ARPA – an introduction
Average revenue per account (ARPA) is an important metrics in a SaaS business, used to monitor the revenue generated per customer account over a given time period.
What is ARPA?
Average revenue per account (ARPA) is a measure of revenue generated by each account, typically over a month or year period. In a subscription business, customers (or accounts) repeat purchases of the same product or service month to month. This month-to-month revenue per customer account can fluctuate depending on plan upgrades, downgrades, discounts or there could be a variable component as part of the price. These pricing components will impact ARPA.
The value in using this metric primarily comes from internal benchmarking and tracking this trend over time, against budget and new/existing customers.
It’s often used interchangeably with average revenue per user (ARPU) and average revenue per client (ARPC). Both of which can have subtly different meanings, depending on whether you’re selling to consumers or businesses and how you’re classifying account management.
Why is ARPA important?
Tracking average revenue per account over time can be used to indicate growth, make projections and help influence strategy. However, it’s important to understand the profile of customer accounts when drawing conclusions from ARPA trends. This often results in segmenting ARPA into new/existing or other cohorts to better understand behaviour and account growth.
For example, price discounting to attract new customers will deliver a lower ARPA than existing customers. The objective will be to increase this price over time and increase overall ARPA. This can be through the end of a discount period, moving customers up plans or other price/functionality increases. In this case, ARPA should be monitored in conjunction with churn (by cohort).
Tracking ARPA over time can help identify trends and customer account behaviour over time.
Segmenting ARPA by geography or other characteristics, can help better understand if there are better performing cohorts to focus resources on in the future e.g. businesses with different number of employees.
Equally, it’s important to either be aware of, or remove, specific outliers when assessing ARPA as these can skew the average, resulting in misleading information. This generally happens where there’s a wide price range in plans.
Understanding ARPA can help in forecasting growth as it’s a key driver in modelling new customer revenue and how that revenue per account expands or contracts overtime.
What does ARPA look like?
How do you calculate ARPA?
ARPA is typically calculated over a month or year period (if you sell to enterprise customers). You can often replace total monthly revenue with monthly recurring revenue (MRR).
The formula to calculate ARPA is:
Average revenue per account (ARPA) = total monthly revenue / no. of accounts
ARPA worked example
If a company has total monthly revenue of £100,000 and 500 different customers, ARPA would be £500, calculated like this:
Average revenue per account (ARPA) = £100,000 / 500 = £200
How can you improve ARPA?
Ways to improve ARPA fall within the two broad categories. While some may improve ARPA and profitability, they won’t all increase revenue – both of which are drivers in enterprise valuation.
Quality of customers
Remove lower value customers
Not all customers are ideal customers. Over time your ideal customer profile may evolve as your business/product evolves. Customers who bought from you in the early days, may be no longer be a good fit. Those that don’t spend much will bring your average revenue per account down and impact profitability. Actively ending their subscription or pricing them out will remove them and increase your average revenue. However, while removing these customers will lead to an increase in ARPA, it will reduce total revenue – which is something fast-growth businesses aren’t always willing to do.
Acquire better customers
Actively targeting higher paying customers will increase your average revenue per account. However, while ARPA will increase, your customer acquisition cost (CAC) may also increase, which will affect your payback and LTV:CAC ratio too. These tactics and ARPA should be considered in conjunction with other relevant metrics.
Standard price increases
Pushing through general price increases across all products/services will increase ARPA.Depending on the increase and price elasticity of your product/service you may churn volume of customers. Price increases are often accompanied/justified by new product features.
Changing pricing models e.g. by seat rather than account, or to a combination of fixed and consumption model, can both help retain customers on lower base fees but increase overall revenue per account as they consume data, hours or another variable.
ARPA is a high-level but important metric for a business to understand its customer base and pricing trends at a strategic level . At a deeper level it can, and should, be used in conjunction with account contraction and expansion, and even segmenting new and existing customers to better understand the direction of customer revenue.
If a business does understand, track and segment its average revenue per account, it can make strategic decisions that can influence the direction of revenue e.g. the increase in price of subscription plans could increase revenue across customer account base with limited churn.