This article covers everything related to ARPPU – definition, formula, mistakes to avoid while calculating ARPPU, ARPPU tool and ways to grow your ARPPU.
So let’s dive deep into it.
What is Average Revenue Per Paying User / What is ARPPU?
Average Revenue Per Paying User (ARPPU) is the average amount of money you make from a paying customer.
If your monthly recurring revenue is $10000 from 100 paying customers, your ARPPU will be $100.
Some may even call ARPPU as Average Revenue Per Account (ARPA).
Note – While calculating ARPPU, you need to be careful to determine the timeline because there are users who have subscribed to annual or quarterly plans.
Since ARPPU is calculated based on monthly recurring revenue and active paying customers, you need:
- Net MRR
- Total active paying customers count
How to arrive at the net MRR?
- Include upgrade revenue
- Include existing paying users revenue
- Include revenue earned from new subsciptions (Full price + non-zero discounted)
- Normalize revenue on monthly basis for annual or quarterly subscriptions
- Deduce revenue lost from downgrades and cancellations
Want to get free from the MRR calculation hassle? Here’s how.
Getting total paying customers
Include only those customers who have paid you and have active accounts.
Adding the following type of users will end up watering down your monthly average revenue and provide you with a distorted image of how the company is performing. Exclude these following users:
- Free trials
- Paid trials
- Canceled subscriptions
- Inactive subscriptions
Based on the above conditions, let’s calculate your ARPPU.
From July 1 – July 31 2018; here’s what happens:
- 35 existing customers renew their $100 per month
- 3 customers have paid $1200 for annual plans
- 2 customers pay $180 every quarter
- 5 customers upgrade from from $100 to $150 plan
- 5 customers downgrade their $100 plan to $80 plan
- 10 new customers subscribe to $100 plan using 20% OFF coupons
- 5 customers cancel their $100 plan
In the above scenario, revenue from annual and quarterly paid customers needs to be normalized on monthly basis and then add them to monthly recurring revenue.
- $1200 annual plan customers contribution to MRR will be $300. [(1200/12)*3]
- MRR contribution from customers on the quarterly plan will be $120. [(180/3)*2]
- Existing paying customers contribute $3500 to MRR.
- Upgrades add $250, new customers add $800 to MRR
- Downgrades and cancellations reduce your MRR by $600
3 common mistakes people make while calculating ARPPU
1. ARPPU and ARPU are same
As we are analyzing ARPPU metric, there is one more similar metric which is Average Revenue Per User (ARPU). Sometimes businesses get confused by both of these terms and assume both are the same, but they are not! There is a fundamental shift in both the metrics.
ARPPU is calculated as the monthly recurring revenue divided by the total number of active paying customers.
On the other hand, Average Revenue Per User (ARPU) = Monthly Recurring Revenue / All users (paid + free).
Let’s assume you have 100 users, out of which 30 are paying users. And your total monthly recurring revenue is $3000.
So your ARPU will be 3000/100 = $30.
This means one user brings you $30 per month.
Further, calculate ARPPU which is 3000/30 = $300 that means one paying user brings you $300 per month.
This shows a considerable difference between both the values. So, if you are using both ARPPU and ARPU, state them clearly.
2. ARRPU = Total Revenue / Total users
Instead of considering monthly recurring revenue, people may consider the total revenue earned. But for subscription businesses, it’s the monthly recurring revenue that shows the true picture of your business.
So, in both these cases, the total user count will always be greater than the paying users.
3. Average Check and ARPPU are the same
Another common mistake businesses do while calculating ARPPU is that they take the Average Check as ARPPU. That’s wrong! The result may not be unfavorable but it could misguide the business.
Average Check is an average transaction value and the number of transactions cannot be the same as the number of paying users. If one user pays repeatedly in a month his number of transactions will not be taken in ARPPU calculation but it will be considered in Average Check calculation.
Let us try to understand this with an example.
Assume, 50 users paid $50 each, later 10 of them again paid $10 each. In this case the ARPPU will be (50 x $50 + 10 x $10)/50 = $52.
On the other hand for Average Check calculation, we will divide the revenue with the number of transactions which is (50 x $50 + 10 x $10)/60 = $43
Get correct ARPPU for your business
If your business model needs to ascertain the correct ARPPU and you may have made some mistakes as we discussed above what would you do?
In addition, you get in-depth reporting and analytics related to your sales, products, customers and visitors.
Connect your payment gateways/e-commerce systems to Putler and get a complete picture of your business.
$550 ARPPU…are you kidding me?
The number seems a dream right? But it’s a reality.
It’s neither any famous tech-giant nor any investment conglomerate that has achieved this. It’s a gaming company Machine Zone who had achieved this milestone with their game “Game of War” in 2015.
This value is incredible and the game achieved this value with some intriguing tactics. What tactics did they execute? See the excerpt here from the original article.
Of course, a lot of games do stuff like this, and part of Machine Zone’s success is that other studios haven’t figured out how to duplicate its money-making techniques.
Two factors that affect your ARPU considerably
1. Low price bracket
If you’re charging like $10, $15, and $20 a month, your ARPPU is going to be pretty low.
A low ARPU means that support, infrastructure, and scaling issues hit you harder, and faster. You’ll face a difficult time staying in business.
2. Customers migrating to lower or higher value plans
If you offer majority and beneficial features in your lower plans, customers will be happy to stick to that plans. As a result, you won’t have customers on the higher plans; thus hitting your ARPPU to a great extent.
Why ARPPU is so important
ARPPU determines loyalty among all users, those who are more loyal will pay you every month. In other words, the higher ARPPU has the potential to fetch more money from the existing customers.
Additionally, if you’re able to have a high ARPPU relative to the value you’re providing or the revenue of the company, you know you have a product that’s driving a better value ratio.
Indicates your business’ financial health
If your ARPPU is low at $50, then you know you need to get a metric ton of customers to grow a sustainable company. This allows you to see what kind of business you need to be from a pricing and value perspective.
A higher ARPPU indicates you’re growing. A lower ARPPU indicates your product doesn’t suit the market.
Indicates whether you’re extracting enough value from your personas
You may be absolutely deflating your ARPU by targeting too many small, distracting (and expensive) low revenue customers. If you’re not in the consumer space or a space with hundreds of thousands (if not millions) of potential customers, then you shouldn’t be chasing sub $100/m customers. Make sure you quantify your buyer personas properly and target the right ones for growth.
Validation that your marketing and sales teams are driving the right deals
An increasing ARPU consistently over time indicates that your sales and marketing value propositions and targeting are constantly getting better time over time. Essentially, you’re becoming more efficient.
5 actionable ways to optimize and grow your ARPPU
Here are the five ways you can optimize ARPPU for your SaaS business:
Increase the price — but wisely and with justification
The most common method to increase ARPPU. But it shouldn’t cause friction with existing customers otherwise more users will churn than an upgrade.
If you are increasing the price, you need to present a strong justification for it. If feasible, do micro price increases; customers won’t complain.
Offer up-sell / cross-sell
Identify key touch points where you can try to up-sell (invite customers to upgrade accounts) or cross-sell (offer additional relevant services if you have them).
Giving a limited free trial run also let users sign-up for the paid plan before the expiry.
The game here is to analyze past user behavior, determine the key turning points where users are most likely to benefit from an upgrade and make the pitch.
Pitch other valuable products
After establishing a successful customer relationship, you can pitch your other products, affiliate products that make sense for your user base.
Focus on the cream crowd
With enough experience to deeply understand the market and delivering outstanding value consistently, you can afford to focus on the top 1-2% of clients to attempt to sell special membership offer or high priced services like premium support, customer success management, etc.
Ignore low growth potential customers
Narrow down customer segments that are least likely to progress to high-paying tiers. Allocate more resources towards cross-selling and up-selling to high-growth potential customers, which will have a positive impact on ARPU.
We have tried to cover all aspects related to ARPPU. If you have any questions, suggestions for the same, drop a comment below and we will get back to it.
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