Any business create metrics with one goal - to increase profits. However, as Seth Godin rightly remarked: “The metric can be accurate and consistent with the goals of the company, but working on it is completely pointless if it is not related to what you came to work for today.”
With this approach, the ARPU indicator can be a useful metric as it combines both components - income and value. ARPU (Average Revenue Per User) - the average income that you receive from each active user for the period . This metric helps companies measure product value, forecast profits, and make decisions based on these numbers. How to calculate ARPU? So, to calculate the average income from a user for a month, you need to divide the total income for this month by the number of users who were active during this period. Let's say this month 600 people have used your service (we consider everyone: those who have been using the free trial period, those who have been with you for 5 years, those who have subscribed to the most expensive tariff - now we are talking about everyone who like or use the service for a month). Revenue amounted to $3200. It turns out that your ARPU this month amounted to: 3200/600 = $5.3 Which ARPU is good? We got the result, but how to interpret it? 5.3 is good or bad? The fact is that ARPU does not have an optimal value. But there is one rule: if ARPU is reduced, you need to attract more customers. This metric cannot be specifically estimated because it is very much related to the number of customers. For example, consider two companies with two similar services (when comparing two ARPUs, you must take necessarily close companies or products). Analysts of both services calculated ARPU, and in both cases it amounted to $15. Only now, Service1 in first company was used by 700 people this month (100 people used the free trial period), and the income was $9000. At Service2 in second company, things were not going so well - only 300 customers were recorded (and also 100 people at a free tariff), income was $ 4,500. It turns out that equal ARPUs for equal companies with equal desired income do not mean the same thing. You can evaluate ARPU only within your business, or compare it with the result of a company that boasts a similar (in terms of characteristics and volume) audience. For what period to consider the ARPU indicator? First you need to decide what period you are interested in. Reading ARPU once a month is especially convenient for services that work by subscription. However, if the average user lifetime (average Lifetime) for your company is small (as, for example, in mobile applications), it makes sense to calculate ARPU more often. Strictly speaking, the ARPU for the month is correctly called ARPMAU (Average revenue per monthly active user). If the Lifetime of users of your service is small, it is better to consider ARPDAU (Average revenue per daily active user) - the average income from an active user per day. If you do not work by subscription, pay attention to how often customers need your services. To assess the quality of traffic, you can calculate the income from users who came to you in a certain period (for example, everyone who registered on June 15). To do this, consider cumulative ARPU. The formula is similar, but it calculates the income that a particular group of users brought to you. Every day, the ARPU for this group will increase, which is why it is called cumulative. Cumulative ARPU (X days) = (Revenue from the selected group for X days / Number of users within this group) For example, on June 15, 800 people registered in your service. On the same day, they paid a total of $600. ARPU in this case will be (600/800 = $0.75) Suppose the next day this group brought you $300. Even if some of the users who arrived yesterday left you or did not use the service on the second day, the size of the group remains the same - 800 people. Cumulative ARPU for 2 days will be (600 + 300) / 800 = $1.125. Every day he will continue to grow. You can consider Cumulative ARPU for 1 day, week or 2 weeks - this way you will find out how much money each client brings for the first time you work with you, and you can also predict what income and after what time it will bring. With an increase in the period, this indicator increases and gradually reaches the level of your CLV (Customer Lifetime Value). How is ARPU related to value? At the very beginning, we said that ARPU links income and value. This may seem strange: is it just about money? In fact, ARPU shows how much the user is willing to pay for your product. Suppose you offer 3 tariff plans and a free trial period. A monthly subscription for each of the paid tariffs costs $15, $20 and $30 respectively. You counted ARPU and it was $ 23. If we take into account that we take into account users of the trial period who do not pay anything, it turns out that most of your payers prefer expensive tariffs And if most of the users choose the most expensive tariff plan, it is likely that they are willing to pay more. If you do not offer them this opportunity, you are losing money. High ARPU shows that users value your product. Therefore, when the indicator reaches the value of your average (at a price) tariff, you can safely raise prices. If ARPU is approaching the cost of the cheapest tariff, it's time to work on marketing. You attract people who pay a little, it makes sense to slightly change the strategy and attract the attention of users to more expensive tariffs. How ARPU and CLV are related? Many would confuse these two metrics and sometimes ignore ARPU metrics and consider only CLV (because they think that it is almost the same thing). They are really connected, but each is important individually. CLV is the profit that the client brings to you for the entire time you work with him. ARPU shows the profit from your work with the user for a certain period. The difference between these metrics is Lifetime - the life expectancy of the client within your company. CLV shows the total customer value for your company, and ARPU shows the current state of business relation. What is the difference between ARPU and ARPPU? One letter here really matters a lot, because the extra P in ARPPU is Paying. ARPU shows the average income for all users, even those who have not paid anything this month. ARPPU is revenue per paying user. There are always fewer payers, so this indicator is always higher. ARPPU will show you the reaction of paying users to product value. However, if you raise prices, your ARPPU will also increase, but this is not a reason to celebrate. Perhaps the share of paying customers has fallen, it’s just that prices have become higher, so the figure has risen. It is the share of paying customers (Paying Share) that links ARPU and ARPPU. For example, this month you had 1,200 users, 40 of them paid for premium access. The income was $1000. ARPU = 1000/1200 = $ 0.8 ARPPU = 1000/40 = $ 25 The proportion of paying users = 0.8 / 25 = 0.032 or 3.2%. The optimal amount of Paying Share depends on the type of business. For example, for mobile applications, an indicator of 1-2% is a good result (most use the free version, not many people make purchases in applications). Considering the proportion of paying customers is important. The fact is that if ARPPU grows, but Paying Share falls, this will lead to a reduction in your income - the profit from paying will not be able to compensate for the reduction in their number. This metric helps you evaluate and predict your income. How to use ARPU metric in marketing? ARPU shows how the value of your product relates to its value. How else can I use this metric? 1- Compare yourself with competitors. It is this metric that investors are interested in when they decide which company to invest in. If within the framework of your business you launch two or more projects, you can determine the most effective one also with the help of ARPU: whoever has a higher indicator, he won. Important! You can compare ARPUs only of companies (products) with the same or related audience. 2- Measure reaction to price changes. Suppose you decide to raise the cost of a monthly subscription and see if ARPU changes for new users (the one with you for less than a month). Last month, you recorded 810 newcomers, and the income was $ 900. After the introduction of the new price, the number of users decreased to 700, revenue - up to $800. To evaluate the result of a price increase, compare ARPU. ARPU before upgrade = 900/810 = $ 1.11 ARPU after upgrade = 800/700 = $ 1.14 It turns out that the experiment is quite successful, and the reduction in income is not associated with an increase in price. If at the same price to attract more active users, the income will increase. 3- The choice of channels of attraction. CLV is often used to evaluate the effectiveness of the acquisition channel, but ARPU is also great for this. Suppose you had 2,200 customers this month, they brought you $ 4,000. It turns out that your ARPU = 4000/2200 = $ 1.81. You have launched a new advertising campaign, and now you have 3450 users and $ 5000 of revenue. Sounds great, but look at the numbers: ARPU = 5000/3450 = $ 1.44 It turns out that the income has decreased - it seems that you have attracted not quite the target audience. 4- User segmentation. You can divide all users, for example, according to the time of subscription start date, and compare the profit from each group. Let's try to identify 3 groups: beginners (those who came to you less than a month ago: they use a free trial period or paid for a subscription for the first time), those who are already familiar with you (prolonged a monthly subscription already 2-3 times), and regular customers ( renewed the subscription more than 3 times). It turns out that the main income you bring are from those who have long been with you, and newcomers. By focusing on these two groups, you can significantly increase profits. Important! The user may not have made a payment in a specific period for which we consider ARPU. 5- Forecast for the future. You can express your hypotheses in money related to attracting or retaining users using ARPU. Suppose you are launching a new advertising campaign and expect to attract 20% more new users - previously 120 people came to you every month, and after the launch you are preparing to meet 144. With an ARPU of 30, your income will be 4320 (and it was 3600). It’s very convenient to evaluate how the costs of a new campaign pay off and what income awaits you next. How to improve this metric Whatever your ARPU, there is no limit to perfection. In WINNOVIA, we will analyze the most common ways to increase this metric. In WINNOVIA, We know how to add value to your product. The more often the customer made payments, the higher his next payment. It is very important to monitor user engagement, activation and retention - the deeper a person understands the value (and the faster he does it), the more likely that he will stay with you seriously and for a long time. This directly affects your income, which means it increases ARPU.