To grow a business one has to both talk the talk and walk the walk. To begin with, you have to be great at making promises. Compelling promises — made to the right audiences at the right times — will get you paying customers. That’s the talking part.
But to walk the walk you have to excel at fulfilling promises. And if there’s one metric that says more than any other about your ability to retain and continually provide more value to customers, while reaping adequate rewards for the effort — that metric is ARPU. Let’s look at seven ways to increase it.
Refresher: ARPU stands for Average Revenue Per User. It’s calculated by dividing total revenue by the number of active users in a given time frame. Usually a month. By “active user” we ordinarily mean a paying customer. Although, for some SaaS products with a freemium model, it makes sense to distinguish between ARPU and ARPPU (average revenue per PAYING customer).
Trying to increase ARPU will force you to think about your SaaS business from its foundation — does it have enough growth potential inherently?
Best SaaS providers are structured as virtuous cycles. When entry-level customers achieve success, their requirements grow. Providers have higher priced tiers set in place to meet those requirements. Customers are then naturally drawn towards them — generating more revenue in the process.
One obvious example is Mailchimp. If users are succeeding with email marketing, their lists will grow larger, requiring them to upgrade their accounts.
What’s the success scenario of using your SaaS product? Does it breed demand for more features, functions, or resources that are already offered with higher pricing plans? If not, go back to the drawing board.
If it is, yet your ARPU is not increasing as you’d hope, perhaps your account tiers are not revolving around the right value metrics.
You need to determine which specific features, functions, or resources are most relevant to customers and base pricing tiers on them. These are your value metrics.
The focus should be on choosing metrics that are:
Again, let’s look at Mailchimp. Their pricing plans are tied to number of subscribers. That’s relevant to the customer because a larger list can be expected to generate more revenue.
One could say that there’s perhaps an even stronger correlation between total number of emails sent and expected revenue. So why not charge for that? The answer is that it’s less predictable — campaign schedules are not evenly distributed throughout the year.
Now, if your SaaS already makes your customers succeed, and if they tend to move through successive pricing tiers because of it, you have a pretty healthy business. Make sure to value it accordingly.
If you did the work of optimizing your product, the increased value should be reflected in the price.
That said, price increases can cause friction with existing customers. This can be circumvented in several ways:
After optimizing the product, value metrics and prices, your foundation is set. The wheels are already spinning. Now you can focus on identifying when and where to push to make them spin even faster.
Identify key touch points where you can try to up-sell (invite customers to upgrade accounts) or cross-sell (offer additional relevant services if you have them).
For example, Evernote will send emails when users are nearing the limits of storage space allocated for their account, prompting them to upgrade.
Limited trial runs that let users experience higher-tier accounts can be also used as an incentive.
The game here is to analyze past user behavior, determine the key turning points where users are most likely to benefit from an upgrade, and make the pitch.
At this point you can think about offering bells and whistles to extract ounces of added value to offer users. These are nice-to-haves that aren’t part of the core product.
You can branch out and explore co-branding and joint venture opportunities that make sense for your user base. One such example is Evernote partnering with Moleskine to offer notebooks with smart stickers that transform into meta-tags when scanned into Evernote.
Another approach is to organize paid trainings, get-togethers or whole conferences for your user base.
When going through this entire process your organization will inevitably acquire enough experience to deeply understand the market. This puts you in a position to deliver outstanding value.
With the rest of the business optimized, you can afford to focus on the top 1% of clients to attempt to sell premium priced services with dedicated staff.
This includes premium support, customer success management and other forms of person-to-person engagement.
Likewise, by now you will have enough Business Intelligence to use predictive analytics to be able to narrow down customer segments that are least likely to progress to high-paying tiers.
The goal is to be able to allocate more resources towards cross-selling and up-selling to high-growth potential customers, which will have a positive impact on ARPU.
Thinking about Average Revenue Per User will help sharpen your focus on continually increasing the value delivered to customers — and maximizing the returns. In the long run, this will have a strong impact on expected Customer Lifetime Value, increasing the overall valuation of your company. But it’s important not to focus on a single metric to the detriment of common sense: tackle the fundamental big questions first, and move on to exploring more granular tactics and opportunities later.
Copywriter with background in PR. Ran digital marketing campaigns that launched award-winning products (through crowd-funding) as well as increased sales of established products. Experienced in leading small teams. Proficient in technical writing and daily blogging.
Apr 5. 2017
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