Average revenue per paying user (ARPPU)
Average revenue per paying user (ARPPU) is a measurement that app marketers use to figure out how much revenue is generated by paying users and players, on average, over a certain time period.
What is ARPPU
Originally designed for subscription-based apps, this mobile metric is now a cornerstone for app marketers – specifically those measuring revenues from freemium games, or relying heavily on in-app purchases as their main revenue drivers – to understand ROI.
Most simply, ARPPU is a formula used to calculate the amount of money an app can expect to generate from paying users over a set period of time.
Note: This isn’t to be confused with “ARPU” – the extra P for ‘Paying’ in ARPPU makes all the difference.
Why is ARPPU important?
ARPPU measures what matters the most – revenue.
With ARPPU you are able to isolate smaller groups of paying customers and understand their value to your business. It’s easier to focus on revenue without the noise of the non-paying majority.
It’s particularly important in categories like gaming where paying users are normally only a small percentage of the overall user base.
ARPPU can inform decision-making by helping you understand which channels, networks, campaigns, and even creatives attract the most valuable customers. It even allows you to understand the characteristics of a paying user so that you can get similar ones through lookalike remarketing.
How to calculate ARPPU
To calculate ARPPU, follow this formula:
Total revenue generated in time period X / Total number of paying users in time period X
Be mindful of the time period that you choose to examine as a monthly ARPPU and a daily ARPPU will bring up different results.
For example, in a monthly ARPPU one user may make a number of payments over the course of the month. However, if you’re only examining the ARPPU of a specific day and the same user has not made a purchase that day, then they will not be included in the calculation.
For subscription-based businesses you will first need to calculate your monthly recurring revenue (MRR), which will act as your numerator. When calculating your MRR, remember to include users who have upgraded, existing paying users, new users (that paid full price), and new users who are paying a discounted price (because they paid upfront quarterly or annually).
ARPPU for mobile games
As we mentioned above, freemium is the predominant model in the app market. In this model, app owners are dependent on in-app purchases (IAP) and in-app advertising (IAA) to generate revenue.
When it comes to gaming, the vast majority of revenue comes from a small number of users, as little as 2-5%. Within that small percentage are an even smaller number of users who spend a lot, usually in a series of microtransactions. These players are referred to as whales, just like in real-life gambling.
Because of this revenue structure, user segmentation is vital as marketers must be able to identify and isolate the whales. Doing so also highlights which network or channel they were acquired through, so marketers can focus their efforts on getting the highest return on ad spend (ROAS).
Advanced measurement: Cohort ARPPU
Calculating ARPPU as we described above is useful for product managers, business executives, and marketers alike. It combines all of the revenues generated in a given date range regardless of their acquisition date.
However many marketers are interested in metrics based on cohort groups, for example, calculating how much revenue was generated by all users who were acquired in the month of May versus June.
To calculate Cohort ARPPU use the following formula:
Total revenue generated in time period Y by users who were acquired in time period X / Total number of paying users who were acquired in time period X
For example, say you tried out some new messaging in May when ARPPU was $15. Then, in June, you changed the messaging back to the original (and nothing else) and your ARPPU decreased to $12. From this you know that your new messaging in May was more successful at attracting paying users than the old messaging in June.
It is important to note that advanced ARPPU calculations done according to cohorts are not an industry standard. However, cohort metrics are extremely useful for marketers and therefore we see value in understanding your ARPPU through this prism as well.
ARPPU vs. other metrics
ARPPU has its own value, particularly for gaming apps, but let’s compare it to some other popular measurement metrics.
ARPPU vs. ARPU
The main difference between ARPPU and ARPU as we mentioned above is the exclusion of non-paying users and revenue gained from advertising. Paying and non-paying users have different in-app activities and so separating them out is important for identifying successes as well as areas for optimization.
ARPPU vs. ARPDAU
Average Revenue Per Daily Active User (ARPDAU) is good for testing out different creatives, ad placements, or adding new ad formats and seeing the reactions and changes to your revenue based on these, on a day-to-day basis.
However, ARPPU looks at revenue over a longer period of time, on a weekly, monthly, quarterly basis, etc.
ARPPU vs. LTV
LTV stands for lifetime value, which takes into account how much a user is worth from acquisition until churn, whether two weeks, or two years.
ARPPU looks at a specific period of time, so for example, 30-day ARPPU or 60-day ARPPU.
Where it gets confusing is that sometimes a user will install, purchase, and churn within the same period of time as the ARPPU, in which case they can be used interchangeably.
How to grow your ARPPU
Your ARPPU is a reflection of your business’s monetization strategy and how much a user is willing to pay for your service.
For online businesses there are a number of revenue streams which include subscriptions, purchases (including paying for an app), or advertising revenue.
Increasing your ARPPU can be achieved by:
1. Turning non-payers into payers
One way to grow your ARPPU is to take users who are active and turn them into paying users. You could do this through incentives, such as special offers for first time purchases.
You can also incentivize occasional paying users and try and turn them into whales by inviting them to be brand ambassadors/influencers, or simply offer perks and discounts. For a gaming app you could incentivize these players by inviting them to join a tournament.
2. Celebrating your whales
By celebrating your whales you can make them feel special and appreciated, thereby encouraging them to keep being whales. Try recognizing their achievements with ranking statuses or by giving them perks to encourage them to keep purchasing.
You can also try and get feedback from your whales on how to improve your app or site. Bringing them into the product conversation will make them feel valued and give you feedback from your most important users (win-win!).
3. Adjusting your pricing models
Increasing your prices is a simple way to increase your ARPPU but do it gently and be aware that you may suffer some churn as a result. Your ARPPU may in fact remain the same as the revenue is split between fewer users.
If you do raise your prices it’s important to do it transparently and explain what extra services you are offering to justify the price change. This is a good way to see if there are premium features that users would be willing to pay for.
You could also test out if different bundles are more attractive to different user profiles. It is easier to experiment with new users and observe their buying patterns than trying to convince an existing user to change their package and spend more.
4. Introducing new advertising formats
You can also vary the placement of your ads and see if an interstitial ad is more effective than a banner ad. For an app you can see if native content, which blends into your app’s content, is the least disruptive to user experience and thus better at converting.
Programmatic advertising is one method used to achieve a smooth experience by automating the buying and selling of online advertising and creating a more streamlined process.
Targeting tactics help to deliver only the right advertising format to the right user at the right time which helps to ensure the least disruptive experience possible.
ARPPU is a critical metric for mobile marketers, especially those whose business model is a free-to-install app and when the share of paying users is particularly low.
Knowing who your paying users are and how much they spend can help you make more informed decisions about which campaigns are most effective at engaging or re-engaging with the highest value users.
- ARPPU and ARPU differ in that ARPPU is focused on paying users and ARPU calculates based on your number of active users
- ARPPU isolates your monetizing users, which at the end of the day are the most important segment
- For advanced ARPPU measurement you can segment your data using cohort-based groups which is particularly useful for understanding your UA efforts
- Gaming apps should remember it’s important to be aware of who your whales are – celebrate them, incentivize them, and invest in them and you’ll see a positive ROI
- If you change your pricing structure be prepared to lose some customers (however if you’re transparent and demonstrate the added value of your price increase it may help to mitigate the churn rate)