ARPPU: Revealing the Real Revenue Potential of Your Users

Introduction

Revenue is the lifeblood of any business, and regardless of how appealing and sticky your app's value proposition may be, it's not going to work if you can't successfully monetize your users.

Even the hottest social apps ultimately seek monetization (after all venture money only lasts so long!), and finding the right business model is more of an art than science - making your users spend real money WHILE staying engaged on the platform is no small thing.

One fundamental indicator that reflects how well you're monetizing your product is the average revenue per paying user (ARPPU). Let's explore how founders can leverage this metric to bolster their monetization plans.

Defining ARPPU: What It Actually Is?

ARPPU is a metric that measures the average revenue generated by each paying customer of a business over a particular period. Paying users are those who spend money on a product / service, either through subscriptions, in-app purchases, or download fees. It is a crucial indicator of the health of a business and can uncover important trends in user behavior.

ARPPU is particularly useful for subscriptions-based businesses, mobile apps, freemium games or other platforms where customers regularly pay to use a product or a service.

The Importance of ARPPU

Using ARPPU as a key performance indicator can be an incredibly helpful tool in analyzing any business where customers pay to use the service. By examining this metric, companies can better understand how much revenue they are generating from each paying customer and whether or not this amount is sufficient to cover the costs of acquiring and serving that customer. By monitoring ARPPU over time, you can spot trends and make data-driven decisions about pricing strategies, product offerings, and customer retention efforts.

As an example, let's say that we're running a subscription-based dating app that has an ARPPU of $50. This means that on average, each paying customer generates $50 in revenue for our business. However, if we are spending $60 to acquire each new customer, it may not be sustainable in the long run (assuming we are a bootstrapped and cash-conscious business). By monitoring ARPPU and customer acquisition costs, we can make informed decisions about pricing and marketing strategies to ensure profitability.

Additionally, ARPPU can help businesses identify opportunities for upselling and cross-selling. By analyzing the behavior of high-ARPPU customers, businesses can identify patterns and preferences that can be used to encourage other customers to upgrade their subscriptions or purchase additional products.

How ARPPU Differs From Other User Metrics

While ARPPU obviously focuses on paying customers only, there are other key metrics that measure user’s average revenue contribution and it's essential to understand the differences between them.

ARPPU vs. ARPU

While the difference here might seem obvious at first glance, these two metrics get mixed up pretty often. We know already that ARPPU answers a question “How much of revenue (on average) does one PAYING user generate for the company”, excluding all non-paying users. ARPU (Average Revenue per User) on the other hand takes a more 'big picture' view and provides data on the average amount of revenue generated by each user, paying or non-paying. The in-app behavior of both user groups is very different, so separating them is key for accurate analysis.

ARPPU vs. ARPDAU

ARPDAU (Average Revenue per Daily Active User) focuses only on those users who actively log in and use your platform every day. While ARPPU metric usually looks at revenue over a weekly, monthly, quarterly or yearly basis, ARPDAU tracks day-to-day revenue changes. ARPDAU proves beneficial when experimenting with different ad formats, creatives, A/B testing, placements, etc.

ARPPU vs. LTV

LTV (or CLV) stands for (customer) lifetime value, which measures the total revenue a business can expect to generate from a single customer over the course of their relationship, until churn. While ARPPU provides insight into the revenue generated by each paying customer, LTV takes into account the entire customer journey, including repeat purchases and referrals. By comparing ARPPU and LTV, businesses can gain a more comprehensive understanding of customer value and make informed decisions about acquisition and retention strategies.

How to Calculate Your Average Revenue Per Paid User

Calculating ARPPU involves identifying relevant data points and using a pretty simple formula. Let's break it down step by step.

Identifying Relevant Data Points

To calculate ARPPU, businesses need to collect data on the total revenue generated by paying customers and the number of paying customers during a specified time period. Generally, companies should define these time periods based on their billing cycles to ensure the most accurate calculations.

It's important to note that not all paying customers are created equal. Some may purchase higher-priced plans or add-ons, while others may only pay for the most basic services. Therefore, it's essential to segment paying customers based on their spending habits to get a more accurate picture of ARPPU.

The ARPPU Formula

The formula for ARPPU is pretty straightforward and easy to calculate.

1. Determine the revenue generated by paying customers.
2. Determine the number of paying customers during the period.
3. Divide the revenue generated by paying customers by the number of paying customers.

For example, suppose our dating app business generated $50,000 in revenue from paying customers during a month and had 500 paying customers during the same period. In that case, the ARPPU would be $100 ($50,000 divided by 500).

Analyzing ARPPU Over Time

Once we have calculated our ARPPU, it's essential to track how this metric changes over time. This can help businesses identify trends in customer behavior and make data-driven decisions about pricing and retention strategies.

For instance, if we notice that our ARPPU is consistently decreasing over time, it may indicate that customers are churning or that our business is not offering enough value to justify a higher price point. In such cases, we may need to re-evaluate pricing to increase retention, or look under the hood to revisit value offering of our service / product.

On the other hand, if ARPPU is increasing, it may indicate that customers are upgrading to more expensive plans, which could represent a potential growth opportunity. In such cases, we may want to focus on upselling and cross-selling to maximize revenue from existing customers.

How to Grow Your ARPPU

Increasing ARPPU is more than just hiking prices. While this might increase your average revenue from paying users, at the same time it would most likely also reduce the overall number of paying users your app has (conversion rate). Like every measure, a well-rounded strategy is essential. ARPPU can be boosted by improved pricing strategy, regularly updated quality content, eliminating revenue ceilings, rewarding your top-paying customers, and introducing in-app features that promote spending.

Get Your Pricing in Order

Pricing is a critical factor that can impact ARPPU. There are several pricing strategies that businesses can use to increase ARPPU.

One effective strategy is to offer tiered pricing options that provide different (more) value to customers at different (higher) price points. User ability and willingness to pay is highly subjective, so figuring out the right price point for various tiers is key in a comprehensive pricing strategy.

Good way to optimize pricing, is to simply rethink how, and how much do we charge for our service. Companies shouldn't be afraid to experiment with different ways of charging, like seat-based, usage-based, or a flat fee, to find out what clicks the most with users (and what has the highest ARPPU impact). Accurate price discovery (how much to charge for our services) is also a challenge, therefore companies are encouraged to continuously review and hone their pricing until finding the sweet spot.

Another strategy is to offer add-on services or products that complement the primary offering. For example, a software company might offer premium support services or additional features that customers can purchase to enhance their experience with the product. This can increase the amount customers are willing to pay and boost ARPPU.

Up Your User Acquisition and Retention Game

User acquisition and retention are critical factors that can impact ARPPU. By acquiring more paying customers and retaining them over longer periods, businesses can significantly increase their ARPPU. One way to grow your numbers is to offer trial periods or discounts to new users. You can do this through incentives, like special offers for first time users. Another strategy are loyalty programs or engaging content that can activate and boost retention in current customers.

Reward Your Whales

When it comes to freemium products, there are power users willing to pay a lot to get outcome they require. We usually call them “whales.”

This is particularly prevalent in the mobile gaming industry. While the majority of users opt not to pay or pay minimally for premium perks, a small fraction is typically ready to shell out substantial amounts to gain an advantage over others.

It's crucial to ensure that these whales don't hit any unnecessary roadblocks. A typical solution is having a one subscription tier that caters to the majority of users, but leaves your most loyal and intense users wanting more. Provide them the opportunity to pay more to get extra perks!

Deliver Value Worth Paying For

Let's wrap this up with stating the obvious — to improve the average revenue from paying users, you need to deliver the value that your users want to pay for.

You can do this by restricting the free user tier, or by enhancing the premium experience and offering your paying users additional benefits and possibilities.

Ultimately, the price your users are prepared to pay is a reflection of the perceived value of your product. The more value you deliver, the higher the probability of your users paying!