Different types of businesses require different measures of success or growth — one man's metric is another's trash, you might say. This is especially true for revenue per user.
Revenue per user is calculated by dividing total revenue by total users, and is used to understand growth and distinguish if some customers are more valuable than others. As business models evolve, it may be more accurate to calculate revenue per user strictly for your monthly active users as opposed to total users.
The metric was historically used for service providers such as a telecommunications company. The main revenue stream would be a subscription, but value-add services and other revenue streams could be taken into consideration with revenue per user.
Now, revenue per user is useful for both businesses based on subscriptions, media companies and social networks — but not retail.
Companies that use revenue per user may calculate it in a number of ways, depending on how they plan to apply it.
Social networks often use revenue per user, and it's a powerful metric for investors looking to compare companies in the space. Twitter, notably, did not include revenue per user in its IPO filing, but others were quick to calculate — finding Twitter's average revenue per user to be $0.55 compared to Facebook's $1.60.
A similar comparison comes from Pandora and Sirius. Pandora brings in revenue from both subscription and advertising, while Sirius is all subscription, with average revenue per user of $6.57 and $149.21, respectively — a notable difference, considering both incur similar costs related to licensing.
For a company with revenue based on app sales, revenue per user is "the amount of money someone is willing to spend for your app," says Cezary Pietrzak, former head of marketing at Appboy. "This helps you determine the overall value of your business given a specified volume of installs, and helps you establish a reasonable figure for your acquisition costs."
When revenue is tied to the number of users, as it is in a subscription business, it is crucial to think of marketing costs through the same lens — this is the average user acquisition cost.
"In a fundamental sense, a digital entity can buy traffic. They can use SEM, SEO or other forms of marketing and partnerships to drive audience. The question is always, at what cost," says Jon Gibs, VP of analytics at Huge.
A retail business such as an ecommerce company, on the other hand, will find the metric meaningless. Because revenue per user does not take into consideration the lifetime value of a customer, it's not helpful in measuring growth or determining strategy. The lifetime value instead can be calculated by factoring in how much a customer spends per year. Loyalty programs like Sephora's VIB are geared to reward those who spend more, thus lifting the average revenue per user.
But a user's value is no longer limited to transactions, as social media allows us to also measure influence.
"Increasingly, this concept of revenue per user, which has been extended to CLV, is being augmented with the social influence of the user," says Gibs. Someone might only buy T-shirts from a retailer — that's not worth much from an RPU perspective, but she might be extremely active and influential on social media. "What if this person, however, has a huge number of Twitter fans and tends to tweet about good experiences?" Now you have an influential brand ambassador encouraging others to support your business.
A higher acquisition cost for this socially connected customer may be justified.
Since Twitter did not choose to include revenue per user in its IPO filings, what metric did it use instead? The company revealed revenue per 1,000 timeline views, tying its business to frequency of use rather than the number of users. Because advertising accounts for 85% of Twitter's revenue, perhaps this metric is more relevant, since high usage yields more advertising revenue
Pandora also uses a unique metric that can be tied to advertising opportunities — revenue per listener hour.
These unique metrics are more useful in planning strategies for growth for each individual company; however, investors or other stakeholders will rely on a widely used metric such as revenue per user in order to compare your business to the rest of the market.
Does your brand use revenue per user or something similar to quantify the value of your audience? Tell us in the comments below.
Image: iStock/Akindo