Analytics, General

ARPU: definition and calculation

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Content:

  1. ARPU calculation
  2. Which ARPU is right?
  3. What time period to use when calculating ARPU?
  4. What does ARPU have to do with value?
  5. How is ARPU connected to LTV?
  6. In what way ARPU and ARPPU are different?
  7. How do I put the metric to good use?
  8. How do I improve the metric?

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 (any numbers–your BMI, your blood sugar, your customer service ratings) 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). 

ARPU (Average Revenue Per User) is an average income you get 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. 

ARPU calculation

Divide your total revenue for a period by the number of active users you had during this period. The result is your ARPU.

arpu formula

Let’s say 600 people used your platform last month. We include free trial users, your super loyal customers, and the ones 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.

Which ARPU is right?

Okay, we’ve got the figure, so what? Is 5,3 good 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.

You can’t evaluate this metric 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, 700 people used Platform 1 (of which 100 people were trial period users), and they managed to make more than expected. Platform 2 was not so successful as they only got 300 customers (with the same 100 ones on a free plan). Their revenue was $4 500. Turns out, if 2 companies want to make the same profits and have identical ARPUs, it doesn’t mean anything.

You can only evaluate your own ARPU. Or compare yourself to a company with identical (both quantitatively and qualitatively) customers. 

What time period to use when 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 often.

Technically, a monthly ARPU should be called ARPMAU (Average revenue per monthly active user).

If your platform’s Lifetime is short, think of calculating ARPDAU (Average revenue per daily active user).

If you’re not a subscription-based platform, think about how often customers need you.

Wanna evaluate your traffic quality? Calculate revenues from your users for a certain period (e.g. all who signed up on June 15). This will be your cumulative ARPU. It’s calculated by a similar formula, but it shows your revenue from a particular user cohort. For this cohort, ARPU will gradually increase, that’s why it’s called cumulative.

Cumulative ARPU (X days) = Revenues from a selected cohort for X days / User count within a cohort

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’s going to increase with each day.

Calculate cumulative ARPU for 1 day, a week or 2 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.

This metric will gradually increase and reach your LTV one day.

What does ARPU have to do with value?

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 3 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, they are highly likely ready 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. 

How is ARPU connected to LTV?

These metrics are often confused. Or marketers only calculate LTV and omit ARPU (as they think they’re almost the same). They’re in fact connected, but each of them is important and cannot be ignored. 

LTV is a revenue you get from a user during their entire relationship with you. ARPU shows revenues from a user for a given period. The residual is Lifetime which is the length of a customer’s relationship with you. 

ltv formula
LTV is about total customer value for your company, while ARPU only shows you the current state.

In what way ARPU and ARPPU are different?

One letter matters a lot here as an additional P in ARPPU means Paying. ARPU gives you an average revenue including those who don’t pay anything. ARPPU means Average Revenue Per Paying User. As there are fewer paying users, this metric 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, therefore ARPPU increased. 

It’s the Paying Share that binds ARPU and ARPPU. 

paying_share_formula

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. 1-2% are good for mobile apps as most users are on a free plan and very few people make in-app purchases.

It’s important 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.

How do I put the metric to good use?

ARPU shows how the price of your product corresponds to its value. How else can you use this metric?

  1. Comparing yourself to your rivals.
    Investors base their decisions on this metric. If you run several projects, you can use ARPU to reveal the winner.
    Note: be sure to only compare ARPUs of products with identical or similar audiences.
  2. Evaluating the reaction to price changes.
    Suppose you’ve decided to increase your subscription fee and see if ARPU for your new users changes. Last month, you had 810 newcomers who generated you $900. When you increased fees, user count decreased to 700, and your revenue to $800. Let’s compare two ARPUs to see how price changes affected them.
    ARPU before the increase = 900 / 810 = $1,11
    ARPU after the increase = 800 / 700 = $1,14
    Turns out, this was a great experiment, and a decrease in income has nothing to do with price increases. If you acquire more active users having the same increased fee, you’ll simply make more money. Amazing, isn’t it?
  3. Choosing acquisition channels.
    ARPU is as good for the evaluation of the acquisition channel performance as is LTV. Let’s say you had 2200 customers who generated you $4000. Your ARPU is 4000 / 2200 = $1,81.
    Then you launched an ad campaign, and now you have 3450 users and $5000. Looks great at first glance, but let’s look at the figures:
    ARPU = 5000 / 3450 = $1,44
    Your revenues decreased, so maybe you acquired an indifferent audience.
  4. User segmentation.
    You can segment users by the time they spend on you and compare revenues from each group. Let’s identify 3 segments: newcomers (less than a month with you; trial period users or paid for their plan once), those who know you well (and extended their subscription 2-3 times already), and your super loyal customers (who extended their subscriptions 3+ times.
    Note: A user may not have paid during the specific period for which we calculate ARPU.
    user_segmentation_table
  5. Predict the future.
    You can use ARPU to digitize your acquisition or retention hypotheses. Let’s say you’re launching an ad campaign and expect to acquire 20% more new users. Suppose you’ve had 120 monthly users, and now you’re expecting to acquire 144. If your ARPU is 30, your future revenue will be $4320 (while you had $3600). You can see your ad expenses paying off and predict your future revenues. 

Turns out, you generate most revenues from your super loyal customers and newcomers. If you focus on these two segments, you can significantly increase your revenues.

How do I improve the metric?

Whatever your ARPU is, the sky’s the limit. Let’s look at the most common ways to enhance this metric.

  1. Upselling and Cross-selling. These are the most popular ways to increase the average order value. If you’re a subscription-based platform, you need to encourage users to switch to a paid plan to increase your ARPU.
  2. Play with your plans. Once upon a time, Statuspage.io rearranged their pricing schedule and changed prices. Instead of traditional plans like “Standard” and “Premium”, product managers have come up with plans for different customers. Each plan included its own set of features. Some of them were unknown to users as they were not directly related to a core product. Here’s what it looked like:
    statuspage
    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 it is that they will stay with you for a long haul. This directly impacts your revenues and hence increases ARPU.

May your ARPU skyrocket! 

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Valerie Fenske
Author: Valerie Fenske
Growth Marketer
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