Increasing ARPU Is The Fastest Source Of Profits

Posted by: Matt Shanahan

In Q4, Scout Analytics published research that showed publishers on average have 20-30% untapped revenue potential with their existing users. How attractive is that untapped potential? To examine that question, we did further analysis on the relative value of those revenues compared to increasing sales volume or cutting sales expense. In each scenario we modeled, increasing average revenue per user (ARPU) increased profits more than the other tactics.

While each publisher’s model will vary slightly, here is an example scenario to illustrate the point. Let’s assume a publisher has a $100M online business with a 15% profit margin and 40% cost of sales. In this model, the publisher is generating $15M in profit annually.

Impact of Cutting Sales Expense
If a publisher is able to increase the number of transactions per sales person by 5% (i.e., cut the cost of sales by 5%), the publisher would generate the $100M of revenue at a cost of 38% rather than 40% of revenues. The profit would increase from $15M to $17M or a 13% increase overall.

Impact of Increasing Sales Volume
By increasing sales volume 5% from $100M to $105M assuming no change in average number of transactions per sales person, the publisher would need to increase sales capacity. While the relative cost of sales would stay at 40%, the actual cost of sales would increase from $40M to $42M. The profit would increase to $18M or a 20% increase overall.

Impact of Increasing ARPU
By increasing ARPU 5% assuming no change in average number of transactions per sales person, the publisher would increase revenues without increasing sales capacity. The actual cost of sales would remain flat at $40M, but the revenues would increase to $105M. The profit would increase to $20M or a 33% increase overall.

In summary, the 20-30% of untapped potential with existing users will create higher profits faster and with less risk compared to increasing sales capacity or cutting sales expense.