Episode 10 - How to Grow Average Revenue Per User
Tom Burrell
August 16, 2024
Welcome to the tenth episode of the Retention Blueprint. This newsletter promises to transform your retention impact in just 5 minutes per week, providing digestible retention content that adds value every time. This episode focuses on the growing average revenue per user.
Why Focus on ARPU Growth?
There are three key reasons to focus on ARPU growth. The first is obvious: more revenue per customer equals more revenue overall. The second is less obvious: research from McKinsey shows that subscription brands with the lowest churn are those that cross-sell multiple services to at least ⅓ customers (1). The third reason is efficiency: with the right product set, it's much easier to drive 5-10% of additional value from your existing customers vs. acquiring brand-new customers.
ARPU growth is achieved by moving customers to a more valuable tier, signing customers on a longer commitment (even if the monthly amount is less, this almost always results in an increase in customer lifetime value) or selling ancillary products or services, which can include additional subscriptions or single transaction products.
There are 3 core methods for driving ARPU growth:
How pricing / tier options are presented in the signup flow
Data-driven cross-sell / up-sell pathways
Lifecycle-driven cross-sell / up-sell pathways
Each of these will be explored in this newsletter.
Actually, there is a fourth way to increase ARPU: strategically adjusting existing customers' core subscription prices. However, given activating price rises for existing customers is such a large topic, it will be covered in a future newsletter.
Presenting Pricing and Tier Options in the Signup Flow
ARPU growth doesn't start with cross-selling new services to existing customers; it starts with how you present your tiers and product offerings in the sign-up flow.
Typically, a customer sign-up flow has a maximum of three pricing tiers: basic, middle, and enhanced. Any more, and you create cognitive dissonance and reduce conversion. The enhanced tier can also be a decoy, leveraging behavioural economics principles to drive conversion into your desired tier (see Retention Blueprint Episode 8), which is usually the middle tier.
The lower tier, which can also be a freemium offer is typically used to entice customers into your product, before later moving them to the desired middle tier option.
So given, that the lower tier is just a conversion driver, and the highest tier is often a decoy, you might ask, why not make the offer simpler and simply present the middle option? This comes down to consumer psychology, presenting one option becomes a take it or leave choice for the customer, which is more likely to result in a leave it than the 3-tier approach which creates a ‘which option do I like best mentality’. If you have 3 options, research shows customers are much more likely to convert into your desired middle tier than presenting the middle tier only.
In addition to 3 pricing tiers, you can also offer different terms with associated pricing, such as a lower pro-rata monthly amount for an annual or longer commitment.
Annual plans are typically much more effective for long-term customer retention and result in higher customer lifetime value due to extended tenure. However, at conversion, they can often turn an impulse purchase into a considered one, which then reduces overall conversion. Monthly plans are, by definition, more transient. Most brands find success driving conversion into a monthly plan and delivering an annual upgrade pathway.
Data-Driven Cross-Sell / Up-Sell Pathways
The key to success in data-driven pathways is to leverage subscriber data or research to identify who in your customer base an enhanced solution would add value to. Some of the ways you can do this are:
Identify heavy users of any tier, ripe for a switch to a longer commitment
Identify who in a lower tier shares the profile of those in a higher tier
Identify customers who have tried to use a feature only available to a higher tier
Identify customers who have explored longer commitments and higher tiers in their account profile or your product pages
Identify profiles of ancillary service buyers and look-a-likes
Once you have identified these audiences, the goal is to build a program of constant experimentation within your product, CRM marketing, and contact centre channels to drive the desired outcomes. This includes testing messaging, offers, journey sequencing, timeliness, etc.
Cross-sell / up-sell modelling can be beneficial here, but typically focusing on descriptive analytics to identify the right customer cohorts is sufficient to drive a strong test plan and conversion uplift.
Lifecycle-Driven Cross-Sell / Up-Sell Pathways
Lifecycle-driven cross-sell / up-sell pathways are similar to data driven pathways, but leverage an understanding of where the customer is in the lifecycle of their relationship with your brand. Examples include:
Subscription sign up
Add X ancillary service/product to your order. This should be presented in the page immediately after the subscription purchase confirmation.
Onboarding
In the first week, upsell to a higher tier or longer payment commitment. Upselling in onboarding may seem counterintuitive and overly aggressive, but experience repeatedly shows that an upsell offer in an onboarding program typically means the subscriber is more committed to the outcome and stays longer - this happens irrespective of whether or not the customer takes the upsell (refer to Retention Blueprint Episode 4 for more on this).
Early life
Heavy usage/engagement in the first 90 days. Cross-grade to an annual payment plan or higher tier during high engagement. If the offer is positioned in the customer's interest, this can create customer affection. This is also effective in other times in the lifecycle if product usage peaks.
In life
Bundled offers with a subscription plan, new payment tier and ancillary services.
Recommend a friend and get a discount or free trial on an ancillary service or higher tier.
Cancel journey
Stay for X% discount on a longer payment term / get ancillary service for a discount if you stay.
Final Thoughts
Focusing on ARPU growth is vital for three key reasons: it directly boosts revenue, higher spending or a greater number of services reduces churn, and it offers a much more efficient path to revenue growth compared to acquiring new customers. ARPU growth starts at sign-up and continues throughout customer life. Ultimately, the key to success here lies in understanding your customers, experimenting with approaches, and continuously refining your tactics based on data-driven insights.
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