Average Revenue Per Account (ARPA)

What is Average Revenue Per Account (ARPA)?

Average Revenue Per Account (abbreviated as ARPA) is the average revenue earned by a company per account per year/month. SaaS companies with a subscription-based business model often use this revenue metric. It demonstrates the capability to meet sales targets and the revenue generation capacity. 

ARPA is a measure of profitability that helps a SaaS business to evaluate its revenue per subscriber. Please note that ARPA differs from Average Revenue Per User (ARPU). These terms cannot be used interchangeably because a single user can have more than one account with a SaaS company which might result in different values of ARPA and ARPU.

Why is ARPA crucial for SaaS businesses?

ARPA is a vital profitability metric for SaaS businesses due to the following reasons:

1. Comparison of company performance

SaaS-based companies generally use ARPA to compare their performance against their competitors. They can also use this metric to track their performance over some time.

2. Revenue Segmentation

ARPA can also be used to understand the various elements that make up the company's revenue. In other words, it can help you identify which product generates the highest/lowest revenue or which clients bring in the most revenue.

3. Forecasting of revenue

ARPA is also used to calculate the SaaS company's recurring revenue (ARR or MRR). These recurring revenue metrics are further used as a benchmark for revenue forecasting. 

How to calculate Average Revenue Per Account?

It is fairly simple to calculate the ARPA. Here is the general formula to calculate the Average Revenue Per Account:

 Average Revenue Per Account (ARPA) = Total Revenue / Number of accounts

It is important to understand that the number of accounts can change considerably during a particular period. Hence, it is recommended to calculate the ARPA using an average number of accounts for a specific period. Also, if you are looking to calculate the monthly average revenue per account, you can use the following formula:

Average Revenue Per Account (ARPA) = Monthly Recurring Revenue (MRR) / Number of accounts

Here, it is important to note that if you offer a trial or freemium product version, you shouldn't consider these unpaid accounts when calculating ARPA.

Advantages of ARPA

Some of the advantages of ARPA are as follows:

1. It is an indicator of the company's performance. If you track the ARPA over some time, it can also be an indicator of business growth.
2. It helps the stakeholders to compare a SaaS company with its competitors.
3. ARPA acts as a benchmark for the analysis of the strengths and weaknesses of a company's business model.
4. If a company has an impressively high ARPA value, it stands out from the crowd. It can attract more investors if its ARPA values are consistently high.

Disadvantages of ARPA

Some of the disadvantages of ARPA are as follows:

1. ARPA is a macro-level measure. If the value of ARPA is presented with additional information, it is more beneficial for investors and other stakeholders.
2. A significant value can easily distort the actual value of ARPA. 
3. Users' growth and churn rate are better indicators of a company's performance.