Average revenue per account (sometimes known as average revenue per user or per unit), usually abbreviated to ARPA, is a measure of revenue generated per account, usually per year or month. Although the terms Average Revenue per Account (ARPA) and Average Revenue per User (ARPU) are often used as synonyms, this is not always correct, as a customer may have multiple accounts with one company.
Definition of Average Revenue per Account (ARPA)
Software-as-a-Services (SaaS) and other companies with recurring fee are different from traditional businesses and face a unique set of challenges when it comes to growing their business and attracting new customers. Subscription-based companies must pay close attention to metrics that demonstrate their ability to generate recurring revenue, retain customers, and acquire customers at reasonable acquisition costs. These KPIs are best examples of the key metrics used by SaaS companies – and ARPA (Average Revenue per Account) is one of them. ARPA is often used by telecom companies, social media companies, and banks.
What is ARPA and what are the various types?
Average revenue per account (sometimes known as average revenue per user or per unit), usually abbreviated ARPA, is a measure of revenue generated per account, usually per year or month. It can be said to represent average revenue per customer – keeping in mind that a customer may have more than one account, depending on the characteristics of their product or service. Average revenue per account allows for analysis of a company’s revenue generation and growth, which can help them identify which products are generating higher or lower revenues. It is also a way for the company to identify which products are performing better in the marketplace.
Basically, there are two different types of “Average Revenue per Account”: new and existing ARPAs. This is particularly relevant when pricing needs to change significantly and a more accurate average revenue per new account is desired. It is also useful to understand how ARPA evolves based on the behavior of existing accounts compared to new accounts.
How to calculate the ARPA?
In order to calculate Average revenue per account, a standard period must be set. Most subscription businesses operate on a monthly basis, but they can also be calculated annually or quarterly according to billing schedules and options. The total revenue of all customers (paying subscribers) during this period should be divided by the total number of customers.
Therefore, the calculation is as follows:
ARPA = Recurring Revenue over the agreed period/total number of customers.
Thus, if ARPA is measured on a monthly basis, your recurring revenue is the monthly recurring revenue, also called MRR (Monthly Recurring Revenue).
The existing ARPA is calculated using the same formula, but based on segmentation of average revenue and number of accounts for the desired time period ( such as in the last year).
The new ARPA is also calculated using the same formula as shown above, but the recurring revenue and number of accounts are limited to any time period specified as “new”.
If a freemium model is offered, the free accounts are typically not included in the calculation.
Accuracy in the calculation of ARPA
ARPA can easily become a vanity metric if this metric is not placed in the context of its net MRR, the LTV growth rate. One of the biggest criticisms of this metric is that accounts that generate extremely high or extremely low revenues can skew the average, often resulting in a false positive.
In this case, ARPA looks higher because of one or two very large accounts, and you get a false positive impression of business results. This usually happens when the price range is very wide for the plans and products offered. It is important to keep track of the metrics by tracking other relevant SaaS metrics in parallel.
Conclusion: ARPA is considered a valuable indicator
Average revenue per account is a valuable indicator. It is useful for uncovering trends in account expansion and contraction, evaluating pricing plans, and understanding how ARPA develops over a period of time. The ARPA trend over time provides important insight into the value of the company’s products and services. This allows users to uncover trends in account attrition and expansion. A good strategy is to focus on internal benchmarks.