closely, we can simplify that the total revenue is equal to the price of each unit multiplied by the number of units of that product. After doing this, we find that the average revenue per unit is equal to the price per unit.
If the price for a product stays the same, then average revenues will be equal to the price of that product. This is why calculating the average price can be useful for products that have variable prices.
Why is ARPU Important?
Calculating your ARPU can help you better understand your profit margins, make better marketing and pricing decisions and track your sales and marketing efforts.
Manage SKUs More Accurately
When used in conjunction with your SKU tracking system, ARPU can help you better manage your stocks.
This helps you monitor which SKUs are selling hot, profitable, moving slow, and draining your funds.
You can then apply these insights to make informed decisions about which products to stock and which to discontinue.
An efficient SKU management process improves your revenue because the sooner you stop selling unprofitable products, the more money you can save on purchasing and warehousing.
Optimize Your Pricing Strategy
Calculating your ARPU can help your business determine if you’re charging the right amount for your product or service. This way you can decide if you should change or update your pricing model to increase profitability.
You may want to adjust your product bundles to raise your ARPU. You may also consider increasing your product markup to an acceptable level.
Every growing startup needs to continually adjust its pricing strategies.
And having an idea of how much you make per user can help you establish a baseline.
According to research from ProfitWell, companies that adjust their price every six months have nearly double the ARPU gain as companies that update their prices yearly.
It’s important to plan a pricing structure that balances profitability with customer acceptance. Your customers won’t want to pay more than necessary, but you don’t want to undercharge and lose business to competitors.
Find a pricing plan that is profitable for you, but also one that your consumers will find fair.
It’s important to stay ahead of the competition by monitoring their pricing strategies. This way, you can make sure you are offering your customers the best possible value.
Improve Your Inventory Management
Tracking your ARPU is also a crucial step in the inventory management process.
It helps you determine if you’re keeping enough stock on hand because if you have excess, your ARPUs will likely drop as you’ll be paying more on purchasing and warehousing.
Having too many products on hand means you run the risk of having a lot of stock that ends up sitting on the shelf.
This reduces your ARPU because you’re spending money on items that are not selling.
However, if you’re constantly tracking your ARPU, it’s easy to identify which products are performing the best and which products need to be dropped.
This enables you to set the minimum quantity of each unit that can be ordered, which is important for keeping your stock levels in check across all your warehouses and fulfillment centers.
This helps avoid over-ordering slow-moving items and under-ordering your bestsellers.
Identify Cost Reduction Opportunities
By calculating your ARPU, you can figure out if you’re overspending on procurement and holding inventory. This can help you lower your cost, leading to higher profits.
Now is a good time to identify which costs you can reduce to lower your ARPUs such as cost per unit and cost of goods sold.
Holding high inventories can ultimately increase your cost of sales, which drives up the cost-per-unit. And if you see that it’s affecting your ARPU, then you should look for ways to reduce it.
This could mean more accurate forecasts and inventory management to ensure that you don’t over-stock your warehouse or run out of stock.
Identify Opportunities to Increase Revenue
One of the benefits of measuring ARPU is to identify more opportunities to grow your revenue.
This key performance indicator (KPI) allows you to understand which of your offerings generate the most income and which don’t.
What are some ways you can optimize your offering to increase revenue?
For example, if you sell a subscription product with high ARPU, then you’ll want to put more emphasis on it, stock up on it, and try to get more subscribers for it.
You could also bundle your most popular and highest-profit items with slower-moving items to increase sales and prevent excess inventory.
Project Future Revenue Growth
Accurately projecting future revenues is essential for any business. ARPU is a major factor in helping you forecast future growth.
To do this, multiply your ARPU with your projected acquisition and retention numbers.
By forecasting your revenues, you can better understand your cash flow and plan for your future. This can help you determine whether you need to access more cash or whether you need more credit for your operations.
Forecasting your revenues accurately will allow you to better predict your future sales, which is crucial for planning production and purchasing.
Conclusion
How do you calculate average revenue? The most common method is to take the total revenue and divide it by the number of units sold in a certain period. Once you have calculated your average revenue, you can use this information to set goals and target areas for growth. By knowing how much money your business brings in on a monthly or yearly basis, you can make informed decisions about where to invest your resources to grow your company.
