Average revenue per user (ARPU)
What is ARPU?
Most often referred to as ARPU, this metric is actually just a ratio calculated by dividing the total revenue of a business for a given period by the average number of users in that same period.
Note: In mobile app lingo, the “user” mentioned above is most often referred to as an “active user.”
Why ARPU is important?
ARPU is one of the most important metrics for any business as it tells you how much money you are earning, on average, from each user in a given time frame – vital information for marketers, product managers, and executives alike.
As a marketer, knowing the ARPU of your lowest and highest value users enables you to optimize your marketing activities according to which campaigns are performing well and which are underperforming. ARPU-driven measurement allows you to re-examine the channels, networks, campaigns, etc. you are using and to keep or remove based on ROI.
In terms of mobile user acquisition, ARPU also complements the cost of media metrics such as cost per install (CPI), or cost per action (CPA). Comparing between them helps to determine your marketing bottom line, or return on ad spend (ROAS), and show if you are spending your marketing dollars wisely.
How to calculate ARPU?
ARPU in its purest form is pretty simple math as we mentioned above. It’s the ratio between revenue generated in a specific time period and the number of users in that same time period.
Choosing the right length of time really depends on your business.
Let’s take the example of a business with a monthly subscription model, like Netflix or Spotify.
To calculate the monthly ARPU you take the revenue generated in the previous month and divide it by the number of users in the same time period.
For example, your business generated $10,000 between the 1st and the 30th of June.
You calculate that there were 5,000 users who engaged with your brand at least once in the same time period.
1,000 divided by 5,000 gives us an ARPU of $2.
Businesses with more sporadic usage, like those in the travel or eCommerce industry, may opt for quarterly time periods as their users tend to buy when they need or want a product and not so much in set intervals.
Remember that the total revenue includes new users, existing users, upsells, and cross-sells.
ARPU for mobile
In the competitive mobile ecosystem, where the majority of apps are free to download, app owners rely heavily on in-app events to generate revenue.
Revenue from in-app events can be generated in one of four ways:
- In-app advertising (IAA)
- In-app purchases (IAP)
- Paid for apps
If your app is subscription-based then ARPU can also be used to improve understanding into which pricing models get the best response from customers. Perhaps there is a specific bundle that is attractive to a particular cohort, and measuring ARPU can help highlight that.
For free apps, IAP delivers the bulk of the revenue, but increasingly IAA is helping to bolster income as more app owners recognize the value of their in-app real estate for advertising purposes.
For a more granular view, you can also separate the revenue streams. Doing so could help you understand how much revenue was generated from advertising by all active users in May, and then compare it to your purchase revenue from the same time period.
For example, if your total revenue was $10,000 and you knew that $3,000 was coming from advertising revenue, then it’s easy to deduce that the remaining $7,000 is from in-app purchases. If you are spending less than $3,000 on advertising then you have a positive ROAS.
By separating out the two revenue streams you can see which is delivering better results.
Advanced ARPU measurement: Cohort ARPU
The calculation described above can be referred to as Activity-based ARPU (i.e. revenue generated by all users in a specified period of time). However, there is another way to calculate ARPU and that is based on cohorts, which is particularly helpful for mobile marketers.
Cohorts are a group of users who share similar traits such as the date of install, geo-location, device type, etc.
To determine the Cohort APRU use the following formula:
Total revenue generated in time period X by users acquired in time period Y / Total number of users acquired in time period Y
Cohort-based ARPU refers to revenue generated by new users in a set period of time. It’s pretty useful for determining your ROI and how your mobile user acquisition (UA) efforts are going.
For example, you could measure the average revenue per user generated within 30 days (known as Day 30 ARPU) for all users acquired in May.
Remember that in this scenario, even if a user installed your app or visited your website for the first time on May 30, the revenue they generated over the next 30 days, in June, would still count towards your May cohort ARPU.
Cohort metrics are a critical tool for marketers, so while it isn’t an industry standard to differentiate between activity-based and cohort-based ARPU, we believe there is value in doing so.
NOTE: Don’t get confused between ARPU with average revenue per paying user (ARPPU), which defines how much an average paying customer spends in a given time period.
What’s the difference between ARPU and LTV?
ARPU and LTV (lifetime value) are very similar metrics, and are sometimes used interchangeably with some slight differences. But they should not be confused.
The difference lies in the timeframes.
Whereas ARPU can be any length of time that’s pre- determined with a clear start and finish (e.g. 30, 60, or 90 days post install, subscription, purchase, etc.), LTV looks at the entire time period of a user (from initial interaction with your brand right up until they churn, whether it’s 1 day or 300 days).
Where it gets confusing is that the time periods could be equal. For example, say you are measuring May ARPU, but a user purchases and then churns within the month of May. That means if you measure their LTV, it’ll be the same.
That said, LTV definitely has some added benefits when it comes to measurement.
For example, LTV can help you measure how valuable a user was before they churned, or how well you are retaining customers.
LTV is also the True North when it comes to optimizing your ROAS and reaching that magic state where revenue per user is greater than cost per user (read: you’re making $!).
How to improve your ARPU?
There are a variety of ways to improve your ARPU. Here are some of the top ones.
1. Adjust your pricing plans
If you run a subscription-based service you may find that adjusting your pricing plans will improve your ARPU.
This could include adding in extra features to attract users to more premium plans, or lowering the monthly rate if a user pays upfront for the year.
2. Optimize UA campaigns
Measuring your ARPU based on your UA efforts will highlight which channels, creatives, or campaigns are delivering high value users. For mobile, you can also assess the value of the different advertising networks.
Once you identify a trend you can double-down on your investment and deliver an even higher ARPU for your business. Equally, if you notice your campaign or a channel is delivering a lower performing ARPU then you can divest and focus your resources elsewhere.
3. Focus on retention
Focus on your most valuable users and work hard to retain them. As we know well, retention is much cheaper than acquisition.
Analyze whether there is a trend for users churning and launch a remarketing campaign at that point to keep them interested.
One effective way to retain users is with loyalty plans. For an eCommerce business this could take the form of regular special offers and discounts, whereas in a gaming app you could offer free boosters for every consecutive day a user launches the app.
ARPU is one of the most relied upon metrics in marketing as it gives an overall picture of how well you are doing at generating revenues.
- ARPU is a ratio of revenue to paying users and is important because it tells you how much money you are making and evaluates which channels are delivering valuable customers.
- ARPU is different from ARPPU which looks at the revenue of a paying user in a particular period.
- ARPU and LTV can be used interchangeably, but there are some differences mostly pertaining to the time period you are measuring.
- ARPU can be split into activity-based, and for more advanced analysis, cohort-based, which is useful at measuring the success of your UA efforts
- ARPU can be improved by adjusting pricing plans, retaining active users, and optimizing your UA campaigns to help deliver high value users to your business