ARPPU – what is average revenue per paying user and how is it calculated?

ARPPU – what is average revenue per paying user and how is it calculated?

ARPPU, which stands for Average Revenue Per Paying User, is a crucial metric used by app marketers to determine the average amount of revenue generated by paying users and players within a specific timeframe.

Originally developed for subscription-based apps, ARPPU has become an essential tool for app marketers, particularly those involved in freemium games or heavily reliant on in-app purchases as their primary revenue sources. It serves as a means to gauge return on investment (ROI) accurately.

At its core, ARPPU is a formula employed to calculate the projected revenue from paying users over a designated period. It enables app marketers to gain insights into the financial contribution of specific customer segments, allowing them to focus on revenue generation without being influenced by the non-paying majority.

This metric holds significant importance, especially in categories like gaming, where paying users typically constitute only a small fraction of the overall user base. ARPPU empowers decision-making processes by providing valuable information about the most valuable customers, including the channels, networks, campaigns, and even creative strategies that attract them. Furthermore, ARPPU helps app marketers comprehend the characteristics of paying users, enabling them to target similar individuals through lookalike remarketing techniques.

Note: This isn’t to be confused with “ARPU” – the extra P for ‘Paying’ in ARPPU makes all the difference.

Calculation of ARPPU – how to calculate average revenue per paying user?

To calculate ARPPU, you can use the following formula:

ARPPU = total revenue (in time period X) / number of paying users (in time period X)

By dividing the total revenue generated within a given time period by the number of paying users, you can obtain the average revenue per paying user, which serves as a valuable performance indicator for app marketers.

It is important to consider the time period when analyzing Average Revenue Per Paying User (ARPPU) since monthly ARPPU and daily ARPPU can yield different results.

For instance, in monthly ARPPU, a user may make multiple payments throughout the month. However, if you are calculating the ARPPU for a specific day and that user did not make a purchase on that day, they will not be included in the calculation.

In the case of subscription-based businesses, the first step is to calculate Monthly Recurring Revenue (MRR), which serves as the numerator in the ARPPU calculation. When calculating MRR, it is crucial to include various user segments such as upgrades, existing paying users, new users who paid the full price, and new users who paid a discounted price (e.g., quarterly or annual upfront payment).

ARPPU for mobile games

When it comes to mobile games, the freemium model dominates the app market, relying on in-app purchases (IAP) and in-app advertising (IAA) to generate revenue.

In the gaming industry, a significant portion of revenue is derived from a small percentage of users, often ranging from 2% to 5%. Within this small percentage, there is an even smaller group of users who spend substantial amounts, typically through microtransactions. These users are commonly referred to as “whales,” akin to high rollers in real-life gambling.

Given this revenue structure, user segmentation becomes crucial as marketers need to identify and isolate these whales. This process also allows marketers to determine which acquisition network or channel was responsible for acquiring these valuable users, enabling them to focus their efforts on maximizing return on ad spend (ROAS).

Introducing an advanced measurement: Cohort ARPPU

The conventional method of calculating ARPPU, as described earlier, provides valuable insights for product managers, business executives, and marketers by considering all revenues generated within a specified date range, regardless of the acquisition date.

However, many marketers are interested in metrics based on cohort groups, which involve analyzing the revenue generated by users acquired during specific periods. For instance, they might want to compare the revenue generated by users acquired in May versus June.

To calculate Cohort ARPPU, you can utilize the following formula:

Total revenue generated in time period Y by users acquired in time period X / Total number of paying users acquired in time period X

Cohort analysis proves particularly useful in understanding user acquisition (UA) efforts.

For example, let’s suppose you implemented new messaging in May, resulting in an ARPPU of $15. In June, you reverted to the original messaging (without any other changes), and your ARPPU decreased to $12. This comparison indicates that the new messaging in May was more successful in attracting paying users compared to the original messaging in June.

It’s important to note that advanced ARPPU calculations based on cohort analysis are not yet an industry standard. However, cohort metrics offer exceptional value to marketers, allowing them to gain deeper insights into user behavior and acquisition strategies. Therefore, understanding your ARPPU through this cohort-based prism can provide valuable information for optimizing marketing efforts.

Comparing ARPPU to other common metrics

  • ARPPU, with its unique focus on paying users and their revenue generation, holds significant value, particularly for gaming apps. However, let’s compare it to some other popular measurement metrics to gain a broader perspective.
  • ARPPU vs. ARPU – as mentioned earlier, the key distinction between ARPPU and ARPU lies in the exclusion of non-paying users and revenue derived from advertising. Separating paying and non-paying users is crucial for identifying successes and areas that require optimization, as their in-app activities differ.
  • ARPPU vs. ARPDAU – Average Revenue Per Daily Active User (ARPDAU) is useful for testing different creatives, ad placements, or introducing new ad formats to observe how these changes impact revenue on a day-to-day basis. In contrast, ARPPU examines revenue over a longer timeframe, such as on a weekly, monthly, or quarterly basis.
  • ARPPU vs. LTV LTV (Lifetime Value) – takes into account the value of a user from acquisition until churn, spanning a range of time, whether it’s two weeks or two years. ARPPU, on the other hand, focuses on a specific time period, such as 30-day ARPPU or 60-day ARPPU.

It can become confusing when a user installs the app, makes a purchase, and churns within the same time frame as the ARPPU calculation. In such cases, ARPPU and LTV can be used interchangeably.

By understanding the nuances and differences between these metrics, app marketers can gain comprehensive insights into user behavior, revenue generation, and long-term user value. Each metric serves a unique purpose and contributes to a holistic understanding of app performance and monetization strategies.

Strategies to increase your ARPPU

Your Average Revenue Per Paying User (ARPPU) reflects your business’s monetization strategy and the willingness of users to pay for your service. Here are some approaches to growing your ARPPU:

  1. Converting non-payers into payers: One effective way to increase your ARPPU is by converting active non-paying users into paying customers. Offer incentives, such as special discounts or offers for first-time purchases, to encourage users to make their first payment. Additionally, incentivize occasional paying users to become loyal customers by inviting them to become brand ambassadors or influencers, or by providing exclusive perks and discounts. In the case of a gaming app, consider inviting these players to join tournaments as a way to incentivize their engagement.
  2. Celebrating your “whales”: Acknowledge and appreciate your highest-spending users, often referred to as “whales,” to foster their loyalty. Recognize their achievements through ranking statuses or provide them with exclusive perks and rewards to incentivize continued purchasing. Additionally, actively seek feedback from these users to involve them in the product conversation, making them feel valued and providing valuable insights.
  3. Adjusting pricing models: Gradually adjusting your prices can help increase your ARPPU, but be mindful of potential churn that may result from price changes. Keep in mind that although your ARPPU may increase, revenue will be divided among fewer users. When raising prices, transparently communicate the added value and extra services that justify the price change. This can also help identify premium features that users are willing to pay for. Additionally, experiment with different bundles tailored to different user profiles to attract varying segments.
  4. Introducing new advertising formats: Experiment with different advertising formats, such as rewarded videos or playable ads, to increase engagement and, subsequently, your conversion rate of non-paying to paying users. Vary the placement of ads and test whether interstitial ads are more effective than banner ads. In the case of apps, consider incorporating native content that seamlessly blends into the app’s user experience, minimizing disruption and enhancing conversion rates. Programmatic advertising, which automates the buying and selling of online ads, can help streamline the process and create a smoother user experience. Utilize targeting tactics to ensure the delivery of the right advertising format to the right user at the right time, minimizing disruption and maximizing effectiveness.

By implementing these strategies, you can optimize your monetization efforts and drive growth in your ARPPU.

Key information about ARPPU to remember

  • ARPPU is a crucial metric for mobile marketers, especially for apps that are free to install and have a low proportion of paying users.
  • Understanding the characteristics and spending habits of paying users enables informed decision-making regarding effective campaigns to engage and re-engage with high-value users.
  • Differentiate between ARPPU and ARPU, as the former focuses on paying users while the latter considers all active users.
  • Prioritize the analysis of monetizing users since they are the most important segment for revenue generation.
  • Utilize cohort-based segmentation for advanced ARPPU measurement, which aids in understanding user acquisition efforts.
  • For gaming apps, identify and cater to “whales,” the users who spend the most. Celebrate and incentivize them to drive a positive return on investment (ROI).
  • When changing pricing structures, anticipate some customer loss. However, transparency and demonstrating the added value of the price increase can help mitigate the churn rate.

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