ARPU vs ARPPU / ARPMU … but really LTV and CAC / CPA

So what’s more useful ARPU or ARPPU? Which is a better monetization metric for free-to-play MMORPGs or MMO games? The answer turns out to be more complex than you might think. First, let’s dispense with a few definitions:

ARPU – Average Revenue Per User, typically calculated over a monthly interval. However, you could use any interval you wanted. Weekly ARPU works just fine, as long as you count unique users by week for that metric. An exact definition would be the total revenue earned in a set interval divided by the number of unique users in that interval.

ARPPU / ARPMU – Average Revenue Per Paying User or Average Revenue Per Monetized User, also typically calculated over a monthly interval. On occasion, you’ll also see this metric quoted as a Daily ARPPU. Since we are talking pennies (pardon the pun), you’ll find Daily ARPPU more palatable in currencies with a high ratio of units to the dollar, such as the Yen — or Drachma when it returns after the Greeks actually default.

CAC – Customer Acquisition Cost. Average spend required to create a group of new customers. More about this below.
CPA – Cost Per Acquisition. Another way of saying CAC.

LTV – Lifetime Value. The total revenue (or profit) generated by a customer over the course of the relationship with that customer. Technically, you might use the net present value of such cash flows if the time frame is exceptionally long.
CLTV – Customer Lifetime Value (same as LTV).

–“But I’ve never heard of ARPMU.”

Right, that’s because we coined that term here at Global Decision. Our Online Gaming Analytics team finds that ARPU pronounces easily. ARPPU, not so much. In English, double consonants don’t necessarily lengthen the sound of the letter, so we needed a letter that could be joined with ARP*U. After careful consideration of the other 25 possibilities (ARPXU had a delighfully Basque ring to it like pintxos), we settled on ARPMU as “Average Revenue Per Monetized User.” Our clients laugh at first but we find them repeating it after us in presentations. As an avid reader of our blog, you can say you heard it here first and sound “ahead of the curve.”

Back to the math!

Consider the following table of fictitious data for a recently-launched MMORPG:

ARPU ARPPU LTV CAC

ARPU, ARPPU by Month

How is the game doing? ARPU and ARPPU (ARPMU) are both trending lower. All else equal, that’s not a great sign — but all else is never equal in the world of analytics. As a result, we can’t really conclude anything about the overall strength or weakness of an MMORPG’s performance by looking solely at ARPU and ARPPU. For starters, neither number gets to top line revenue. Consider the following larger set of information for the same game:

Revenue, ARPU, ARPPU, Percent Paying

The above data presents a much fuller financial picture of the game. While ARPU and ARPPU (ARPMU) are in decline, both Unique Users and Unique Paying Users are increasing — so much so that total revenue is also increasing over time. That’s quite a different take than our initial impression. But is the game profitable? Even assuming near-zero marginal cost per new user, we don’t have the data we need to answer that question.

ARPU and ARPPU (ARPMU) are nice to have. However, to really get at the key question of profitability, we need to think in terms of LTV (Lifetime Value) or CLTV (Customer Lifetime Value). Once we know how much a customer is “worth,” we can balance that worth against the cost to acquire that customer (CAC / CPA) to determine the net profitability of the customer.

The following data represents LTV for all customers who joined our fictitious MMORPG:

New Users, Acquisition Cost, CAC, ARPU, LTV

Two new factors enter our calculations in the above data: acquisition spend and average months of play. Acquisition spend should be the total dollars spent to acquire the set of customers obtained in a given month. Average months of play is a measure of projected tenure. We need to estimate this value (for now) in order to get a quick-and-dirty LTV, where LTV = average months of play * ARPU. We are using ARPU instead of ARPPU, because all calculations are based on the full set of players (paying and non-paying).

The bottom line, literally, is the LTV:CAC ratio. Ideally, this should be greater than one to have a fighting chance at overall profitability. Our current example shows a comfortable ratio of between 3.85 and 5.76, giving us plenty of revenue to cover acquisition costs, keep operations running, and pay out bonuses that would make Goldman’s compensation committee blush.

But what if I want to use ARPPU / ARPMU? No problem, consider the following data:

New Paying Users, Acquisition Cost, CAC, ARPPU, ARPMU, LTV

You’ll notice that the bottom line ratio of LTV to CAC is, well, the same. Your model is now filtered to include only paying users. As a result, CAC is higher by a factor of 20x (only 5% of users are monetized). But this higher CAC is counterbalanced by an LTV (based on ARPPU / ARPMU) that’s also 20x higher. So the ratio nets to the same number.

Not all MMORPG’s make money. Consider what happens when the marketing budget needs to be increased from $25,000 to $75,000 each month, and players only hang around for 3 months vs. 4 months:

MMORPG profitability using ARPPU and LTV

These changes cause the LTV:CAC ratio to hover around 1.0 — certainly a danger zone for an MMORPG.

In conclusion, ARPU and ARPU are “nice to have,” but they really need to be coupled with a CLTV / LTV approach to determine MMORPG profitability over time. Embedded in LTV is the concept of churn, survival curves, and tenure — all great topics that will be explored in upcoming posts.

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10 Responses to ARPU vs ARPPU / ARPMU … but really LTV and CAC / CPA

  1. Alex says:

    Very clear and interesting… Know I can boss my colleagues with ARPMU, LTV, and so on… So nice ! ^__^
    Seriously speaking, this article was of great help in my job. Thanks !

  2. Junde Yu says:

    Hi,

    I’m studying your third table and I’m a little confused.

    New Users, Acquisition Spend and CPA are total and averaged numbers for that particular single month, while I suppose your Avg Months of Play and LTV are historical all-time values?
    As in, from the first 3 data variables, we are looking at per-month values, but for LT and LTV, these are figures tabulated from 4.00 future months of data.

    How is it possible to compare these values of different time frames in the same monthly table instead?

    Regards,
    Junde

  3. Hi Junde,

    In the 3rd chart (and all the charts for that matter), each month refers to the cohort of users that join in that month. So, for example, in March 2011, we had 25,000 new users. Of those, 5% became paying users — for a total of 1,250 paying users.

    The average months of play is defined as the average months of play for that cohort. So you are correct that it is “forward looking” in this case. The average months of play for the March-2011 cohort would be not be something we would know for certain in March-2011. We would be able to make an estimate based on how average months of play was trending in prior months, and hopefully our estimate would be reasonably close to the actual.

    LTV is calculated directly from the average months of play and the average spend per month, again on a forward-looking basis. LTV is the total lifetime value of the customer’s revenue, so the primary drivers of LTV are the number of months of use and the revenue per month generated.

    In the 3rd table, we have an LTV of $91.17 for the March-2011 start cohort. That works out to $22.17 per month for each of the 4 months of expected play. The $22.17 is generated from Table 1. For the month’s March, April, May, and June, we expect revenues of $24.44, $24,00, $22.73, and $20.00, respectively. This nets to the LTV of $91.17 for those who start in March 2011.

    Hope that helps!

    Jaysen Gillespie
    Global Decision

    • Junde Yu says:

      Hi Jaysen, thanks for the clarification. I guess it’s fair to make an estimate for the average LT then, they generally apply, except perhaps in times of lengthy school vacations.

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  5. Dimitra Koroneou says:

    Thank you very much! This actually helped me a lot. Another also interesting website on these things is this: http://www.playcompass.com/kalmpourtzis/freemium-game-monetization-terminology-and-strategy/

  6. Matt Cook says:

    Great article – thanks for clarifying the basics of how this works.

  7. Richard says:

    In table 3, you say that LTV = Avg months of play X ARPU. Shouldn’t that be 4 X1.5 = 5? How do you get 4.81?

    • Hi Richard,

      Good question: it’s been a number of years since I created the model you are referencing, so I had to go back to the source Excel file with the model for LTV (which should remind us all of the importance of retaining detailed calculations for our summary statistics!).

      In any case, the ARPU starts at $1.25 in Feb 2011 but declines to $1.00 in June 2011, after which we assume a steady-state value of $1.00/month going forward. Thus, the LTV (which also assumes a 4-month lifetime), declines from $4.81 in Feb 2011 to $4.00 in June 2011. You’ve hit on an interesting point about the statement that “LTV = Avg months of play * ARPU:” such a statement requires “ARPU” to the the average RPU over all months of expected revenue, as opposed to just using the current month’s ARPU.

      -Jaysen Gillespie

  8. Great line up. We will be linking to this great article on our site. Keep up the good writing.

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