For technology companies that rely on users, such as software-as-a-service (SaaS) companies or apps, knowing the value of each user is critical to success. Businesses can use this metric to determine how much to spend on advertising, the value of customer loyalty, and much more.

However, uncovering this information may not be so straightforward. There are multiple ways to calculate the value of a user. Here, we’ll look at two of them: ARPU, also known as average revenue per user, and ARPPU, average revenue per paying user.

What is ARPU?

The amount of income generated by all users over a given period of time, usually a month or a year, is referred to as ARPU. A common ARPU application is in the analysis of subscription-based products and SaaS businesses.

With ARPU, you’re “flattening” subscribers into a single figure that speaks for all subscription tiers, service levels, etc. This includes anybody using a free model, which will bring down the ARPU (with the upside of upselling and perhaps in-app microtransactions). The statistic can be used to track the worth of your company's various monthly subscription levels.

ARPU is a non-GAAP metric and therefore isn’t standardized, so different companies may calculate it in their own unique ways. Some calculate based on total installs. Others look at what they qualify as “active” users.

ARPU = Monthly Recurring Revenue (MRR) / Total Active Users

What is ARPPU?

ARPPU is a metric used by businesses to determine how much revenue is earned on average by paying users and players over a given period. Basically, you’re filtering out users that are using a free model or trial version who aren’t making any sort of in-app purchases. ARPPU is calculated by dividing total revenue generated in a period by the total number of paying users in the time period.

ARPPU = MRR / Active Paying Users

Apps, games, and other businesses with a free model often offer users microtransactions to enhance their experience. You see this often with SaaS applications, mobile games, or mega-games like Fortnite. ARPPU is a way of viewing users based on the value they contribute to your bottom line, whether they’re paying a monthly subscription or not. This can also help you understand the pricing and popularity of microtransactions and in-app purchases – which can be significant profit sources.

When to use ARPU vs. ARPPU

As mentioned above, ARPPU is a more effective way for companies with a freemium model to convey revenue per user. The extra “P” that denotes “paying users” instead of all users is an important distinction. ARPPU should be used any time free users make up the majority of the user base, such as with free-to-play gaming apps. Additionally, this metric can be used to help a business find a sweet spot for cost.

For example, raising prices may raise ARPPU temporarily, but if paying users begin deleting the app, a business will see ARPPU decline and know that they have raised prices too high.

For SaaS companies, it’s more common that all users are paying to some extent, and it’s more accurate to account for all of them with ARPU. However, this doesn’t mean that businesses with free users should never use ARPU. ARPU is still an effective way to understand the overall monetization strategy and how effective it is.

ARPU can be used as the primary statistic for determining new project changes (particularly monetization): if the metric rises, you've done something good. ARPU can be used to evaluate the success of multiple initiatives because you get an apples-to-apples look at profitability. Ceteris paribus.

Calculating ARPU and ARPPU

With the need to look at ARPU or ARPPU continuously and pull from multiple data sources, having tools and templates readily available helps financial planners get the data right without burning the midnight oil. Take Causal’s SaaS template, for example. Here, you can integrate data from your systems and run continuous data models. This gives you more time to look into the numbers rather than checking spreadsheets.

Considering the time you’re using for calculations is very important for calculating both ARPU and ARPPU. First and foremost, it’s critical to ensure that you use the same period when gathering data about users and revenue to give the correct result

Both ARPU and ARPPU are often modeled and monitored on an ongoing basis, usually daily or monthly. For a SaaS company that bills monthly, modeling daily ARPU may not be a valuable exercise. However, for a freemium app, daily ARPPU could help show the results of a new campaign or feature. Each business is unique, so it’s important for the finance team to carefully consider the business and its needs before determining the best model.

Calculating ARPU and ARPPU in cohorts

Another way to analyze ARPU and ARPPU is in groups or “cohorts” by demographic information. This can be helpful to understand who you should be marketing to based on which groups are generating the most income. Some cohorts could include users in certain areas, users who identify as male or female, or age groups.

Are you an ARPU or ARPPU?

Using ARPU and ARPPU in the right circumstances helps financial planners find the opportunity behind the numbers. Whether you’re trying to figure out the overall revenue generated by your customers or need to look only at those breaking out their wallets, ARPU and ARPPU give you an excellent way of seeing the gap between your total user base and paying customers. This could lead to smarter incentives that encourage more in-app purchases, converting users from your free services or restructuring pricing. It all starts with the data.

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