Every company relies on having a solid base of customers who need its products or services. In the internet industry, a wide variety of social media, online gaming, cloud computing, and other service providers look to sign up as many users as they possibly can.
Yet because most Internet-reliant companies get more revenue from users who actually use their services on a regular basis, it's not enough just to look at the total number of people who sign up for a given company's services. The metric of monthly active users is designed to focus on a service-based company's most important customers.
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What a monthly active user is
The idea behind monthly active users is to measure users who use a service at least occasionally. If someone uses the service at least once during a given month, then that person should show up as a monthly active user. If the same person subsequently goes an entire month without using the service, then monthly active users for the company providing the service will drop by one during that month.
The definition of a monthly active user might sound simple, but it's actually subject to interpretation. For instance, in late 2015, Facebook changed its definition of monthly active user to exclude those who shared content or other activity by using a third-party website or app that integrated Facebook information. Going forward, Facebook only measures registered users who log in and visit the site online or with a mobile device, or who use the Messenger app during the period.
Why monthly active users are important
In general, the more customers a business has, the better. Consistent growth in monthly active users indicates that a business is attractive enough to increase its customer base. That, in turn, allows the company to monetize its service more effectively, reaping larger revenues from ad sales and other sources that rely on traffic volumes to boost cash inflows.
For social media companies, the monthly active user count is even more important. Because social media thrives on the network effect of having more people using the service, rising monthly active user counts create a positive feedback loop that encourages even more growth in the future. By contrast, falling monthly active user counts can indicate that people have moved away from a given service and are either favoring a competing offering or simply becoming tired of that particular company.
Other metrics beyond monthly active users are also important. For instance, the count of daily active users measures those who use a service daily. If a large percentage of monthly active users use the service that frequently, it shows how successful a company has been at integrating its service into the daily lives of its customers. A low percentage indicates less frequent use.
Overall, monthly active users are a good indication of how popular a service-based business is -- especially if it's an internet- or mobile-based service. That doesn't always translate to immediate profits, but it does give a data point that investors can track over time.
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