When it comes to measuring the monetary value of an online gaming community or virtual world, the industry standard as of late has been ARPU (average revenue per user) and ARPPU (average revenue per paying user). ARPU is essentially the total revenue divided by the total number of users, and ARPPU is calculated by dividing the total revenue by only paying users. But, are these the right metrics for measuring the financial stability and success of a community? As social gaming and virtual world communities continue to grow in 2010, it’s relevant to explore these metrics further.
What’s good about the ARPU and ARPPU metrics?
- In the user-paid model, these are metrics based on the total number of users rather than impressions or clicks. That’s good because it helps you focus on the right things:
- Growing the user base
- Ensuring the user experience is good — if you truly believe that the experience is what users are paying for then these metrics will reflect that
- Combine ARPU or ARPPU with a viral coefficient and growth numbers, and you can arrive at the amount you should need to invest in acquiring customers. At least it seems reasonable.
What’s missing in the ARPU and ARPPU calculation?
- By accounting for only revenue in these metrics, the actual cost of generating this revenue is overlooked. People often claim that the cost of virtual goods is marginal, but it still remains that hosting, payment processing, customer support, licensing, and development are costs that must be accounted for. So, when calculating the acceptable cost of customer acquisition, you should really be using profit instead of revenue in this calculation.
- It is also important how you define revenue. If you calculate your revenue before taking out the payment processing costs, and you use a high cost payment system such as iPhone payments (30% per transaction) or Facebook credits (again believed to be 30% per transaction), then you are going to be very far from the true measurement of total revenue. Alternatively, you may think your costs are nominal because you use a Paypal or credit card payment fee structure, say $0.30 + 3%, but even this is 9% of a $5 transaction value – and as high as 33% of a $1 transaction value. In other words, cost of processing micropayments can be a significant portion of your revenue, and you should question if ARPU is really the right metric. Clearly, if your ARPU comprises a lot of $1 transactions, your margin per user is much smaller than if ARPU derives from larger price points.
- Once you start investing in acquiring customers, you will need to look at additional metrics, such as customers acquired via paid advertising versus customers acquired through viral adoption. As an example, on average it may cost you $0.20 to acquire a user and if your ARPU over the user’s lifetime is $0.50, then your profit margin per user is actually $0.30 as opposed to the ARPU calculation of earning $0.50 per user. Further, hypothetically, you may generate lower revenue from free users versus paid users and this may lead you to believe that paid users are more valuable than free users. However, by looking at the margin or profit per user, you may arrive at a more accurate metric about the value per user.
No metric is complete in itself, and so it is questionable if ARPU is really all you should be looking at to measure the success of your community. We suggest that Average Margin Per User (AMPU), as opposed to ARPU, may be a more important metric to measure and track. Once you factor out the variable cost associated with the revenue as well as the cost to acquire the user, you have a better sense of what is the true value of the user to you.
How does Social Gold help? First of all, the cost of processing transactions is much lower than other systems, including iPhone payments and Facebook credits. In the example above, inclusive of all payment processing costs, Social Gold pricing never exceeds 10% of the transaction and we scale our processing fees for merchants with higher transaction volume.
Secondly, and more importantly, our in-game payments flow significantly improves conversion and revenue — we consistently see merchants achieve more than 20% revenue lift by using Social Gold. Social Gold’s zero-friction payments solution increases the likelihood of repeat purchases by more than 200%. And finally, we tune the payments flow to convert a larger number of users from free to paying users. In other words, your costs do not increase as user base increases, but your ARPPU as well as your AMPU grow.
In the end, the short answer of whether ARPU is a good measurement of success in our opinion is “not by itself.” We recommend looking at AMPU as much as looking at ARPU in order to get a complete perspective on the welfare of an online gaming community or virtual world.
As always, email us or follow us on Twitter — and we would love to work with you to increase your AMPU.
