Thrive Commerce | From the Blog
Everything You Need to Know About Revenue Per User
When running an eCommerce site, many merchants focus on driving traffic to increase sales and revenue growth. We all know that it’s a bit of a numbers game — more users equal more revenue — so if you can increase those numbers, you undoubtedly have a greater pool of buyers. But what about maximizing the revenue you get from each of those users you’re investing so heavily in to get to your site?
While businesses understand the importance of website optimization to attract more visitors, many are stumped when it comes to optimizing their current users’ potential. Understanding your users’ revenue potential is critical to assessing your success and spotting opportunities for improvement. If you’re increasing users on the site, surely you also want to increase the potential purchasing value of each of those customers, both new and existing.
To that end, it’s time to get familiar with your average revenue per user metric.
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Let's get familiar with average revenue per user
Average revenue per user (ARPU) Defined
ARPU stands for average revenue per user. In some organizations, it is called ARPC, for average revenue per customer, but both virtually have the same definition.
As the name suggests, average revenue per user is a metric that eCommerce merchants(and anyone selling online) use to identify the average customer spend, based on historical figures.
Identifying your average revenue per user is simple. You can calculate for the month, year, quarter, or whatever timeframe you want by taking your revenue for that period and dividing it by the number of unique users you had on your website for the same time period.
For example, let’s say you had 10,000 users last month, and your total revenue was $300,000. Your ARPU calculation would then be: $300,000/10,000 = $30 is the average revenue you make per user.
ARPU is also a factor of average order value (AOV), so the higher your price points are or the more each shopper spends during their visits, the higher your ARPU will be.
Like all metrics, it’s an indicator that can help build a bigger picture of how your business is doing. If your ARPU is low, it’s an indication that you’re not effectively engaging your users once they are on your site. If it’s a higher ARPU, you can investigate what may be leading to these results so that you can continue to perform at a high level.
Knowing your ARPU can also help you determine how profitable you are. By measuring your ARPU against your customer acquisition costs (CAC), you can figure out if your CAC is “worth it.”
For instance, if it costs you $50 to acquire a new customer, and you have an ARPU of $100, then you know that your CAC efforts are profitable.
ARPU vs. LTV vs. MRR metrics
There are many marketing metrics to keep track of, and understandably, some of them can get confused with others. In particular, it’s common that some people confuse average revenue per user with monthly recurring revenue (MRR) and customer lifetime value (LTV).
While they are related, they are all quite different. Here’s a quick look at all of them and how they differ:
Lifetime value measures how profitable each customer is across the duration of their relationship with your business. While it is used in eCommerce, LTV is also applicable to subscription services that have customers sign up for monthly/annual access to services. This metric calculates the lifetime value, including variable costs like support, refunds, and transaction fees. LTV is about projections for long-term customers, while ARPU measures your business’s overall health on an ongoing basis.
Similarly to customer lifetime value, monthly recurring revenue is suitable for SaaS companies or those with subscription models that are more definitively able to predict their monthly recurring revenue. As the name suggests, MRR measures your customer retention to indicate the monthly recurring revenue that you can expect from customers and active users.
What’s the average revenue per user benchmark for eCommerce?
Now that we understand the difference between our metrics, it’s important to know what the ARPU benchmarks are in the eCommerce space to ensure your business is aiming for the right level.
Littledata, an analytics platform for eCommerce, surveyed 1,930 stores in May 2020 and found that the average revenue per user was $100. According to the site, an ARPU north of $252 puts you in the top 20% of stores, and an ARPU of $476 would put you in the top 10%. Meanwhile, if your ARPU is less than $50 then you’d be at the bottom 20%of stores
While it’s interesting to look at general ARPU data from other stores, we need to remember that a “good” ARPU is relative. Whether or not your store is doing well in terms of average user revenue depends on several factors including your price point and the number of customers you have.
For instance, if you sell a $15 product, an ARPU of $50 is amazing because it means that shoppers are spending way more than what your items typically cost. That same ARPU of $50 would be considered mediocre if you’re a retailer that sells $50+ products, because it could mean that you aren’t maximizing the value of each customer.
The size of your customer base also matters a great deal when determining if you have a great ARPU. If your ARPU per month is $50, but you only have 100 customers, then your monthly revenue $5,000. But if you have an ARPU of $50 and have 1,000 customers, that gives you a monthly revenue of $50,000.
The bottom line is it’s difficult to benchmark the average revenue per user without proper context. ARPU shouldn’t be looked at in isolation, and if you want to see how your ARPU compares to others, make sure you’re looking at merchants that are in the same industry and who sell similar products to yours.
How to improve your ARPU metric
There are plenty of avenues to explore to improve your ARPU figure. Check out the following.
Focus on users that convert
Customer acquisition cost (CAC) is one of the biggest expenditures for online merchants. If you’re investing in marketing to attract customers, you want to make sure you’re getting people who have the highest probability of purchasing from your store.
While high new user numbers can be validating, it’s critical to look at these numbers alongside your ARPU. If your new users aren’t converting, you’re not getting value from your acquisition efforts.
Look into your acquisition channels and campaigns. Identify the high-value users on your site and explore where they come from. Try to adopt a more targeted approach, focusing on buyer personas that you know buy your products.
Never miss a chance to upsell or cross-sell
Don’t miss out on opportunities to sell more to users who are already on your website. Look at your site navigation and checkout experience and find opportunities to upsell, cross-sell, or offer attractive promotions.
Sgt Grit Marine Specialties (Grunt.com) does this really well. The site uses Thrive’s Smart Bar, which displays data-driven code-based and non-code-based offers. These offers are designed to drive conversions and increase LTV by requiring shoppers to provide their contact details to qualify for the incentive.
“Thrive’s Smart Bar provided an immediate injection of personalized content onto the site, which translated into more engaged shoppers,” says Tim Mariani, President/CEO at NLC Products, the company that owns Grunt.com
“The Thrive team made smart, data driven recommendations of what promotions to test and optimize with, and we were able to accomplish our goal of increasing sitewide revenue per user by 6.6% and 10.4% for Creative Irish Gifts and Grunt.com respectively.”
Carefully manage discounts and promotions
Another common reason for low ARPU metrics is the mismanagement of discounts and promotions. When merchants don’t monitor discounts and promotions carefully, they can risk giving away too much, putting their bottom line in an unhealthy position.
Promos and discounts are fantastic tools that help you appeal to customers, compete with other stores, and generate extra revenue, but there has to be a discount “sweet spot.” The goal is to implement an offer that’s generous enough to generate sales, but not too much that it diminishes your profitability
To that end, keep testing different tactics and carefully monitor the performance of your promotions. What types of offers convert best? Which promotions are driving sales and profits? What types of promotions work on different types of pages on your eCommerce site? Pay attention to your promotions data and make sure you’re always running high-converting and profitable offers.
Thrive’s end-to-end Promotions Suite offers insights and analytics that can inform your sales and marketing offerings.
Our dashboard and professional services enable you to:
Review the performances of all KPIs
See performance detail down to the individual promotion
Optimize promotions strategy, effectiveness and best practices
Use your customer data
As an online business, you have the ability to capture valuable data with every click and movement of your users. These insights are gold when collected and used correctly. With your customer data, you can create segments of users and design special offers to appeal to each of those segments.
Simply identifying which of your customers are more likely to respond to particular product upsells or promotions is a super-powered insight that can help you significantly increase your ARPU by targeting users on-site with deals that match their interests. Nordstrom, for example, pays close attention to the products that each shopper buys. Did you buy designer items? You’ll likely get alerts and offers for those products. Bought something from the beauty and cosmetics department? Nordstrom may send you and similar subscribers offers for makeup and skincare products.
One of the keys to running data-backed offers is to ensure that you’re collecting the right information. An effective tactic is to “gate” your offers by requiring shoppers to enter certain details to access an online and/or in-store offer code.
Thrive can help you do this using our Data Require Promotions (DRP).
For example, if you know that having an email address and zip code is valuable to your marketing efforts, you can use a DRP where you’re giving a promotion away in order to get important shopper data that will pay you back in the long run.
Using promotions to enhance CRM is a very smart move, but requires knowing what pieces of shopper data are important and doing something with that data once you get it. When you have the right shopper information, you can use it to launch and fine-tune your digital promotions strategy and ultimately increase your AOV and ARPU.
Run A/B tests to see which factors influence ARPU Constant testing and optimization are important. If you’re looking to improve your average revenue per customer, run different experiments on your website to see which initiatives work best. You could test everything from offer types, placements, copy, etc., then take note of the results.
Conclusion
Your ARPU may be one metric in the overall marketing mix, but it’s a powerfully insightful one. With just a simple equation, you can learn how you measure up against your competitors, whether your pricing model benefits your business, and whether your customers are really engaging with you as they should be.
Tracking your ARPU can help you optimize your efforts, improve your customer experience, and boost your sales — results that every eCommerce merchant can certainly do with some more of.