An abbreviation to ‘Average Revenue per Paying User’, ARPPU means the average amount of cash you generate from a single paying customer during a specific period. Those customers could be paying for your services through subscribing, download, or in-app purchases.

This article is written to cover the definition of ARPPU and the difference between ARPPU, ARPU AND ARPDAU.

In addition it will cover its formula and how to calculate your ARPPU, as well as what three common mistakes people make when calculating it. It will also cover factors that will impact this KPI, why it is important, in addition to five ways to enhance your ARPPU.

This metric doesn’t involve those customers who don’t pay for your services even though they are engaging with it through free downloads, trial periods or limited features usage. This metric is usually used by mobile applications businesses to identify their valuable users.

ARPPU is usually a very accurate metric to be generated as it needs to differentiate between customers or users who pay on different plans, for instance those who pay annually VS quarterly.

The value of this metric is not only to identify those who pay for your services but also to identify those who will need to see more tweaks and new features of your services with time to ensure their retention and loyalty to your product, service, and brand.

Difference between ARPPU, ARPU and ARPDAU

ARPPU focuses exclusively on paying customers and their contribution to the generated revenue, but it’s not the only measure of user’s contribution to the generated revenue. There is ARPU and ARPDAU which also measures this factor.

What is ARPU?

This term stands for ‘Average Revenue per User’ and it measures the average paid cash or generated revenue by all the users of a service or all the downloads of an application.

This metric in its calculations will include both types of users: those who pay for the service and those who did not pay.

What is ARPDAU?

This is an abbreviation to ‘Average Revenue per Daily Active User’ and it’s a metric that measures the interaction or paid interactions of users with your services or application on a daily basis.

This metric differs from ARPU and ARPPU in terms of the time period it calculates users’ contribution to the generated revenue.

Formula for ARPPU, ARPU and ARPDAU & how to calculate them?

How to calculate ARPPU and its formula?

ARPPU is calculated once you have your total revenue and the number of paying users. To calculate your total revenue or monthly recurring revenue (MRR)  you need to include your:

– Upgrade revenue

– Existing paying users’ revenue

– Revenue earned from new subscriptions (Full price + non-zero discounted)

– Normalize revenue on monthly basis for annual/quarterly subscriptions

– Deduct revenue lost from downgrades and cancellations

Once you have these two factors it will be easy to calculate the ARPPU by simply dividing them.

How to calculate ARPU and its formula?

Average revenue per user is simply calculated by calculating the yearly generated revenue or the annual generated revenue divided by the total customers or users you have during a month or a year.

Contrary to ARPPU, to calculate your generated revenue for ARPU you are not required to know the paying customers or users, you simply need to count all the users you have on a monthly or annual basis.

How to calculate ARPDAU and its formula?

As ARPDAU calculates users who engage with your services or applications on a daily basis and generate revenue for your business on a daily basis, you need to count the number of users who use your services on a daily basis and make payments on a daily basis.

Once you have this number you will take your total revenue and divide it by your daily active users to have your ARPDAU.

Three mistakes calculating ARPPU

When calculating our ARPPU & ARPU, a mistake can occur and this is because they both measure and calculate users contribution to the revenue aggregated and they have relatively close names, but they are totally different metrics and provide different results and information.

ARPPU is counted as the monthly recurring revenue (MRR) divided by the total number of active paying customers. The key word we need to focus on is ‘Paying Customers’ who pay for features in your app or services and not only one-time subscribers or users.

Contrary to ARPPU, Average Revenue Per User (ARPU) is measured or counted by dividing monthly Recurring Revenue / All users (paid + free). For instance if you attract 200 customers, out of which 100 are paying users and your total monthly recurring revenue is $4000.

So your ARPU will be 4000/100 = $40.

This means one user brings you $40 per month.

To calculate your ARPPU, which is 4000/40 = $100, this means one paying customer brings you $100 per month. This means a major difference between both of these calculated values. Hence, if you are utilizing both ARPPU and ARPU, make sure to clarify that.

ARRPU = Total Revenue / Total users

Rather than considering monthly recurring revenue, people may consider the total revenue earned. But for subscription-based endeavors, it’s the monthly recurring revenue that shows the actual performance of your business.

So, in both these cases, the total user count will always be greater than the paying users. Average Check and ARPPU are the same.

Moreover, One of the common mistakes businesses make while calculating ARPPU is that they take the Average Check as ARPPU.

The result may not be unpleasant, hence it could mislead the business.

Average check = Revenue/Transactions

Average Check is defined as the average transaction value, and the number of transactions can’t be as the number of paying customers. If one customer pays regularly in a month his number of transactions will not be taken in ARPPU, but it will be part of the Average Check calculation.

We could try to understand this with an example.

Imagine  we have 100 users who paid $100 each, then later 20 of them again paid $20 each. In this case the ARPPU will be (20 x $20 + 20 x $100)/100 = $24.

On the other hand, for Average Check calculation, we will divide the revenue with the number of transactions which is (100 x $24 + 20 x $100)/20 = $220

What affects your ARPPU?

When we mention those two metrics, we need to understand their core source. These metrics tackle elements in the business that deal with the end user and their direct interaction with the product or services through their purchases.

The first element that will impact your ARPPU is your prices. Your prices are one if not “The” main element that will directly manipulate and impact your ARPPU. Low prices means low ARPPU which means slow growth in terms of infrastructure, expanding and so on.

On the other hand, higher prices means higher ARPPU but you need to have a thorough understanding of your pricing in correlation with your customers’ purchasing power.

In addition you need a thorough understanding of your future goals and growth.

The second factor that will impact this metric is your customers and your value added services in your packages.

Meaning, even if you priced your packages with low prices but they have crucial value or provide valuable features this can guarantee for you a broad customer base.

Your customer base growth is a crucial factor for you if you decide to have low prices for your products and services, or you could provide value added services that would reside well with your existing customer base and it would bring in additional potential customers for you.

You could categorize your customer-base into different segments, meaning you could provide low priced products and services to a segment, and in the same time high priced products and services to another segment. However, the value would obviously differ with the features provided.

As long as you understand the importance of your customer-base and its growth, then you will realize its direct relation with your ARPPU. Simple adjustments in your prices and provided value to your customers will make a direct impact in your ARPPU.

Why is ARPPU important?

This metric is important for you to see the positioning of your products and services in the served market and how its being adopted by the potential customers or users you are targeting.

We could say that the importance of this metric can be mentioned in five points, but the actual value of this metric can vary from one business to another depending on the type of information they want to see and their strategic planning.

Loyalty is one of the valuable insights you can extract from your ARPPU, as it will directly show you how many of your customers are constantly paying for your products or services. You can also target those paying customers to give them promotions and value added services.

In addition, it is important because it will demonstrate the value ratio for your products and services, and at what price customers and users find your provided services are of value to them. This allows you to see if you need to increase your prices or lower them.

This metric is also important as it will provide indications about the financial performance of your company and its overall health. For instance, if your ARPPU is growing this means your business is growing and more customers find great value in what you provide.

On the other hand, if your ARPPU is hitting lower rates, this can mean that either your pricing is too high compared to the provided value or the problem that it’s solving is not an actual problem and it’s merely a trend that resolves itself with time.

Moreover, this metric is important for you to be able to validate the performance of your marketing and sales teams. If these teams are reaching their targets and the targeted segments in your business plan, then the metric will demonstrate this achievement.

Five ways to enhance your ARRPU:

1- Increase your prices wisely. This approach will enhance your metric but in order to do so you need to make sure not to create tension between you and your already paying customers, unless you are adding new features or have a strong justification for this increase.

Another approach to increasing prices is micro-increases, this will allow you to see the reaction of your already paying customers by causing major friction, and also it will allow you to enhance this metric.

2- Identify major touch points, which will allow you to attempt to up-sell. This involves inviting potential customers or users to upgrade their plans to higher priced plans with more valuable features.

You can also try to conduct a cross-sell action where you offer additional relevant products or services to your customers or users.

In addition to up-selling or cross-selling, you can provide limited free trial plans for your products and services which will require users or customers to sign-up for these limited plans which will require fees.

The idea behind all these approaches is to study the behaviour of your current customers and see where there is a turning point for them in-terms of prices, packages, and value, and when they are willing to make the jump from their current plans to others.

Moreover, it gives you insight about your potential customers or users, and which key points they are looking for in your products and services, and at what price they are willing to be fully committed to acquiring them.

3- Another approach to enhance your ARPPU is by pitching your other products and services to your loyal customer base that already pay for your services or products. They might be more willing to purchase more products from you since they are already paying customers.

4- Focus on your top payers. This simply means those who have been paying for your products and services for a long period of time. They should have your attention so you could design promotions and special memberships for them.

5- Don’t focus on customers or users with low growth potential. Narrow down or segment your customer base and focus on those who will be valuable if you conducted a cross-sell or an up-sell action. This will positively impact your ARPPU.

Researched and Authored by CEO of NeuralWize Ahmed Fagiry