Average Revenue Per User is a crucial metric to assess your company’s financial performance. It tells you how much money each user brings in on an average. It’s super important to measure ARPU because it tells you how well you’re monetising your user base and helps you figure where you need to double down and where you need to course correct.

There are majorly 2 ways of increasing revenue for your business, acquiring new customers and charging them or increasing revenue from existing customers. In this section, we’ll talk about the latter. When your ARPU is maintained or growing (depends on the nature of your business), it’s a sign that what you’re doing is working → maybe its the pricing strategy or your upsell and cross sell efforts are paying off. If not, you might want to look at your current strategy and rework it.

It is a function of total revenue and total number of users during a specific period.

Now that you have identified your top, let’s say, 5% high-value users, how do you go about increasing average revenue generated from them?

As a company, you tend to have multiple ICPs that you target, which are further narrowed down into specific buckets based on their contribution to your business in terms of revenue. You need to segment customers based on their appetite and willingness to pay.

For high value customers who have a high appetite to pay, we can solve for willingness by means of creating and communicating value. This bucket of users is usually the highest contributor to your revenue and you need to personalise efforts towards them. Again, this may differ in the context of your business so feel free to alter based on your business model.

Let’s say your ARPU is $4. This may be made up of a lot of users coming to your website and buying nothing at the moment and some users spending a lot. Let’s break it down with 100 customers:

Now, you need to personalise your efforts for these different buckets of users to increase average revenue you generate from them.

You wake up in the morning and go to your favourite coffee shop to get breakfast. You order your regular everyday coffee which is the barista probably remembers at this point. Suddenly, he asks you if you’d like to upgrade to a larger size or add an extra shot of espresso for a little more. 

You finally decide what coffee size you want, and the barista asks if you’d like to add a pastry or a sandwich to go with your drink – 

With you being a high-value customer for the coffee shop, they made an attempt to increase the size of your order, increasing revenue generated from you.

Increasing Average Revenue Per User or ARPU

In the next 2 chapters, we’ll look at it from 2 lenses → Up-selling and Cross-selling.

https://private-cdn.growthx.club/learning-experience-products/production/foundations/intro-to-monetisation-v2/intro-to-monetisation-v2hls.m3u8

Introduction to ARPU

Introduction

Introduction to Monetisation and a litmus test to see if you're really ready to monetise. 

How effectively you monetise can make or break your business.

The likes of Spotify have become a household name by offering unmatchable value and having solid monetisation strategies → nailing free to paid conversions, retention and average revenue per user. In that league, companies like 

Sure, all of them have built great products but their success is holistic. It’s about how they’ve gotten users interested and converted them into paying customers and optimised for their revenue streams. 

And to help you solve monetisation problems at work, we built this foundation. 

Folks with 3-5 years of experience in monetisation, solving for Free to Paid and ARPU and beginners who are curious to learn about solving for these problem statements.

Learning is tough. It takes effort. Lots of it. It's not easy to pull the brakes on your work or life and sit down to learn when you have the option to spend your time in a million other ways.

But now that you've taken this step for yourself, let's do it right.

Don't think of this guide as just another piece of content to read and learn from. Instead, take it as a step-by-step process, which if you follow will help you achieve the above outcomes. If you find yourself dozing off - take a break, stretch and come back. Take notes, read, re-read, process, practice and apply.

Set up your work desk and sit there (I know, the temptation to be on your bed is real)

Put your phone on silent, switch it off for the next hour if possible.

Grab your favourite cup of tea or coffee and settle in.

Intro and Overview

Before we dive into how you can scale your monetisation efforts by solving for Free to Paid conversions and Increasing ARPU, let’s get some basics in order and see if your product is even ready for monetisation.

This will tell you whether or not your users are sticking with your product. To be able to monetise, you need a flattening or a smiling curve like that of LinkedIn. You might be thinking, how do I put a number to retention? When do I know that the stickiness of my product is enough to monetise it? It’s simple. You need to define the core metric for it. Let’s say you’re acquiring 150 users per month, but only 40 of them are coming back to transact with your product. Red flag.

Now you know users are sticking to your product, next step is to see how deeply are they engaging with it. 

This process will help you figure out the willingness to pay of your ICPs:

Btw, we go into much greater depth with the litmus test in our flagship 

 If you're a founder or operator in the Indian start-up ecosystem solving for acquistion, onboarding, engagament, retention or monetisation, this is for you. 

But coming back, now you know whether or not you’re ready for monetisation. 

 If you are, we will dive into solving for 

 by means of upselling and cross selling in the next modules. 

If not, it’s think to go back to basics and solve for retention, engagement and willingness to pay before you proceed to monetisation.​

Litmus Test: Are you ready for Monetisation?

Solving for Free-to-Paid 

Building Free-to-Paid conversion strategies using the Value Funnel framework and Trial Period design. 

Wait no, I’m not going to lay out the definition for you here, that will be futile. 

Rather, we'll see what F2P looks like in different contexts and you'll define what it means for your business. 

With that in order, let’s move to the next stage where we’ll figure out how we can solve for Free-to-Paid in the context of your business by creating a value funnel.

Let’s take an example to understand →

Through the next chapters, we will dive into each part of the funnel in detail.

: Creating value for free and paid plans, segmenting by ICPs and figuring what to charge for

 Ensuring discovery of value via different channels

 Through the free and paid plans to ensure conversion and retention

 Capturing value by understand how much to charge and designing an effective pricing page

What is Free to Paid?

You might be in a hurry to get paying customers onboard asap. I get it. 

But that requires a super solid foundation. Because if it’s shaky, your entire strategy might fall.

Start off by asking yourself, what’s the 

 between the free and paid plan of your product? If there’s no difference, big red flag right here. Similar if the difference is minimal.

The value you provide in the free version v/s paid version needs to have a clear differentiation. If it doesn’t, you’ll not be able to convert. Value creation will happen in the form of product features and how they help your customers do their job more effectively and efficiently.  Let's look at this via value circles. 

You’re assessing a project management tool. The value creation for a free plan v/s a paid plan could be basis the number of projects you can manage, how many users you can collaborate with, how well can you track progress and productivity. Let’s take a look at the core value being created here and how it can be split between free and paid.

Look closely and you’ll see how different aspects are changing. Starting with the number of projects that can be managed. For a large org managing multiple projects at a time, the free plan is clearly not enough. But for a freelancer with only a few projects ongoing, it might be just fine.

To convert free users to paying customers, you need to understand how different customers value different features. Which is why knowing your ICP becomes crucial. 

Two things you need to figure out: Who to charge and What’s important to them.

We’ll look at this with the RFM Grid: Recency, Frequency and Monetary.

Based on the context of your business →

Let’s continue with the project management example →

Here your ICPs might include freelancers and large orgs. Value creation for each of them will look very different because of their use cases. And so they will prioritise different features at different stages.

According to this example you might feel like freelancers are always going to be okay with the free plan and not upgrade. 

That’s where your job comes in. You need to ensure that they don’t feel the free plan is 

. Not just that, you also need to make sure that they perceive the paid plan to be superior to the free plan.

Once you’ve created the right amount of value in both the free and paid plans, it’s time to communicate that value to the customer. By right amount of value I mean enough for the customers to experience an aha moment or build a habit but not so much that they’re satisfied with the free version and don’t see the point of upgrading.

Value Creation

You might have created killer value for your free and paid plans but if your customers don’t understand how your offer creates value, don’t blame them. Blame your messaging.

You need to figure out these 2 things for effective value communication →

Figuring out what you can charge your users for gives you an insight into how they perceive your product and what is its value for them, that is, perceived value. This can differ from person to person. 

Shouldn't this be a part of Value Creation? You might be wondering. 

You need to know what your customers are willing to pay for in order to create value for them. But this concept is extremely crucial to value communication as well. Once you know what the perceived value of your product is in the eyes of your customer, all your efforts need to go towards communicating value in a way that hits home. 

Once you know this, you can really nail your messaging. 

So then, let's look at the 4 things you can charge for:

But, how do you figure this out for your product?

Your core value prop + user outcome → What you should charge for

Now comes value communication and discovery. 

Value created is wasted unless its communicated to the users and they’re able to discover it on the channels that you choose. There can be majorly 3 ways to look at it:

In-flow communication is all about seamlessly showing users the benefits of your product right when they're using it. When you’re using Duolingo, as you complete lessons, little reminders pop up how Duolingo Plus can offer offline access and an ad-free experience. This way, you see the value exactly when you might need it.

Similarly, Trello gently nudges users about its premium features like advanced checklists and unlimited power-ups while they’re managing their tasks, making the upgrade option feel like a natural progression.

“Unlock ad-free music and unlimited skips on any device, plus download your music and listen offline” Ring a bell? Yep. That’s the annoying Spotify ad you would’ve heard a million times before upgrading to Premium.

In-app ads are a way for you to communicate the value in your paid plan to a wide audience. While the ads do get annoying, the repetition makes users aware of the added value they can get by subscribing, nudging them towards the paid plan after experiencing the limitations in the free version.

Continuing with Spotify’s example, they figured out that ad-free music, unlimited skips and offline music are some of the top features for their ICP and so monetised them and communicate via ads on the platform.

Another way of communicating value of your paid plans is nurturing folks in your funnel with email marketing. It helps with personalised and targeted communication. You can send tailored messages that highlight specific features or benefits aligning with the user’s interests or usage patterns.

Here's a real life experiment from The Ken:

With that, we end this this chapter on Value Communication. 

In the next one, we'll go deep into Value Experience:

→ Aha moments and Habit building for Free and Paid

Value Communication

Once the value has been communicated to the user, it’s super important that your product lives up to the promise. 

If it doesn’t, the trust you've built all along breaks.

Value Experience is a function of creating an aha moment and/or building a habit for users and is applicable at both stages → free and paid.

You need to ensure that the user either experiences an 

 of your product, thereby creating a necessity for the paid version.

Okay, people like your free product. When do you start charging?

Good news, your users have started building a habit for your product or they've experienced enough aha to develop a liking for your product and probably talk about it with friends and people at work. Should you let them continue using it for free or is this the right them to put a paywall and make money? Let's find out. 

We'll see this with an example from Tinder:

(Note the series of events here carefully)

You sign up for Tinder and fill out all your information like name, profile pictures, bio, interests and more. 

You start swiping right (and left) on people, waiting to match with the right person (this varies from person to person based on what they're looking for from the app). 

Now you either need to pay to get unlimited swipes right now or wait before you can start swiping.

In an ideal case scenario, you find the experience worthwhile and go ahead with subscribing for premium. Tinder makes money, you find a match, hopefully. 

The essence being, they built a perceived value for their product in your mind, delivered it by making you experiencing an aha moment with your match and then limited usage by putting a paywall at the inflection point once they knew they’d built enough perceived value.

I'll see you in the next one where we'll talk about the final step of the funnel: Value Capture

→ An interesting pricing experiment from The Ken that increased their conversions by 28%

Till then, take care and continue your learning streak. You're doing great. 

P.S. Want to learn how companies like Tinder, Wix, Razorpay nailed their monetisation strategies? 

We cover that and more in Immersion. Everything you 

 is actionable at work from the next Monday morning. 

Value Experience

If you’ve opted for a free trial method for your F2P strategy, you need to make sure the conversion strategy is working or else you’ll end up wasting time and money on users who won’t buy from you.

Most companies end up copying their competitor’s trial period design and use it to make a standard 7-day or 30-day trial.

Your trial period needs to be a concrete mix of your ICP → value provided to them → when do they experience a very strong AHA moment. For example, if you’re selling a project management tool to a freelancer, you need to know what feature gives them the max value and after how many use cases do they experience a strong AHA moment or build a habit.

I know, we keep talking about ICPs everywhere. But that’s how important knowing them is. 

To create a successful trial period, you need to start by identifying your ICP. And really getting to know them. Which users are the most likely to find value in your product? Understand their pain points, workflow, and what features they would find most beneficial, not what you think are the best. And then tailor your trial to highlight these features.

HubSpot has done a great job with targeting their ICPs. If you look closely, you'll notice how they've segmented their ICPs by way of Use Case and Team Size. 

Screenshot 2024-07-23 at 9.46.35 PM 1.png

Screenshot 2024-07-23 at 9.48.43 PM 1.png

What they've done really well is knowing their users in and out, segmenting them based on requirements and stating clear outcomes from their product and how it will help the ICP → 

But how do you go about it? Make user calls your best friend.

Understand the difference between user behaviour on the product from 2 sets of users:

This will reveal a lot of insights - how many times do they login to the tool in a day, what is their primary use case, what is their biggest pain point, how big of a problem is it for them and so on. how many times did they login to the product, what happened in those sessions, was it dependent on the day of the month they signed up and so many other things.

Once you know who your ICP is, focus on delivering value quickly. This means 

 that provide the most significant benefit and making them 

For example, if your project management tool offers exceptional task automation, make sure trial users can easily explore this feature. The goal is to showcase the essential benefits of your product without overwhelming the user with too many options. Highlight the 

 that differentiate your product from competitors.

Let's look at the value they provide in the free trial:

And the best part? You can invite teammates to also use and evaluate Asana. 

They've designed the trial in such a way that users experience ease of access and build a habit over time by managing their work effectively. Especially with multiple people from a team using it, the chances of conversion becomes higher, 

AHA moment is a milestone in the user journey where they come across a proposed value and realize the worth of your product. And this moment needs to be captured. You need to design your trial in a way that users experience it as quickly and seamlessly as possible. For instance, in Asana, the AHA moment might occur when a user checks off their first project on time. 

With that, we've completed this module on the Solving for Free to Paid. Consider this a V1 and if you have any recommendations, resources, or information you’d like to contribute, 

Alternatively, you could also email us on 

Trial Period Design

Increasing ARPU

Learning to scale ARPU by way of upselling and cross-selling. 

Selling more of your current offer to an existing customer

You can increase usage by adding more cases for an existing customer. A classic example here is how every telecom operator (Jio/ Airtel) tries to sell an OTT bundle (Jio + Netflix) every time a customer buys a new sim card or ports between telecom operators. The idea is simple. 

find more users with the same “customer”

Look at it like - Can the value of your product grows exponentially when it is used in collaboration with “multiple users of the same customer”? You can think of customers here as the company/user and users in terms of more teams in the same company or people related to your users who can be targeted.

A classic example of this would be Slack. 

(Think of users as teams and customer as the company → slack in this case)

Let’s say an engineering team at a Series A start-up started using Slack, and now this company is growing. As the company grows, more engineers will be added to slack so it’s penetrating into the engineering ICP while slack, by the nature of the tool will also get into the product, design, sales, and business team at the company.

The value of Slack increases exponentially when 

🏁 Super! You're almost at the finishing line. 

In the last and final chapter of this module, we'll look at Cross-selling and how that can help you scale ARPU. 

Till then, rest up and recharge. See you in the final one. 

Upselling

Selling a new product/feature to an existing customer

Now one way to sell a new product to an existing customer is go the TATA way, where they are selling everything from Steel to cars to even refined edible oil. Most of you aren’t selling extremely different categories to the same customer. Most Indian ecosystem consumer/ SaaS brands haven’t really evolved to that state.

So we will look at cross-selling by way of 

Urban company is a great example. They started off as a home services company and eventually expanded into multiple services like grooming, beauty, and more. If you’re looking to book a spa service via Urban Company, you might see them trying to sell multiple other products to you on the website or app → additional services tailored to your requirements that you might like/find useful. This is a classic case of cross-selling.

The same applies to Swiggy. When you place a food delivery order → they try and sell services from Genie and Instamart within the flow of usage.

So, how can you build a function cross sell strategy?

Once you get enough validation, the next line of question should be - what will it take for them to switch from their current product to the new offering you have built?

Continuing with the Urban Company example here - you must’ve noticed a certain behaviour at home when it comes to home services. Your parents (or you yourself) would’ve had their go-to carpenters, plumbers and other people for getting things done. When Urban Company launched, they would’ve had to break through this behaviour and pattern to really figure how to get people to switch.

So to build a successful strategy, you need to go deeper into the switching cost (what it’s going to take for people to switch). This is going to be your core marketing pitch on the product to cross-sell this new “feature”.

Think of this whole journey of cross-sell as finding the right “feature-customer-fit” (similar to product market fit). That means we will have to do three important things:

Once you have figured out the “feature-customer-fit”, the next step is to be able to monetise. Now the foundations of value creation → communication → experience → capture remain the same, and the classic framework of monetisation as discussed above remains constant. All you need to do, is apply it.

We hope this guide has been full of value for you. Consider this a V1 and if you have any recommendations, resources, or information you’d like to contribute, 

Cross-Sell

Case Study: Spotify

An in-depth case study on how Spotify aced Free-to-Paid conversions. 

Spotify

We're at the final stage of the funnel → 

This happens when your customers have experienced the value that you created and communicated and they’re willing to pay for it. It is a function of what to charge for, how much to charge and how to design pricing to seal the deal.

We've already covered this in depth under Value Communication. 

Because you need to have a solid understanding of what features your ICPs value the most to capture their intent. 

User research is your best friend here. You might think people value X and Y features the most but that can change drastically when you actually speak to users and develop an understanding of what they value the most.

As much as I want to give you a number here, I can’t. It’s tricky. 

❌ And  no, you can’t go to your competitor’s pricing page, copy it and use it as your own with a 10% discount. 

I mean we can’t stop you if that’s what you really want. But you shouldn’t.

So then what to we do and how do we think through pricing?

How much to charge for your product is a function of 

Finally, we look at how to design the pricing page. 

Here we will play into the psychological biases of customers to see how buying decisions are actually made and build strategies based on it. You might know some of these strategies (or you’ll learn now) but you still fall for them. Every single time. 

We'll look at different elements and aspects of pricing page design which you can incorporate based on the nature of your business + the product you're trying to capture value for. 

With this, we've finished learning about the Value Funnel which forms the basis of every monetisation strategy. We look at the frameworks for creating value, communicating it, delivering experience and capturing value by way of pricing page design. 

This funnel works across models, whether Freemium or Trials. However, with the next chapter we'll dive deeper into Trial Period Design and how you can leverage it effectively. 