You’re always looking for ways to increase profits and one way to do this is by understanding the difference between LTV vs ARPU. By knowing how these two concepts work together, you can make sure that your marketing efforts are focused on acquiring high-value customers who will stick around.
LTV vs ARPU
LTV, or lifetime value, is a measure of the gross profit that a customer will bring in during their time with a company. This number is important because it allows businesses to know how much they can afford to spend to acquire a new customer.
ARPU, or average revenue per user, is the total revenue your app generates across all users. This number is important because it allows businesses to know how much they need to make to keep their business afloat.
Let’s look at the LTV vs ARPU metrics and why they are important to your business.
What is Customer Lifetime Value (CLV)?
Lifetime Value (LTV) or Customer Lifetime Value (CLTV) is the amount of profit that a client brings to your company over their lifetime as a customer.
What is the Average Revenue Per User (ARPU)?
The ARPU is the total amount of money that the app makes on average per user. This doesn’t account for all users who download the app but rather averages out all users.
The Average Revenue Per User is a widely used measure of how much revenue a company generates from an average customer. While the ARPUs is not a GAAP measure, there is a widely accepted process for calculating the value.
The key to keeping and attracting customers is understanding their value.
Knowing what your users are worth to you can help you gauge the success of your marketing campaigns, set realistic goals for revenue growth, and determine which business model works best for you.
Although both ARPU and LTV help track revenue, they measure different things.
Customer lifetime value (LTV) is a prediction of the profit margin that a company can expect to earn from the entire relationship with the customer. It takes into account all variable costs associated with acquiring, serving, and retaining customers.
This differs from average revenue per user (ARPU) which only takes into account the revenue from that customer.
LTV formula:
Lifetime Value = Average Conversion Rate x Average Number of Conversions Per Time Period x Average User Lifetime
While LTV measures the value of each customer at an individual level, ARPU measures ongoing profitability across the business as a whole.
How to Optimize Your ARPU
1. Adjust Pricing Plans
As your user base expands, so will their needs. Providing additional functionality or features to paying customers can add value to your product. Pay attention to what users are asking and consider adding new features to your paid plan.
If most of your users are willing to pay for a subscription service, you may want to push them towards a paid annual plan. This can help bring down their monthly costs.
Your paid users are always on the lookout for more value. So, when it comes to your price plan, let them choose between the features they’re willing to pay more. This can help you increase your ARPU.
Let’s look at how the meditation app, HeadSpace, offers three subscription plans for users.
They even have a yearly plan labeled “most popular” to trick users into signing up for a longer term.
2. Find More Upselling Opportunities
By offering limited trials, you can let potential customers see the benefits of signing up.
Once a user has tried out a few free meditations, the mobile app will alert them to “get more” by subscribing to the service.
They send out an email that highlights the benefits of signing up, encouraging readers to do so.
An e-commerce app can increase its customer’s average order value by bundling products together. This not only increases the perceived value of the product but also makes it more likely that customers will make a purchase.
By offering a bundled package with several products, you can increase the AOV of your customers and the perception of your product. This, in turn, will increase your Average Revenue Per User (ARPU).
3. Focus on Users That Matter
By looking at your Average Revenue Per User, you can figure out which of your users are worth the most to you and take steps to increase their engagement. You can also see which of your customers aren’t worth as much and work to increase their spending.
Let’s say you’re an e-commerce website. One of your users only purchases $10 worth of products each month.
Another user buys from you twice a year, but when they do, they spend $250 each time. This makes you more money and increases your ARPU.
As you gain more experience in the industry, you’ll start to notice certain patterns and attributes that are indicative of a user’s profitability. By focusing your resources on these high-growth potential customers, you can increase your ARPU significantly. Keep an eye out for these key indicators to maximize your profits.
CAC, LTV, and ARPU
How do these three metrics correlate?
First, let us answer this: How much is a new customer worth to your business?
Customer Lifetime Value = Average Revenue Per User (ARPU) x Number of Months an Average Customer Remains
The lifetime value of a customer is the average revenue per user multiplied by the average length of time that an average customer remains.
As your ARPU grows, you can invest more into growing your business and increasing your profits. ARPU is a measure of how profitable each customer is for your business.
Conclusion
Business owners need to understand the difference between LTV vs ARPU. By knowing how these two concepts work together, you can make sure that your marketing efforts are focused on acquiring high-value customers who will stick around. Keep in mind that your LTV should always be higher than your CAC, otherwise you’re losing money with each new customer. Use this knowledge to focus on strategies that will help increase your LTV while keeping your CAC low.
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