Regardless of how successful your value proposition is, it’s a dead-end if you can’t monetize it successfully. After all, building and maintaining products isn’t a cheap endeavor.
One of the key metrics showcasing the effectiveness of your monetization efforts is the average revenue per paying user (ARPPU). Let’s take a look at how you can use this metric to drive your monetization strategy.
Table of contents
ARPPU vs. ARPU
Let’s kickstart the topic by looking at how ARPPU differs from the average revenue per user (ARPU). Although the difference might seem obvious initially, you’d be surprised how often these terms get mixed up.
ARPPU answers the question, “How much revenue, on average, does one paying user generate for us.” It’s usually calculated for 30-day periods, but variations also exist.
The formula to calculate ARPPU is:
ARPPU = Total revenue during period X / Total number of paying users during period X
ARPU, on the other hand, takes a broader approach and answers the question, “How much revenue, on average, does one active use generate for us.”
The formula for calculating ARPU is:
ARPU = Total revenue during period X / Total number of users during period X
The difference is subtle yet significant. You increase ARPU mostly by moving more users from freemium to premium plans. On the other hand, you increase ARPPU by maximizing the number of dollars one subscriber pays you.
Although both are important, they answer different questions and have different relationships to other metrics. It’s important to clearly distinguish one from the other.
When should you optimize ARPPU?
Before we jump into strategies for optimizing ARPPU, let’s first unpack when to do so. Although you might feel that a higher ARPPU is better, it’s only a part of the equation. It isn’t always the best leverage to increase actual revenue.
Let’s look at a few examples:
ARPPU vs. lifetime value (LTV)
In most cases, increasing ARPPU and lifetime value (LTV) goes in pairs. Increasing average revenue from the user tends to increase the value you capture from the user, but it’s not always the case.
For example, increasing the subscription price will naturally result in higher ARPPU but also in higher churn. This might level out or even reduce the user’s lifetime value, thus the long-term revenue.
As another example, it’s a common tactic to incentivize long-term subscriptions by offering discounts (the longer you subscribe, the less you pay). While it decreases ARPPU, the increased user retention might increase the LTV positively.
In many cases, it’s all about choosing the right tradeoff — do you need more short-term (ARPPU) or long-term (LTV) revenue?
ARPPU vs. conversion rates (CVR)
Should you maximize the revenue you get from paying users or increase the number of paying users?
On the one hand, you could double your ARPPU while killing half of your conversion rate (due to higher price points) to boost your revenue by approximately 50 percent. You could also double the number of your paying customers by reducing your ARPPU and achieve a similar result.
It’s a more strategic question than just a matter of monetization optimization. You should know if you prefer to have:
- Many low-revenue customers (low ARPPU x many paying users)
- A few high-revenue customers (high ARPPU x few paying users)
Ideally, you should have a benchmark of what percent share of paying subscribers you aim for.
For example, if your goal is to “convert 30 percent of engaged users into paying subscribers,” then if only 20 percent of your engaged users are subscribed, focus on CVR. If you are above 30 percent, focus on maximizing ARRPU.
Rotate the focus between ARRPU and CVR to keep your percent share of paying customers aligned with your long-term strategy.
Strategies to increase ARPPU
The following tactics can help you improve ARPPU:
- Optimize pricing
- Remove the ceiling
- Enable customization and personalization
- Maximize the value you deliver
Optimize pricing
One of the main ways to increase the ARPPU is price optimization. There are three points in price optimization:
1. Optimizing how you charge
The way you charge is often more important than how much you charge.
For example, charging a flat fee might leave money on the table if you have plenty of heavy users. Experiment with different ways of charging your users, like usage-based, seat-based, result-based, or a flat fee, to find what resonates the most with your users and what drives the highest ARPPU.
2. Optimizing how much you charge
Discovering the perfect price point takes continuous research and testing. Don’t just set the price and leave it to the side.
Review your pricing regularly and experiment different prices to find the sweet spot with the most optimal ARPPU, LTV, and total revenue.
3. Proper bundling and tiering
Different segments of users are willing to pay different prices for different solutions. Figuring out the right offering for various tiers and bundles might be a game changer.
Ensure you understand your user segments well and offer a tailor-made package for them.
Remove the ceiling
In many freemium products, there are heavy users willing to pay a lot of money to get desired benefits. We usually refer to these users as “whales.”
It’s especially common in mobile gaming. Although most users don’t pay or pay very little for the premium advantages, a small group is usually willing to pay a lot just to get an edge over other users. Often, 5 percent of users can generate 80 percent of the revenue. It’s like a Pareto principle on steroids.
Make sure these whales don’t experience any needless ceilings. A common example is to have one subscription tier that answers the needs of most users but leaves your most loyal and heavy users unsatisfied. Give them the option to pay even more money for even more benefits. For example, by offering additional tiers and options.
Enable customization and personalization
Even the most homogenous segment will have slightly different needs inside it. It’s especially true for already mentioned whales.
At some points, consider deeper offer customization — standard tiering and bundling might not be enough.
Let’s take a look at Intercom. They not only offer a few different subscription tiers, but you can also choose additional add-ons depending on your needs. Letting users pick their features on their own usually increases the amount of money they leave.
Take it even a step further and recommend the best extensions and add-ons depending on your user activities and problems within the product. A personalized offer goes a long way.
Maximize the value you deliver
Let’s wrap up the section with a dose of common sense — to improve the average revenue you get from paying users, and maximize the value you deliver.
You can either achieve it by limiting the possibilities of free users, although it’s often short-sighted, or by streamlining the premium experience and giving your premium users more perks and possibilities.
At the end of the day, the price your users are willing to pay represents the value they perceive. The more value you provide, the more likely your users will pay for different perks.
Wrap up
ARPPU is a critical monetization metric. It tells us how much money you are getting from an average paying user. The higher the ARPPU, the more you’ll get from every new conversion, and the more valuable every retained user will be.
There are many ways to maximize ARPPU, the most common ones being:
- Optimizing the way you charge
- Optimizing how much you charge
- Finding the best combination of tiers and bundles
- Maximizing revenue you get from your whales
- Customization and personalization of the offer
- Maximizing the value you deliver
However, you shouldn’t follow ARPPU maximization at all costs. It’s only part of the equation. Higher ARPPU doesn’t always equal higher total revenue. Other metrics, such as LTV, conversion rates, and churn, also play a critical role.
Ultimately, it’s all about finding the balance between short-term and long-term revenue, and between the number of paying users and the average revenue you get from one.
The post What is ARPPU? Definition, formula, and how to calculate appeared first on LogRocket Blog.
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