We are increasingly often seeing the metric ARPU in financial reports of startups, but many of you might be wondering ‘”what is this metric?”
ARPU is an indispensable KPI for improving sales of “well-established services” for which dramatic growth in the number of customers is no longer expected.
This article will provide a thorough overview of ARPU, the differences from similar metrics, and how to maximize it.
ARPU (Average Revenue Per User) is a measure of the average amount of revenue per user and can be used to measure how well a service is monetized.
Although it was mainly a metric used in the telecommunications business, it is now often used in mobile games, video-streaming services, and SaaS businesses, as it is appropriate for evaluating the state of business for monthly charged services.
ARPU is calculated by using the formula “sales divided by the number of users.”
For example, if the total monthly sales of service is 100 million dollars and the number of users is 50,000, the monthly ARPU is 2,000 dollars.
100,000,000 ÷ 50,000 = 2,000 (dollars)
In the application business and SaaS business, there are basically only two ways to increase sales; 1) to increase the number of customers or 2) to increase the size of sales per user (ARPU).
The number of customers is generally considered important in the early stages of the business, however, for these business models, the user growth tends to slow down after it hits a certain level, so ARPU becomes more important as the business grows.
In order to maximize ARPU, the amount of sales, which is the numerator, has to be increased. You can take the following two approaches to increase the amount of sales.
Increase the frequency of purchase
Up-selling is to persuade a customer who is considering purchasing or has previously purchased your product to switch to a higher-tier service/product.
For example, at the end of the month, you may have a mobile data limit on your smartphone that slows down the loading speed. If someone promoted an increase in the mobile data limit on your smartphone, you may consider up-selling.
Cross-selling is to persuade customers to purchase another single or a set of service/product, in addition to the service/product they have already purchased.
Promoting a tablet or a Wi-Fi service to a customer who is already under a smartphone contract is an example of cross-selling.
For more details on up-selling and cross-selling, we explained it in our article “What are up-selling and cross-selling? From their overview to cases”.
It may not work as expected if you simply rush to tackle “increasing the frequency of purchase” and “achieving up-selling/cross-selling”. The key is customer loyalty.
In this day and age, where goods and services abound and you can make the best choice for yourself from a wide range of options, the purchasing decision rests with the consumer. It is now impossible to drive customers solely based on the suppliers’ will.
As a prerequisite, you need to make your customers feel a strong trust and attachment to your service or company. In other words, the customers must be very loyal. Therefore, you need to first improve loyalty from the customer’s perspective, and then make proposals for repurchase or up-sell/cross-sell so that the sales will increase.
In contrast, forcing customers to repurchase or up-sell/cross-sell when their loyalty is not improved may, in the worst case, lead to user defection.
In order to improve customer loyalty, it is effective to quantify it using NPS®.
NPS® is one of the most commonly used metrics of customer loyalty, and it has a particularly strong correlation with growth of performances. In 2003, Satmetrix conducted a survey which featured more than 50 companies in 12 industries, including airlines, transportation companies, and life insurance companies. They found that NPS® scores had a significant correlation (correlation coefficient of 0.70 or higher) with revenue growth rates for most companies. The airline industry especially had an extremely high correlation coefficient of 0.89.
Thus, it is essential to continuously measure NPS® and quantitatively determine when to propose repurchase or up-sell/cross-sell since it is highly predictive of customer behaviors.
There are similar metrics to ARPU called ARPA and ARPPU
ARPA stands for Average Revenue Per Account, and it measures the average revenue per account, not per user like ARPU.
When there is a gap between the number of subscribers (users) and the number of accounts, ARPA is a more accurate measure. Specifically for services that allow a user to sign up from multiple devices or create multiple accounts under one subscription.
For example, a typical example of a service that allows a single user to use multiple devices is telecommunications carrier services.
Today, many people own multiple devices such as smartphones and tablets. However, in the case of ARPU [sales ÷ number of units], the number of units is counted as the number of users, so it would be calculated as if each user has only one device.
In other words, even if one person owns multiple devices, each device is counted as if it were owned by a different user, resulting in a larger number of users than the actual number.
This can lead to misunderstandings such as there are many opportunities for up-selling/cross-selling, or overestimating the opportunities for new customer acquisitions.
In contrast, ARPA (sales ÷ number of contracts) counts the number of contracts as the number of users, so the calculation results are in line with the actual number.
Therefore, in the case of a service that allows a single user to use multiple devices, it is more appropriate to focus on ARPA, which indicates sales per contract, rather than ARPU, which indicates sales per device.
Similarly, in the case of BtoB SaaS businesses, where multiple accounts are often used in a single contract, it is better to use a unit of per contract rather than per account to grasp figures so that you can get more accurate results.
ARPPU stands for Average Revenue Per Paid User. It can be used to measure how much a loyal user is willing to pay.
Even though it has the same numerator, the amount of sales, as ARPU, there is a difference in the denominator. While ARPPU’s denominator is all users, ARPPU only takes paid users into account, thus it always holds ARPPU ≥ ARPU.
In the case of a service that has a mix of free and paid users, it will be more effective to focus on ARPPU. A typical example is mobile games.
By comparing ARPU and ARPPU, you can identify how the revenue of the service is structured such as the percentage of users supporting the service, and how they react to various pricing schemes such as discount campaigns and limited time offers.
When the difference between ARPU and ARPPU is large
If the value of the denominator, which includes the number of free users, is significantly low, it means that the percentage of paid users is low, i.e., the service is supported by a small number of core users.
Since the service relies on a small number of users for revenue, it may be difficult to increase future revenue. In the case of mobile games, you need to think about ways to make it easier for free users to pay, such as creating limited-time-only gachas or offering special coupons so that the billing rate will increase.
When the difference between ARPU and ARPPU is small
If the value of the denominator, which includes the number of free users, is not significantly low, it means that the service is supported by a large number of users, i.e., a large percentage of paid users.
It would be ideal if the service is generating revenue from a wide range of users. In order to further stabilize the revenue stream, you need to acquire new customers or increase revenues from existing customers (via up-selling and cross-selling).
By increasing ARPU, you can increase sales even for products/services that face stiff competition in matured markets.
However, it is not recommended to rush to increase ARPU. Promoting a customer with insufficient loyalty to up-sell or cross-sell may have the opposite effect.
The first priority is to improve the customer experience and increase customer loyalty, and then up-sell or cross-sell so that ARPU will increase.