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:
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:
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:
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:
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:
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.