I tweeted last week on this topic and decided to follow it up with a quick post to clarify what I meant here:

ARPU = Average Revenue Per Users
ARPPU = Average Revenue Per Paying Users

The formula for ARPU = Total Revenue / Total Users
The formula for ARPPU = Total Revenue / Paying Users

ARPU & ARPPU defines the revenue potential of a business. Higher ARPU leads to higher revenues. So the core focus of your business should be to optimize ARPU or ARPPU. Ways to optimize these two metrics differs for each business so I won’t go there in this post.

Important Tip: Define the optimum period to calculate ARPU/ARPPU. Monthly is recommended, but some fast changing businesses can measure it on a weekly basis.

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Lifetime Value
I have often heard people talking about optimizing LTV & trying to optimize their marketing spends to keep CAC below LTV. In my opinion, that's trying to artificially elongate the business. Let me explain why:

The (simplest) formula for LTV = ARPU X Average Retention Time
Note: There are several methods to calculate LTV, which takes into account gross margin, cost of capital deployed & any other costs, but that would require a separate post or you can check the wiki page here

Objective of calculating LTV is to find out how much money to be spent on acquiring a customer. In an ideal scenario LTV > CAC

Spending more time balancing LTV & CAC and less time on increasing retention or ARPU is an extremely short term approach. Reducing CAC may compromise growth, cut down on quality acquisition sources which look expensive up front (eg. Facebook/Native/Display) or diverting marketing dollars to acquire poor users (eg. incentivized installs/click baits). These negative steps can be pretty dangerous for any business.

Hence focus on retaining users & optimizing ARPU and rest everything will fall in place. So I am reiterating that LTV is just a number which is good to know, but don’t obsess over it ☺

I will be happy to hear your feedback on this. Feel free to comment here or tag me on twitter @deepakabbot

Mail me at dabbot@gmail.com