Duolingo filed to go public yesterday, giving the world a deep look inside its business results and how the pandemic impacted the edtech unicorn’s performance. TechCrunch’s initial read of the company’s filing was generally positive, noting that its growth was impressive and its losses modest; Duolingo recently began making money on an adjusted basis.
While the company’s top-level numbers are impressive, we want to go one level deeper to grow our understanding of the company beyond our EC-1.
Duolingo is likely entering a period in which it will have to invest heavily in features like pronunciation, efficacy and new apps — which could come at a steep upfront cost.
First, we’ll explore the growth of Duolingo’s total user base, how much money it makes per active user, and how effectively the company has managed to convert free users to paid products over time. The numbers will set us up to understand what else can be learned about Duolingo’s business beyond our original deep dive into the company’s finances — specifically underscoring the pressure cooker it finds itself in when looking for new revenue sources.
Starting with Duolingo’s growth in total active users, guess how fast they rose from 2019 to 2020. Hold that number in your head.
The actual numbers are as follows: In 2019, Duolingo closed the year with 27.3 million monthly active users (MAUs); it wrapped 2020 with 36.7 million MAUs. That’s a gain of 34%. If we narrow our gaze to Q1 2021 numbers compared to Q1 2020, we can see that Duolingo’s MAUs rose from 33.5 million to 39.9 million, or growth of around 19%.
The bulk of Duolingo’s growth, then, came in early 2020 when we consider its pandemic bump. Put more simply, the company scaled from 27.3 million MAUs at the end of 2019 to 33.5 million MAUs at the end of Q1 2020; from then, the company added 3.2 million more MAUs throughout 2020 and 6.4 million during the next four quarters.
Another lens through which to view the numbers is simply a recognition that first-quarter results at Duolingo appear to be stronger than results in the rest of the year, perhaps due to New Year’s resolutions to learn a new language or brush up on a second language learned in high school.
Next, let’s examine Duolingo’s monetization efforts regarding converting free users to paying users.
Here we can see a very different growth story. While the company’s MAUs rose 34% from 2019 to 2020, the company’s paying users rose from 900,000 at the end of 2019 to 1.6 million at the end of 2020. That is a far sharper gain of 84% on a year-over-year basis.
So, while Duolingo did see material user growth during 2020, it saw turbocharged expansion in the users it was able to shake revenue from. Improved monetization, more than acceleration in user growth, was the pandemic’s effect on Duolingo.
What can we see in the company’s more recent results? From Q1 2020 to Q1 2021, Duolingo’s paid subscribers rose from 1.1 million to 1.8 million, a gain of around 64%. That was a slower pace than the company managed more generally in 2020, which matches Duolingo’s slower revenue growth in Q1 2021 than it recorded in 2020.
The number is still strong, we think. But not as impressive as the more than 100% revenue expansion that the company put on the board last year.
In percentage terms, 3.3% of Duolingo’s MAUs were paid subscribers in 2019. That figure rose to 4.4% in 2020. And in Q1 2021, it reached 4.5%. Duolingo rounds that number to 5% in its S-1, which feels somewhat aggressive to us, given the somewhat modest pace at which the metric is improving. Here’s the wording:
As of March 31, 2021, approximately 5% of our monthly active users were paid subscribers of Duolingo Plus. Our paid subscriber penetration has increased steadily since we launched Duolingo Plus in 2017 and, combined with our user growth, has led to our revenue more than doubling every year since.
A gain of 0.1 percentage point in a quarter is growth, we suppose.
Next, let’s chat about revenue per MAU. To get consistent numbers, we’ll divide quarterly revenues by MAU figures from the same period. So, we’ll compare Q4 2019 revenue at Duolingo with its year-end MAU figure. We’ll do the same for 2020, and for Q1 2021 we’ll use both numbers from that period.
Here are the results:
- 2019 revenue per MAU: $0.85.
- 2020 revenue per MAU: $1.32.
- Q1 2021 revenue per MAU: $1.39.
This is pretty interesting. The company saw strong year-over-year expansion in its revenue per MAU during 2020. In effect, this metric is a mashup of the company’s paid user figures as a percentage of MAUs and how much revenue the company can derive from paying customers in a single metric. It’s a blend, in other words.
But the good news for Duolingo is that despite large gains in the metric during 2020, it is still pushing the figure higher in its most recent quarter. A gain of 7 cents’ worth of revenue per MAU for the quarter may not sound like much, but when you have 40 million users or so, it can add up to material revenue gains.
The method of business
This look into Duolingo’s financial performance serves as a follow-up story to our original reporting on its route to monetization.
For background, Duolingo said at its launch that it would never do advertisements, subscriptions or in-app purchases — approaches that now all exist on the platform. Eventually, it brought monetization into the app for survival’s sake. Currently, it has a free version with all of its learning content, and it charges a subscription of $6.99 per month for paywalled features such as unlimited hearts, no advertisements and progress tracking.
While the current numbers paint a picture of growth, the company is clearly also betting on other forms of revenue, primarily the Duolingo English Test (DET), to strengthen its position.
In our EC-1, we learned that there was a 2,000% increase in DET test-taker volume from 2019 to 2020, and more than 2,000 new schools began accepting the DET in 2020. When asked about the company’s pandemic growth, most executives at the company pointed to the DET as the most illustrative bit. Still, the S-1 filing shows that the DET only accounts for 10% of revenue, a miss from co-founder and CEO Luis von Ahn’s hope that DET would account for 20% of revenue after more than doubling the cost to take it.
Furthermore, in the S-1 filing, Duolingo states that it will expand the DET by driving acceptance of the test at higher education institutions, tapping into immigration and workforce markets, and integrating it with the Duolingo language learning app. The last bit will be the hardest to execute because of a simple, ironic truth: You can’t learn enough English via Duolingo’s app to pass Duolingo’s English Test.
Long term, the company could use the patterns of mistakes that test-takers make on the DET to revamp the English courses on the Duolingo app, said Jennifer Dewar, director of strategic engagement for the test. She added that the ambition is for users to be able to use “the app to learn English all the way up through [an advanced level] and then be able to assess.” The company will need to heavily invest in speech technology, as well as continue to rewrite and deepen its coursework before that embed can happen.
As the S-1 shows, the company has been able to grow alongside these tensions, monetizing a smaller user base instead of the vast majority of users. However, in preparation to become a public company, Duolingo’s relationship with alternate revenue streams matters more, as does its ability to fully educate consumers. Today only 8% of its global workforce is in the curriculum space.
While it will continue to call itself a tech company, a rebalancing to focus more on educational outcomes may be ahead. Duolingo is likely entering a period in which it will have to invest heavily in features like pronunciation, efficacy and new apps — which could come at a steep upfront cost. Imagine a host of mergers and acquisitions, or a hiring spree that puts creative content at the center of the business.
In previous interviews, executives noted how the company is determined to keep the core experience free — or not paywalling any content — and monetizing only the bits that don’t have educational values. As it scales its business, keeping that balance is core to its mission, but also puts more pressure on creative projects that come with a price tag.
Leaving this second look at Duolingo here, our general perspective — that the company is going public from a position of strength — stands. Of course, questions remain regarding how the company’s growth will fare in a post-pandemic world. However, for a company memed by incessant, often passive-aggressive notifications, the quiet period is beginning during what one could only imagine is the start of some key internal experimentation.