The Holy Trinity of Monetisation

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The term The Holy Trinity of Monetisation struck me when I was writing Monetisation 101. I had never read it and I’ll admit I even googled it just in case someone had coined it before. All performance dashboards that I maintain have a line graph with the three parts of this trinity:

  • ARPU aka Average Revenue per User
  • ARPPU aka Average Revenue per Paying User
  • Conversion Rate

These are the three most important KPIs of monetisation of freemium games because… they are free.

The Power of Free

I think no book I’ve read so far goes as deep on how freemium games are supported than Free: The Future of a Radical Price. If you want to understand what attracts people to free things, then another book is in order: Predictably Irrational. These are two books that certainly deserve a review here but the key points are:

  1. Free is not just $0, the absence of cost or 100% discount. Free is a price category on its own. All things being equal, the average person will choose what is free opposed to what is not.
  2. The freely available product is a whole product. Monetisation is achieved with added value offers for users that want an extended experience, items, etc.

In practice this means that a small percentage of the users (the payers) willingly support the product that is free to many more users. The fact that is free allows a much larger user base than if the product was paid even if the percentage of payers is very low. In a nutshell, a simplified vision of the freemium model.

Time for name calling!

There are three base variables that determine the Trinity. It’s the interaction between these three base variables that we want to understand.

Users is the count of unique users. All of them, payers and non payers.

Payers or Paying Users is the count of unique users that generated revenue. For the sake of simplicity, let’s assume that they made an in app purchase.

Revenue is the total dollar amount of revenue generated by the players.

These three create The Holy Trinity of Monetisation:

holy_trinity_formulas

ARPU is the Average Revenue per User. It is the revenue generated, on average by each user of the game. This is what we want to see increasing over time. ARPDAU (Average Revenue per Daily Active User), probably the most looked at relative monetisation metric is simply the daily ARPU. Any other measure of ARPU, like cohort ARPU, cumulative cohort ARPU, monthly ARPU, etc, are just called ARPU. This should say enough about how important ARPDAU is! It is the only form of ARPU that has its own distinct fancy word!

ARPPU is the Average Revenue per Paying User. It is the revenue generated, on average by each payer of the game. A high ARPPU is often related to a small number of high spenders while a low ARPPU is often related to large number of low spenders. ARPPU is a complex topic, often related with game design. We do a lot of research around ARPPU, like recurrence of purchases, distribution of ARPPU per percentiles of player spent and many others. Not only we (the analysts at Miniclip) have a lot of questions and hypothesis but there are many that come as a follow-up from producers, designers and stakeholders.

Conversion Rate is the percentage of Users that are Payers. Increasing Conversion Rate usually means making a more accessible product available which will increase ARPU at the expense of ARPPU. What makes conversion rate particularly interesting, apart from understanding the dynamics within the Trinity, is that ARPPU often increases later in the player lifecycle by recurring purchases from already converted players. While mathematically it is obvious that moving conversion rate up implies a drop in ARPPU if the ARPU is the same, it is also true that the increase in ARPPU may occur later for this reason with no significant impact on conversion rate.

Why should you care?

There are probably hundreds of ways of increasing revenue. If you acquire players you will increase revenue, for instance. I can guarantee you that if your ARPU is unaffected and you acquire players your revenue will grow. It doesn’t mean that your profit will. It is (very) likely that you’ll loose money in the process. That is why monetisation is so important. Revenue as a business metric is vital but monetisation is as closely tied to profitability as it is with revenue.

A simple example is if you have a multiplayer game. Server infrastructure often grows as player base grows. You can calculate the server cost per DAU. Lets say some new fancy feature will increase server costs by 10%. You can establish how much your ARPDAU has to increase to pay for the development and the server costs and still be profitable.

The added value of the Trinity is that you’ll have a model on how monetisation is affected. You can only increase monetisation, meaning the ability of the game to generate revenue and profit by increasing the ARPU. However increasing the ARPU is always a function of increased Conversion Rate, ARPPU or both although this is a rare occurrence. Establishing as a goal an ARPU increase is meaningless if you don’t know if you want to affect the Conversion Rate or the ARPPU.

It is easier to define features that address monetisation goals if we understand how these three KPIs affect each other and how profitability per user is affected by other business and operational KPIs.

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