By Lawrence M. Walsh, CEO and President, The 2112 Group
Cloud computing promises solutions providers predictable and profitable recurring revenue. True financial return only comes when customers are engaged and expanding their service utilization – and the measurement for that is “average revenue per user," or ARPU.
Groupon stunned the technology world last year when it shunned a $6 billion acquisition bid by Google. At the time, Groupon was a low-revenue business with a growing customer base, so such a deal should have been very attractive. What it actually signaled was the company’s true potential.
According to Spark Capital, Groupon today enjoys the highest annual revenue per active user – nearly $80 – more than any other social media company. Google doesn’t come close with $28 per user, and Facebook is in the distance with roughly $3 per user.
Do the math: If you’re Facebook with 750 million users and your average annual revenue per user is $3, your revenue is $2.25 billion.
ARPU is as important to solution providers in the cloud as it is to Google, Facebook or Pandora. This measure is so important because it has nothing to do with the underlying technology and products, and everything to do with customer engagement.
The laws of commoditization of hardware and software products apply equally to services. Over time, all services will decrease in value as the supply increases, competition becomes fiercer and technology decreases in complexity. Today’s $25-per-seat hosted email service will eventually shrink to $2 per seat.
In the conventional perspective of measuring financial performance and health, technology vendors and solution providers would look at things such as average sales price, profit per unit, cost of goods and services, and SGA expenses. Businesses typically get into trouble when their margins erode faster than their ability to increase revenue on the sale of products with declining value.
ARPU changes this perspective because it’s based on the continuity of customer engagement. If your current ARPU is $2 and your 36-month goal is $4.50, you’re really talking about keeping your customers engaged with additional of products in your services portfolio while simultaneously maintaining existing revenue base.
Yes, increasing ARPU can mean increasing the number of available products, which results in a higher cost of goods and services. But a higher ARPU also means customers are consuming more of your services, which decreases overall operational overhead as resources scale better in services to match demand.
ARPU isn’t the only measure a cloud or services business should utilize to track performance – in fact, most of the traditional financial metrics are applicable – but ARPU is definitely a measure that every services-based business should add to their reporting, as it does reflect directly on customer engagement and loyalty.
Lawrence M. Walsh is CEO and president of The 2112 Group, a technology business advisory service that specializes in optimizing indirect channels and partner relationships, and principle blogger at Channelnomics. He’s also the executive director of the Channel Vanguard Council and moderator of the Channel Partners Cloud Convergence Council. He is the former publisher of Channel Insider and editor of VARBusiness Magazine. You can reach him at email@example.com .