ARPU (Average Revenue per User), ARPPU (Average Revenue per Paying User), and LTV (Lifetime Value) are often confused. Although they may seem similar, they actually serve different purposes. This confusion can be problematic when it comes to budget allocation or job interviews.
What is ARPU?
ARPU is the average revenue generated per user. This metric is important for analyzing user spending trends, adjusting pricing, and overall financial health assessment of a product. ARPU is calculated by dividing revenue by the number of active users.
What is ARPPU?
ARPPU is the average revenue generated per paying user. When calculating ARPPU, revenue remains in the numerator, but instead of all active users, only paying users are included in the denominator. This metric helps understand how much money an average paying user brings in.
Difference between ARPPU and LTV
The main difference lies in the numerator. ARPPU is calculated based on revenue, while LTV is based on profit (e.g., gross profit minus costs). Many businesses (such as mobile games) calculate LTV based on revenue. The debate about this approach has been discussed with Dane Hanin (recording here).
But the most important thing – and this is something I absolutely refuse to understand – is that the whole Internet suggests calculating ARPU and ARPPU for a period (e.g., for February), rather than cohort-based (e.g., for the February cohort of new users). Yes, this makes sense for content products with advertising monetization. Here, we trade users for ad inventory. But for all other cases?
For B2B SaaS, Ecommerce, and everything else where user activation is linked to payment, both of these metrics (ARPU and ARPPU) become nothing more than ego boosters (for oneself and possibly for investors).
Pouring cold traffic in March - reduces your ARPU (using popular calculation methods) for that period. What does this mean? Did someone perform poorly? What conclusions can be drawn? Unclear.
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