We all put a lot of effort into improving business metrics with one ultimate goal — increasing profits, right?
Seth Godin notes, however, that “A useful metric is both accurate (in that it measures what it says it measures) and aligned with your goals. Making your numbers go up is pointless if the numbers aren’t related to why you went to work this morning”.
If you approach the ARPU right, it combines both profits and value (we’ll elaborate on this below).
So, let’s start with a better understanding of the ARPU and how it could help your business!
ARPU (or Average Revenue Per User) is the average income from each active user for a given period. It helps businesses digitize product value and forecast profits. Business decisions are usually made based on ARPU.
Divide your total revenue for a period by the number of active users you had during this period. Here is an ARPU formula:
Let’s say 600 people used your platform last month. We include free trial users, your super loyal customers, and those on the most advanced plan. Be sure to count everyone who used your product within a month.
Your revenue was $3200. So, your ARPU is 3200/600 = $5,3.
Okay, we’ve got the figure, so what? Is the revenue of $5,3 per user excellent or bad?
The point is, there’s no ARPU benchmark.
The only rule is: if you see your ARPU is decreasing, you need to acquire more customers or work on your traffic quality.
You can’t evaluate average revenue per user in isolation as it’s bound to your customer count. Let’s consider an example of two similar platforms thriving to make $10 000 monthly.
Note: if you want to compare ARPUs, ground your research on identical companies or products.
Suppose analysts have calculated ARPUs, which were $15 for both platforms. The only thing is that 700 people used Platform 1 (of which 100 were trial period users), while Platform 2 has 300 customers.
So, Platform 1 made more than expected — the revenue was $10 500. At the same time, Platform 2 was not so successful; they only got 300 customers (with the same 100 ones on a free plan) — their revenue was $4 500.
It turns out, if two companies want to make the same profits and have identical ARPUs, it doesn’t mean anything.
You can only evaluate your average revenue per user. Or compare yourself to a company with identical (both quantitatively and qualitatively) customers.
Generally, companies measure APRU for one month period. However, there are several opinions on what time frame to take for calculating ARPU.
First, decide on what period matches your business tasks. If you’re a subscription-based platform, you can do this exercise monthly. However, if you’re a mobile app with a short average Lifetime, consider calculating your ARPU more often3.
If you’re not a subscription-based platform, consider how often customers need you. Then the period for your average revenue per user calculation maybe three months, half a year, or even a year. So, the tie frame depends on your customers’ lifecycle.
You may use ARPU to evaluate the quality of traffic for a particular period. First, you need to calculate revenue from your users for a certain period. Let’s take all who signed up on June 15. A similar formula calculates it, showing your revenue from a particular user cohort. ARPU will gradually increase for this cohort because this cohort of users may bring you additional income. That’s why it’s called cumulative.
Here is the way you can calculate cumulative ARPU:
Let’s say 800 people signed up for your platform on June 15. The very same day, they made total payments of $600. Your ARPU will be 600 / 800 = $0,75.
Suppose this cohort brought you another $300 the next day. Though some users might have left you or not used the platform on the second day, your cohort is still 800 users. The cumulative ARPU for 2 days will be (600+300) / 800 = $1,125. And it will gradually increase each day and reach your LTV one day.
Calculate cumulative ARPU for one day, a week, or two weeks. This will give you an insight into how much a user brings you when they begin using your platform. You’ll also be able to forecast future revenues from that user. What’s more, you may find out the funnel bottlenecks.
We’ve said before that ARPU combines revenue and value. Strange, huh? Aren’t we talking only about the money?
ARPU shows how much a user is willing to pay for your product. Suppose you’re offering three plans and a free trial period. Plans cost $15, $20, and $30, accordingly. Your ARPU is $23. If we take trial period users into account, we can say most of your users prefer paid plans.
If most of your users choose the highest plan, there is a big chance that they are highly willing to pay more. You’re losing money if you don’t offer them that.
A high ARPU proves that users value your product. If it reaches your average plan, it’s time to go up the ante!
If the metric approaches your lowest plan, it’s a red flag; you’re not marketing your product right. Maybe you acquire users that pay you little money. Make a strategy change and incline your users to higher plans.
These metrics are often confused. They’re connected, but the meaning is slightly different. Each of these metrics is important and cannot be ignored when analyzing a company’s performance.
LTV is revenue from a user during their entire relationship with you. ARPU shows revenues from a user for a given period. The residual is Lifetime, the length of a customer’s relationship with you.
The average revenue per unit is the revenue you make for every unit of your product. This metric is reliable for companies that offer subscription-based products. Telecommunication companies usually use this metric.
The average revenue per unit calculates the same way as the average revenue per unit, but the meaning is slightly different:
The average revenue per unit may be helpful if your clients have several accounts on your platform, i.e., one person bought several units of your product. Using the average revenue per unit formula, you can calculate the income you gained from every unit, not from a particular client.
An additional P in ARPPU means Paying.
ARPU gives you an average revenue, including those who don’t pay anything, while ARPPU shows the revenue you get from paying users only. As there are fewer paying users, ARPPU is always higher.
ARPPU shows how paying users react to your product value. If you increase prices, your ARPPU will go up accordingly. But don’t rush to charge your glasses — maybe this means the share of paying users has decreased with the prices growing, affecting ARPPU.
It’s the Paying Share that binds ARPU and ARPPU.
Let’s say you’ve had 1200 users last month, of which 40 paid for premium accounts. Your revenue was $1000.
ARPU = 1000 / 1200 = $ 0,8
ARPPU = 1000 / 40 = $ 25
The Paying Share is 0,8 / 25 = 0,032 or 3,2%.
An ideal Paying Share depends on your type of business. For example, 1-2% is suitable for mobile apps as most users are on a free plan, and very few people make in-app purchases.
It’s essential to keep track of your Paying Share. If your ARPPU is growing with the Paying Share going down, you’re losing money in the long term. Revenues from paying users won’t beat the decreasing number of them. The metric also helps you evaluate and forecast your revenues.
ARPU shows how the price of your product corresponds to its value. How else can you use this metric?
It turns out you generate the most revenue from your super-loyal customers and newcomers. If you focus on these two segments, you can significantly increase your revenues.
Whatever your ARPU is, the sky’s the limit. Let’s look at the most common ways to enhance this metric.
Eventually, ARPU has more than doubled. Customer segmentation based on plans and pricing, a clear understanding of customer needs, and specific features have a huge impact on ARPU.
3. Increase your product value. The more often a customer pays you, the bigger their next invoice will be. Work hard on customer acquisition, activation, and retention. The better a user understands the value (and the sooner they do), the more likely they will stay with you for the long haul. This directly impacts your revenues and hence increases ARPU.
ARPU (also known as Average Revenue Per User) is the average income you get from each active user for a given period.
You can use the formula below to calculate ARPU:
There is no benchmark. You need to evaluate your ARPU dynamics or compare it to a company with identical (quantitatively and qualitatively) customers.
And remember: when your ARPU is decreasing, you need to acquire more customers or work on traffic quality.
May your ARPU skyrocket!
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|This article was first published on July 20, 2020. December 20, we’ve updated it.|