Dan Martell - November 30, 2020


How To Increase Your Average Revenue Per User (6 Tips)


Episode Stats


Length

9 minutes

Words per minute

195.43129

Word count

1,885

Sentence count

94


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

In this episode, I share with you, what does ARPU mean? How do you calculate it? And most importantly, how do you grow it? Because if you don t understand this core SaaS metric, trust me, you re gonna have a hard time building that business.

Transcript

Transcript generated with Whisper (turbo).
00:00:00.080 Hey there, Dan Martell here,
00:00:01.160 serial entrepreneur, investor, creator of SaaS Academy.
00:00:03.320 In this episode, I'm gonna share with you,
00:00:05.280 what does ARPU mean?
00:00:07.000 How do you calculate it?
00:00:08.240 And most importantly, how do you grow it?
00:00:09.960 Because if you don't understand this core SaaS metric,
00:00:13.000 trust me, you're gonna have a hard time
00:00:14.640 building that business and be sure to stay at the end,
00:00:17.080 where I'm gonna tell you how to get access
00:00:18.560 to my exclusive precision scorecard template
00:00:22.760 to be able to measure all your metrics
00:00:24.480 in this beautiful place.
00:00:25.440 And more importantly, set the targets accurately,
00:00:28.500 especially if you're just getting going in your SaaS business.
00:00:30.720 Let's get into it.
00:00:44.100 So the term ARPU, I first heard it from one of my mentors,
00:00:47.780 this guy named Dharmesh Shah.
00:00:49.360 Dharmesh is the co-founder of HubSpot.
00:00:51.560 Maybe you've heard of it.
00:00:52.380 If you're in the software space, you kind of probably did.
00:00:55.100 Many of you are probably already customers
00:00:56.480 because it's a big CRM and support software
00:00:59.040 for a lot of software companies out there.
00:01:01.700 Anyways, this was 2009 in San Francisco.
00:01:05.820 I'm sitting in my office, he came to visit
00:01:07.580 and we were talking about strategy and he mentioned,
00:01:10.440 he's like, you know, one of our big initiatives right now
00:01:12.340 is increase our ARPU.
00:01:13.480 And I was like, okay, I should probably Google that term.
00:01:16.560 I had heard other kind of three and four letter acronyms
00:01:19.440 around finances, et cetera,
00:01:20.800 but I kind of figured out what it was.
00:01:22.620 But then I got confused
00:01:23.540 because I kept hearing other terms that are similar.
00:01:26.020 Anyways, I figured out essentially what it means
00:01:28.280 at a high level is how much revenue
00:01:31.520 does your user generate for you?
00:01:34.400 That's where the term ARPU comes from.
00:01:36.720 And what I really loved about my conversation with Darmus
00:01:39.580 is understanding the ways to grow it.
00:01:42.240 He shared with me their exact strategies
00:01:44.000 that I've seen them execute over the last 10 years
00:01:46.600 flawlessly at HubSpot to actually grow it.
00:01:50.100 And it's something now that I teach my clients
00:01:52.140 It's called the strategic P3, product packaging
00:01:55.200 and pricing to help clients grow their ARPU as well.
00:01:59.760 These are the strategies, these are the definitions
00:02:01.760 and here's how to grow it.
00:02:02.860 Number one, ARPU versus ARPA.
00:02:05.340 Now, this is where I was confused
00:02:06.780 because when you Google this term,
00:02:09.220 you'll sometimes come across ARPA,
00:02:10.620 which is average revenue per account.
00:02:12.680 ARPU stands average revenue per user.
00:02:14.840 Now, if you have a user and account and they're the same,
00:02:18.340 what's the difference?
00:02:19.140 Well, if you go into the black hole of the internet
00:02:23.160 and you start searching around this,
00:02:24.500 essentially some people argue,
00:02:26.280 well, some accounts have multiple users
00:02:28.380 or different sub-accounts underneath them
00:02:30.160 and other places.
00:02:31.540 And it's honestly, at the end of the day,
00:02:33.340 I'm telling you for the rest of this video,
00:02:34.700 I'm gonna use ARPU.
00:02:35.580 I like the word ARPU.
00:02:37.260 It's just interesting.
00:02:38.680 It has a better phonetics behind it.
00:02:41.000 And from my point of view, it's the same.
00:02:43.740 For 97, 98% of you out there, it's gonna be the same.
00:02:47.720 and that's the difference between both of them
00:02:50.780 because you may come across them,
00:02:51.800 I'm just telling you right out of the gate,
00:02:52.940 it's technically the same thing
00:02:54.200 so you don't have to be confused like I was
00:02:55.660 and now I'm gonna tell you how to calculate it.
00:02:58.060 Number two, the formula.
00:02:59.940 So it's really simple, you ready for this?
00:03:02.080 Take the sum of your revenue,
00:03:04.260 so your reoccurring revenue on a monthly basis
00:03:06.640 and then divide it by the count of your accounts.
00:03:11.160 So essentially like that's the equation,
00:03:12.900 you can literally put that into a spreadsheet
00:03:14.340 and say some revenue
00:03:15.900 and hopefully you have some kind
00:03:16.920 of reoccurring revenue tally.
00:03:19.880 And then also the number of accounts
00:03:22.020 and that'll give you your average revenue per user
00:03:26.020 or per account, ARPU.
00:03:27.680 I'm gonna say ARPU, I might say per account,
00:03:29.440 but correct me if I'm wrong.
00:03:31.180 Here's the thing.
00:03:32.020 So now you're asking what's a good ARPU
00:03:33.520 or what's a bad one?
00:03:34.780 Here's the way I would say it.
00:03:35.960 If you're SMB, small to medium sized business,
00:03:38.800 your revenue per user or ARPU on a monthly basis,
00:03:43.640 you wanna try to get it between 20 to 100 and...
00:03:47.300 Well, I mean, SMB is pretty broad.
00:03:50.380 Depending what you charge per month,
00:03:51.520 some people call SMB zero to $10,000
00:03:54.500 in annual contract value,
00:03:56.660 another three letter acronym, ACV.
00:03:59.860 Essentially, if you take the monthly charge,
00:04:01.860 your average customer, your ARPU times 12,
00:04:03.760 that's your annual contract value.
00:04:05.800 Mid-market is between 10 and $100,000 per month,
00:04:08.720 and then enterprise is 100,000 per month or larger.
00:04:10.920 That's a very broad stroke definition
00:04:14.560 of the kind of three sizings.
00:04:16.360 But I would say if you're on the low end,
00:04:18.220 try to find ways to increase it.
00:04:20.640 If you're, well, I can't really tell you what's good or bad
00:04:23.780 without understanding your specific situation.
00:04:26.120 If you're interested in getting on a phone call,
00:04:27.500 just go to danmartell.com forward slash call.
00:04:29.760 If you're a B2B SaaS founder, that's my specialty.
00:04:32.520 That's where I know I can help the most.
00:04:34.160 And I can dig into it, but the formula is really simple.
00:04:37.680 MRR per month divided by accounts,
00:04:39.420 that's gonna give you your ARPU.
00:04:40.760 Number three, growth ceiling.
00:04:42.580 So here's where companies get in trouble,
00:04:44.840 is if you hit a point where what's called,
00:04:47.940 there's three variables that you should understand, okay?
00:04:51.680 New starts, that's the amount of new customers
00:04:55.480 you get on a monthly basis, okay, that you add.
00:04:58.740 Your ARPU, which I just shared with you the formula
00:05:01.580 to measure that, so that's your ARPU.
00:05:03.000 How do you measure the value per month on average
00:05:07.060 that your accounts make?
00:05:07.940 Because you might have different plans,
00:05:09.080 You have different pricing, add-ons, structure, et cetera,
00:05:11.380 but you need to just figure out your ARPU.
00:05:13.320 Multiply times your,
00:05:14.900 or the equation uses also the churn, right?
00:05:17.980 So your logo churn, your account churn.
00:05:19.620 How many people do you lose on a monthly basis?
00:05:22.100 Because a growth ceiling means that
00:05:24.460 your ability to replenish
00:05:26.900 or replace the amount of new clients per month
00:05:29.880 that you're losing,
00:05:31.180 it's gonna hit a ceiling and eventually,
00:05:33.540 and you can actually, there's a mathematical equation.
00:05:35.280 If you search growth ceiling,
00:05:37.220 or what I call the churn flatline,
00:05:39.540 you will come across some calculators
00:05:41.760 that you can run in the numbers and say,
00:05:43.440 okay, well, how many new customers do I have per month?
00:05:45.600 What do they pay me on average per month?
00:05:49.220 What's my churn?
00:05:51.060 And how many customers do I have now?
00:05:52.980 And it'll actually map out the exact point in the future
00:05:57.080 to the day that you're gonna hit the growth ceiling
00:06:00.260 where you won't be able to grow
00:06:01.260 without increasing the amount of new starts,
00:06:04.160 increasing your ARPU or reducing your churn.
00:06:07.220 In this video, I want to share with you exactly how to think about increasing your ARPU so that
00:06:13.200 you can push out that growth ceiling further. Number four, grow ARPU. How do you actually
00:06:17.980 make your average revenue per user per account grow? Well, you only have a few options. Number
00:06:23.500 one, you've got your product plans and pricing, what I call the strategic P3. This is understanding
00:06:29.440 the plan levels. A lot of you may have, I mean, one question I love to ask new founders that I
00:06:34.300 work with is when's the last time you increased your price? The average that people say to me
00:06:39.440 is three to five years, okay? That's the average. I've had one client, hasn't changed their price
00:06:43.360 in 15 years. And then a client that worked with me yesterday, it was really fun because they were
00:06:48.140 like, last week, because I watched your strategic P3 training before our call. And I was like,
00:06:53.140 money, let's do that. So you want to look at your product plans and pricing. And that is to drive
00:06:59.800 the second area, which is upsells and cross sells, okay? So one of the things that I was learning
00:07:04.200 from Dharmesh back in the day was his philosophy
00:07:07.200 on creating other modules or hubs, they called it.
00:07:11.700 Salesforce has these different areas
00:07:14.380 or product suites that they sell, right?
00:07:16.260 So they have the support force, they have the sales force,
00:07:18.600 they have other different big catalogs of products.
00:07:22.500 So if they sell a customer on this hub,
00:07:24.580 they can cross sell them to another one
00:07:26.820 or they can upsell them into a higher plan
00:07:29.600 or they can look at add-ons.
00:07:31.800 Add-ons, if you do not offer premium support
00:07:34.040 as an add-on right now to all levels of your tier,
00:07:36.360 it's a huge opportunity to increase your ARPU
00:07:38.860 because a lot of people want it
00:07:40.740 and they're willing to pay a premium for that
00:07:42.700 and it doesn't take much more effort.
00:07:44.880 You don't have to write any code,
00:07:45.960 you just kind of change your support structure
00:07:47.500 and you're good to go.
00:07:49.720 And then the last, the other thing I wanna say
00:07:51.820 is product bundle.
00:07:52.840 So understanding how to do promotions
00:07:55.340 to bundle things to move the ARPU up.
00:07:59.060 If you put more things together
00:08:00.840 that can increase your average revenue per user,
00:08:03.680 sell them more things on a monthly basis, sell them.
00:08:06.460 Think about maybe there's some aspect of the transaction,
00:08:09.140 the value metric, but that's how we grow the ARPU
00:08:12.640 and really build the business.
00:08:16.140 Because like I said, we have new starts,
00:08:17.660 we have revenue per user, the ARPU, and then we have churn.
00:08:20.880 Those are our three variables
00:08:21.920 to help increase the growth ceiling
00:08:23.540 so that we don't hit it anytime soon.
00:08:25.320 You wanna push that out three or five years in the future,
00:08:28.100 but that's how we grow it.
00:08:29.460 So quick recap on some definitions, ARPU versus ARPA.
00:08:33.080 Number two, formula for measuring your ARPU.
00:08:36.160 Three, how to calculate the growth ceiling.
00:08:38.960 And number four, how to grow your ARPU if you're stuck.
00:08:42.200 So as I mentioned at the beginning of this episode,
00:08:43.660 I wanna share with you my precision scorecard template.
00:08:47.040 It is essentially the specific metrics
00:08:49.700 that you wanna measure per core function of your business
00:08:52.360 over the monthly periods, the quarterly periods,
00:08:55.760 and more importantly, the way you structure the report
00:08:58.880 so that you have your actuals and you have your targets.
00:09:01.480 The targets is what you need to hit per quarter
00:09:03.600 and then break it down per month and per week
00:09:05.460 so that you can actually hit your MRR goal.
00:09:08.220 So click the link below to download your free copy
00:09:10.320 of my Precision Scorecard Playbook
00:09:11.700 and I'll walk you through exactly how to set it up.
00:09:13.540 And also if you're at pre-million in revenue
00:09:15.920 versus past a million in revenue,
00:09:17.420 there's two different sets of metrics
00:09:18.800 that you're gonna wanna know about that.
00:09:19.920 So click the link below.
00:09:21.640 And if you like this video,
00:09:22.580 be sure to smash that like button, subscribe to my channel.
00:09:25.680 And if there's anybody that you care about
00:09:27.200 that you think this could serve,
00:09:28.020 feel free to share it with them directly.
00:09:30.140 As per usual, I wanna challenge you
00:09:31.580 to live a bigger life and a bigger business
00:09:33.400 and I'll see you next Monday.
00:09:35.340 It's an alphabet soup of acronyms.