ARPU: How to Calculate and Interpret Average Revenue per User
Published: 2024-03-16 20:01:13

ARPU, or Average Revenue Per User, is a crucial metric in game analytics. Though many developers see it as a vanity metric, ARPU still helps game developers understand how much money they earn from each user. 

ARPU is a common metric used for all types of businesses, including games. It is most common when analyzing subscription-based products. In a gaming context, this would historically be games like [MMOs](https://www.occasoftware.com/blog/upcoming-mmos) that charged monthly subscription fees for recurring gameplay.

ARPU is a simple, straightforward metric that you can use to analyze your game's performance, and it has a bunch of varied use cases.

Basically, ARPU tells us the average income generated by a single user over a certain period. For gaming, this would be a single player. This information is essential for game developers to evaluate their project's performance and decide on the best monetization strategies. 

In this post, we'll explore what ARPU is, how to calculate it, and how you can use it to drive results.

## What is ARPU short for?

ARPU is an acronym for Average Revenue Per User. Average Revenue Per User is a standard metric in financial analysis. As an analyst, you would use this metric to understand how your company is growing and to compare your company's growth to your competitors.

In game development, you can use the Average Revenue Per User to understand how players are interacting with, and spending money on, your game. You can track this metric over time to track your progress and ability to drive revenue, and you can use it to analyze which offers or service tiers are most effective at converting into sales and revenue.

## What is ARPU (Average Revenue Per User)?

Average revenue per user measures the amount of money that you generate from a single customer. In general, you will calculate the ARPU by taking the total revenue of your business and dividing it among the total number of users.

For example, suppose you offer a free game with microtransactions. Let's say that your game has earned $100,000 in revenue from sales of these microtransactions over the past one year, and that you had a total of 10,000 users over the same time period. To calculate your ARPU, you would take $100,000 divided by 10,000. This would give you a $10 ARPU. Here's the math:

```
$100,000 in revenue / 10,000 users = $10 in revenue per user
```

## Average Revenue Per Unit

ARPU is *also* an acronym for Average Revenue Per Unit. Average Revenue per unit measures the amount of money that you generate from selling one unit of a product. Average revenue per unit is most appropriate for physical products or single-sale items. In a gaming context, the average revenue per unit would be more applicable to games with an upfront price and no microtransactions. 

To calculate the average revenue per unit, you take the total revenue and divide it by the number of units sold. For example, suppose you offer a paid game without microtransactions. Let's say that your game has earned $200,000 in revenue over the past year, and you've sold 50,000 copies of your game. This would give you an average revenue per unit of $4. Here's the math:

```
$200,000 in revenue / 50,000 units = $5 in revenue per unit
```

## Average Revenue Per User vs. Average Revenue Per Unit

Average revenue *per user* is different from average revenue *per unit* because it looks at the revenue produced per user rather than per unit. Per user measurement is most relevant for continuous and recurring revenue streams from a consistent set of users. However, you can use both to understand overall purchasing habits.

For example, let's suppose your business offers a collection of games that must be purchased individually. Let's say that your business has earned $300,000 in revenue over the past year, and you've sold 60,000 units to 20,000 users. This would give you an average revenue per user of $15, and an average revenue per unit of $5. Here's the math:

```
$300,000 in revenue / 60,000 units = $5 in revenue per unit
$300,000 in revenue / 20,000 users = $15 in revenue per user
```

## Calculation and Significance

Calculating ARPU is straightforward, it involves dividing the total revenue generated within a specific timeframe by the number of active users.

For example: if a game accrues $3,000 in revenue from 5,000 active users, the ARPU would be $0.6 ($3,000 / 5,000).

ARPU serves as a critical indicator of a project’s monetization performance, directly impacting income. A higher ARPU correlates with increased revenue. It's instrumental in evaluating the efficacy of changes implemented within a project, considering both paying and non-paying users.

## Variants of ARPU

While ARPU is calculated over a set period, other variants offer more nuanced insights. ARPDAU, or Average Revenue Per Daily Active User, mirrors ARPU but on a daily scale. ARPMAU, or Average Revenue Per Monthly Active User, calculates the average revenue generated by monthly active users.

### Analyzing Pricing Experiments

ARPU helps in analyzing pricing experiments. For instance, if a product's price increases lead to a decline in user count but higher revenue, ARPU helps assess the effectiveness of the change. Similarly, changes in traffic volume and revenue can be evaluated through ARPU analysis.

### How to Increase ARPU

Enhancing ARPU primarily involves focusing on two key metrics: Paying Share and ARPPU (Average Revenue Per Paying User). Converting more users into paying customers and optimizing the value offered can boost ARPU. Additionally, improving user engagement and encouraging repeat purchases can elevate ARPPU.

### Benchmarking ARPU

Determining what constitutes a "good" ARPU varies across industries and business models. Generally, a higher ARPU is desirable, showcasing effective revenue generation per user. Analyzing competitors and industry benchmarks can help gauge the effectiveness of ARPU within a specific context.

### LTV vs. ARPU

While ARPU measures ongoing profitability per user, Customer Lifetime Value (LTV) delves into the total revenue expected from a customer throughout their engagement. LTV accounts for variable costs, offering a holistic view of customer value over time.

## Conclusion

ARPU serves as a cornerstone metric for indie game developers. By focusing on this metric, developers can gain valuable insights into user behavior and make data-driven decisions that lead to long-term success in the industry. ARPU offers valuable insights into monetization strategies and project performance, and when used effectively, ARPU has the potential to improve revenue and create a more sustainable growth.

## Recommended reading

- [Average revenue per user](https://gocardless.com/guides/posts/average-revenue-per-user/)
- [ARPU](https://www.devtodev.com/education/articles/en/131/main-metrics-average-revenue-per-user)
- [What is ARPU?](https://blog.hubspot.com/service/arpu)