Definition

Average Revenue Per Account (ARPA) is used to measure the average revenue generated from each customer account over a specific period, typically monthly or annually. It is especially relevant for businesses with subscription-based models, such as SaaS companies, where customers may have multiple accounts. ARPA provides insights into the revenue contribution of each account, enabling businesses to evaluate pricing strategies, customer segmentation, and overall financial performance.

ARPA is sometimes confused with Average Revenue Per User (ARPU), but the two differ in that ARPU focuses on individual users, while ARPA looks at accounts, which may include multiple users under one customer.

Importance of ARPA

ARPA is a useful metric when assessing the financial health of a SaaS company and its growth potential. Here are some use-cases for ARPA:

• Financial Reporting: ARPA shows how much revenue you're generating per account, enabling you to make data-driven decisions about customer acquisition or overall positioning.

• Strategic Decision-Making: Using ARPA, SaaS companies can tweak their pricing models, identify the most promising accounts, and allocate commercial resources (e.g. sales agents, budget, etc.).

• Customer Segmentation: ARPA is another indicator that enables businesses to segment their customer base by revenue contribution and brings focus to the accounts with the highest profitability.

• Performance Benchmarking: Comparing ARPA across time periods or client cohorts allows your management team to track return on investment on product development and customer success efforts.

• Investor Confidence: An increasing ARPA indicates a company is able to create and capture more value over time, which is attractive to investors.

How to Calculate ARPA

The formula for calculating Average Revenue Per Account is straightforward:

ARPA = Total Revenue / Number of Accounts

Example Calculation

If a company generates $200,000 in monthly recurring revenue (MRR) from 4,000 accounts, the ARPA would be:

ARPA = $200,000 / 4,000 = $50 | This means each account contributes an average of $50 in revenue per month.

Types of ARPA

1. New Account ARPA: Focuses on the average revenue generated by newly acquired accounts during a specific period.

2. Existing Account ARPA: Analyzes the average revenue from existing accounts over time, showing a company's ability to expand clients over time.

When you're executing a Land & Expand strategy, the New Account ARPA may be dramatically lower than the Existing Account ARPA. The shorter your customer lifetime, the more important it is to increase your New Account ARPA.

Challenges and Limitations

While ARPA is a useful metric, it has its set of limitations:

• Outliers May Mislead: Both your biggest and smallest accounts can dramatically distort the average, leading to misleading conclusions. It's a generally a healthy practice to either disregard them from reports or segment your customers.

• Lack of Context: Without complementary metrics like Customer Lifetime Value (CLV) or Customer Churn Rate (CCR), ARPA alone will definitely not provide a holistic view of financial performance.

• Wide Pricing Ranges: Businesses with significant variations in pricing tiers and customer types (i.e. SMB or Enterprise) will find it challenging to draw actionable insights from a single average value. It's a good practice to look at ARPA for specific customer segments.

Strategies for Increasing ARPA

1. Upselling and Cross-Selling: Guide your customers towards upgrading their plans or purchasing additional products and services.

2. Refining Pricing Models: Design tiered or hybrid pricing models or introduce premium features to capture more value from larger accounts.

3. Reducing Churn: Invest in retainment of profitable accounts with customer success, events, loyalty programs, or other relationship-building activities.

ARPA vs Related Metrics

ARPA is often compared with other metrics like Average Revenue Per User (ARPU) or Average Contract Value (ACV):

• ARPU measures revenue per individual user, while ARPA focuses on revenue per account, which may include multiple users under one account.

• ACV typically represents the average contract value per client per annum.

Conclusion: Why Is ARPA Important?

Average Revenue Per Account is a useful metric that provides insights into customer value. By tracking and analyzing ARPA, businesses can optimize their pricing strategies, improve customer retention, and forecast future growth. However, without complementary metrics like Customer Lifetime Value or Customer Churn Rate, ARPA won't provide much guidance.