Business Definition of “RPU”
The acronym “RPU” stands for “Revenue Per User”. RPU or Revenue Per User refers to the amount of revenue generated by each individual user of your product, site, or app. The formula for RPU is: RPU = total customers/total revenue.
What is the formula for RPU?
Formula: RPU = total customers/total revenue.
The formula used to calculate RPU is RPU = total customers/total revenue. To arrive at this calculation, take the total amount of business or service revenue (before expenses) and divide it by the number of applicable users.
Arriving at RPU that is higher than the subscription cost indicates that consumers are spending additional money through the provided service, such as paying for supplemental content or service expansions.
What Does “RPU” Mean?
Revenue Per User (RPU), sometimes also referred to as Revenue Per Unit, is a measure used to understand the revenue generating ability of a program or service at the individual customer level.
Though Revenue Per User can be a useful measure for many businesses, RPU is an increasingly important revenue metric for subscription-based companies, including Software as a Service companies. The benefit of this metric is that it assists with understanding pricing structure and growth patterns in the consumer base.
RPU can be used as a key performance indicator for any business that utilizes a subscription model, from fitness studios to social media companies. However, it was first made common in the telecommunications industry.
Some of the first businesses that depended on Revenue Per User were telephone companies, especially cell phone service providers and internet service providers. Continual competition for consumers was a hallmark of the cellphone and early internet industries, with numerous providers competing for market share among a growing consumer base. In this context, understanding consumer spending patterns was fundamental for businesses success.
RPU is now a popular key performance indicator for Software as a Service businesses, such as Netflix and Zoom. In a rapidly growing industry, characterized by competition, demand for innovation and high customer churn, knowing the potential revenue generated by each customer can provide a framework for long-term financial planning, as well as an understanding of the appropriateness of the service’s pricing structure.
RPU is usually not time-framed, meaning that it refers to generalized lifetime value of each user. It can also be time-framed however, for example, “RPU per month.”
RPU is down this month. What can we do to improve CRO?
What types of businesses use the term “RPU”?
Revenue Per User is a phrase commonly found in business and finance discussions, especially those dedicated to profit-and-loss and financial projections. Business students, business professionals, economists, financial consultants, and entrepreneurs should be familiar with this term and its supporting calculation.
RPU is most utilized in the Software as a Service and telecommunications industries. However, it may even have implications in the not-for-profit sector, as a key performance indicator for organizations that sell, or seek donations for, service subscriptions and add-on content.
With vertical scalability and customer convenience playing a more central role in business planning, RPU is likely to become an increasingly relevant measure of business health in the immediate future.
Understanding revenue, and the value obtained from unique customers, has been a business consideration since the dawn of commerce. However, with time, our understanding of business economics has grown to encompass numerous variables that measure overall businesses health from unique angles. These are often referred to as key performance indicators.
Using RPU as a key performance indicator helps businesses, especially those relying upon subscriptions for their revenue, to understand, track, and predict their growth. For example, service and software companies which provide monthly subscription levels can use RPU to monitor the monetary expenditures of new and ongoing users. This can empower a business to adjust their pricing structure, add new programs that cater to user tastes, and remove underperforming content which does not generate revenue.
This metric is becoming increasingly prevalent in the Software as a Service industry, in which high demand, high churn and an emphasis on speed-of-light innovations, places most businesses in an untenable position. With this in mind, the ability of a SaaS to adapt, continually offering content that consumers want to buy, while attracting new users and maintaining a flexible, affordable pricing structure, is central to its survival.
Depending on the structure of the business and its subscription model, measuring Revenue Per User over different spans of time may make sense. For instance, a free online game looking to capitalize on a new trend may wish to measure Revenue Per User on a weekly, if not daily, basis. Conversely, a travel company or an online tax assistance business, may be more likely to see user revenue on a quarterly, or even annual, basis. However, the most common time frame for revenue measurement is monthly, and most businesses that sell subscriptions tend to do so on a monthly basis. In this case, to calculate RPU, a business would establish the total revenue for the month and divide by the total active customers in that month.
While a “good” RPU can vary significantly between companies, a few considerations can help with using this statistic effectively. For example, a company with high-priced subscriptions, and moderate expenses, like a luxury clothing rental company, may be able to thrive with fewer users. But a business that generates a small amount of Revenue Per User, such a free online game that promotes in-app purchases, will need to attract and sustain an exceedingly high volume of users. Furthermore, if Revenue Per User is consistently higher than the cost of the subscription package, it may indicate that an additional, higher-priced, package option could be offered to capture additional revenue, while still offering add-on features.
How is RPU calculated for a website?
RPU can be deceptively challenging to calculate for websites and web apps because, particularly with websites, you may have a large volume of users who are not monetized. For example, an affiliate marketing website might have a small number of pages that rank for monetized terms and a larger volume of pages designed to rank for non-monetized terms that have some sort of marketing value, such as the creation of backlinks to the website.
In this case, you might want to segment traffic by purpose and deliver and overall RPU in reporting, as well as a traffic stream-specific RPU figure.
What is the formula for RPU of a website?
The formula for RPU or Revenue Per User is: Revenue divided by Number of users. For example, $100 top-level revenue divided by 5 users equals $20 RPU.
RPU vs ARPU: what’s the difference?
Revenue Per User is a straight-forward depiction of the amount of revenue generated by a set of users or subscribers at the individual level. It is an especially useful statistic for understanding the financial health of subscription-based businesses, as well as those that lure customers with low cost / no cost services in the hope of “hooking” them with additional content purchases.
The average Revenue Per User (ARPU) is an aggregate number, which takes the statistical average of revenue generated across all user categories. While it is often ARPU that is analyzed and discussed when considering end-user revenue contribution to a business, it can be a misleading statistic for some companies.
Companies and Software as a Service providers that offer numerous subscription opportunities at a range of price points may risk blurring the clarity of the financial understanding by incorporating all price points into one “average“ user dollar amount. This is because averages can become misrepresentative of the whole when outliers are incorporated. For instance, a small number of very high paying customers can create the assumption that the typical user is spending more than is accurate.
Is RPU useful for comparing companies?
Calculating RPU is vitally important for businesses by allowing a company for which products and services generate the most revenue per customer and, therefore, which subscription services, add on purchases and customer behaviors are generating the most value. In fast-moving, high churn businesses, this measurement can be one of the most important for financial planning and content creation. With this in mind, Revenue Per User can be an excellent internal assessment of the financial health of an organization, especially when paired with other key performance indicators, such as Churn Rate and Customer Acquisition Cost.
However, RPU by itself, is not necessarily a reliable means to compare a business’ health and longevity to that of another company. While someone who is looking to invest in a subscription based business would want to know how the Revenue Per User compares to that of similar companies, including other data, such as revenue after expenses, customer retention, customer satisfaction and the business’ capacity for growth, will provide a more accurate comparison. Factoring in these other performance indicators contextualizes RPU, and helps to reveal if it is a measure of sustainability or short-term popularity, for a given business.