Basics of unit economics. Part 2: ARPU and ARPPU – all you need to know about the basic metrics of unit economics
Unit economics is a complex subject which requires some preparation. It’s impossible to cover everything in a couple of posts, but we will try to provide you with the essential information to be ready for our free webinar on March 22.
In our last post, we discussed how understanding unit economics can help your business. Now it’s time to talk about its basic metrics and the ways of calculating them.
By knowing these metrics you can calculate your business model and figure out the potential result of scaling the business and potential revenue.
In fact, ARPU and ARPPU help us understand how much we can spend on attracting users and whether our business model is profitable or not.
By working with the values of the parameters in the formula, you can find your optimal growth points:
UA x (-CPA + ARPU) = Profit
UA x (-CPA + CR1 x ARPPU) = Profit
CR1 = (Buyers / UA) x 100
ARPPU = ( Av.Price - COGS) x APC - 1sCOGS
ARPU = ARPPU x CR1
ARPU – Average revenue per user (sometimes known as average revenue per unit), usually abbreviated to ARPU, is a measure used primarily by consumer communications, digital media, and networking companies, defined as the total revenue divided by the number of subscribers.
ARPU can be used as a key metric for evaluation of new changes (especially, financial) in the project – if the value increases, then you did everything right.
ARPU also works well when comparing the effectiveness of several projects. For instance, with other parameters being equal, an investor would choose a project with a higher ARPU.
ARPU = ARPPU * (CR1)
ARPPU or ARPC or CLTV – Average revenue per pay user (Average revenue per customer or LifeTime Value).
ARPPU shows how much we get from sales to one customer during a set period of time. It doesn’t include the marketing cost. This parameter is often confused with ARPU, where all users (free and paid) are taken into account. In case of calculating ARPPU, only the number of paying users is considered.
ARPPU is usually significantly higher than ARPU.
ARPPU is mainly used for calculation of the income from one paying customer during its cooperation with the product, service or company:
ARPPU (LifeTime) = average product price × APC
ARPPU is an important value for business effectiveness estimation. By comparing it to CAC (customer acquisition cost) we can measure the return on marketing investments.
ARPPU is the reaction of paying users to the value of your project. This metric indicates how much a loyal paying user is willing to pay. It can also be interpreted as a user’s response to the prices set in the project.
ARPPU = ARPC = (AvP — COGS) × APC
ARPPU = Average Price × (1 + Conv2 × APC)
ARPPU (ARPC) – Average revenue per pay user.
ARPU – Average revenue per user.
AvP – Average price. (The sum of money our customer paid for our goods or services).
COGS – Cost of goods or services sold.
1sCOGS – Special costs for the first transaction, and those that are not included in COGS. For example, the cost of connecting the client to the service, test periods, etc).
APC (or LT) – Average number of payments made by one customer during a set period of time. (APC by default is counted for the whole life period. This value should be calculated carefully. It should never be rounded up).
CR1 – Conversion rate.
CPA (or CAC) – Cost per acquisition or Cost per click or Customer acquisition cost – Cost per acquisition of one User. (It is determined by dividing the entire marketing budget by the number of all Users. Unlike CAC, CPA is an actionable metric. It doesn’t depend on other metrics, such as conversion or User flow).
UA – User acquisition. (The number of Users we acquired. It shows how many Users learned about our product through different marketing strategies. For example, how many visitors came to the site through the search engine advertising or how many companies we contacted by the cold calling).
P.S.: Do you have any further questions, need help in calculating your business's unit economics or would like to have a chat with one of our specialists? Just get in touch! We will be happy to assist!