Average revenue per user: How to calculate ARPU
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Your app might be acquiring and retaining users, but are they driving revenue?
Understanding the value of your users is key to identifying revenue drivers and growing your app’s profitability. This is especially important for app product managers, who need to know exactly how much revenue their app is generating compared to forecasts.
In this guide, we’ll explore how Average Revenue Per User (ARPU) enables you to do exactly that and more.
What is ARPU?
ARPU is a calculation that allows you to assess the average revenue received per user of your app, typically over a set period of time.
It’s especially useful for in-depth analysis of the growth potential of individual users of your app, as well as assisting in monetization modelling.
The calculation for ARPU is defined as the total revenue divided by the number of app users over a given time period.
Why is ARPU important?
ARPU is important as it allows you to plan for both long and short-term goals.
In the short term, it can help you to increase monthly revenue, by identifying opportunities and minor adjustments that will increase in-app conversions.
Looking to the longer term, the real potential of ARPU comes with its ability to assist in forecasting. Armed with ARPU, you can start to assess in-depth metrics like the Lifetime Value (LTV) of your users and then use this to build out advanced monetization strategies.
How is ARPU used?
Beyond the short and long-term value of ARPU, it has a number of specific tactical uses as well. Here are some of the ways you can use ARPU to improve the profitability of your app:
1. Track the weekly, monthly, or annual performance of your app’s paying users
By calculating ARPU on a regular basis, and comparing different periods of time alongside each other, you can build out a clearer picture of your app’s performance. For example, when looking at ARPU across the year, you may see that average revenue per user is up on the previous year.
For a detailed breakdown of the analytical benefits of tracking different time periods, you can read our full guide on daily active users (DAU) versus monthly active users (MAU).
While this is nice to know, it doesn’t tell you why and you can’t learn from it. If you were to expand on this and calculate the ARPU for each month in the year, however, you might see that the update you did in June doubled the ARPU compared to the previous month. With this in-mind, it’s easy to see how powerful ARPU can be for telling the story between customer acquisition, retention and conversion
2. See how your revenue stacks up against the competition
One of the best uses for ARPU is to assess your own performance against competitors. While you may not have access to in-depth performance data for your competitors, app store competitor analysis tools can help you to gather top level metrics around your competition.
Equipped with this intel, you can easily make a high-level comparison of how much your app is making from it’s users compared to competitors. Generally speaking, the higher ARPU app will be more profitable.
3. Identifying and selecting the most effective customer acquisition channels
The strongest metric of all for assessing a customer acquisition channel’s effectiveness is user Lifetime Value (LTV). To calculate this however, you will need to first work out the ARPU, which can be a valuable data point in itself.
By segmenting your ARPU by acquisition channel, you can quickly model the profitability per channel, which may vary wildly from the best performing channels solely in terms of acquisition.
4. Assess which of your pricing plans or monetization models is most profitable
Refine and simplify your monetization model by evaluating which price plan, subscription tier, entry offer or product package converts most frequently.
A/B testing can help with this as you can compare the ARPU for users on the default price plan directly against users on the new pricing strategy being tested.
5. Segment your users based on their profitability
Is a user buying in-game currency once per month? Do they exclusively pay for the ad-free upgrade and nothing else? Or are they a power user that frequently purchases in-app?
Identifying these sorts of trends and using them to segment users can be a powerful way to adapt your strategy for different audiences.
6. Forecast revenue growth and adapt your strategy accordingly
As we covered in the first point, assessing performance over a variety of time frames can help to build out a picture of how profitability changes over the course of a year, or following recurring events like big updates or new app features rolling out.
Once you understand how these factors impact ARPU, you can forecast the profitability of various upcoming events and adapt your strategy to fit.
How to calculate ARPU
To calculate ARPU, simply divide the total revenue for a given time period by the number of users over that same time period.
Here’s what the formula looks like:
So for example, if you earned $10,600 in revenue in December and had 27,800 users in that month, then your ARPU for December would be $0.38.
$10,600 / 27,800
How to increase ARPU
To increase the average revenue per user for your app, you need to identify the changes you can make and evaluate which ones will have the greatest impact. This could be anything from introducing new features, making design changes, adjusting your pricing strategy and even app performance optimization.
There’s no single solution to this. Ultimately it will require continuous assessment, testing and improvement of many aspects of your app strategy. To start this process, here are some areas to consider:
1. Adjust pricing plans based on what users care about
Does your app have a killer feature that every user raves about? You might want to consider making it a pro feature, but giving new users a trial to get a taste of it.
Similarly, if your latest update isn’t converting in-app purchases, you may want to lower the price or make part of it free, to make it more appealing to users.
But how do you assess how your users feel about specific features or subscription plans?
Review management makes this easier than ever. With our review management tools, you can quickly identify common trends in both positive and negative sentiment reviews and then use these to adjust your pricing models accordingly.
2. Explore opportunities for upselling
Do users on your mid-tier price plan often upgrade to pro after around 6 months? If so, you could automatically offer users on the mid-tier plan a free trial to the top-tier subscription once they hit 6 months after signing-up.
By segmenting users and reviewing common trends in relation to ARPU, you can quickly spot opportunities to upsell.
3. Focus on users that matter
Continuing with the theme of user segmentation, not all users are the same and some simply won’t be as profitable as others. The key is to identify the trends that indicate a user will be of high value, and focus on giving them the best possible app experience.
By calculating ARPU and using this to assess LTV, you can spot the most valuable users and focus on understanding how they use your app. This will enable you to develop product roadmaps that are more likely to drive revenue, by appealing to your most profitable users.
4. Test, iterate and continue to monitor ARPU over time
It goes without saying that this isn’t a one-time exercise. For ARPU to be truly beneficial, it should become a permanent fixture in your monthly, quarterly and annual reporting.
By doing this, you can then test new features, deep-dive into further analysis and continuously improve your app experience.
Looking to get started? Here are some specific exercises you can follow to aid in this process:
- Cohort analysis - Segment your user base to better understand the different journeys and motivations that your app needs to facilitate.
- Competitor analysis - What are your competitors doing to drive active users, where are they falling short?
- Semantic analysis - How are your users feeling? What qualitative data are they sharing about their experience?
- Product roadmap - Have you set out a clear growth strategy for your app’s first few years?
- Voice of the customer - find out how to track user sentiment with the voice of the customer analysis.