What is the ARPA?
ARPA, or “average revenue per account”, quantifies a SaaS or subscription-based company’s average monthly recurring revenue (MRR) per account and is most often segmented into distinct cohorts (groups) of customers.
How to Calculate ARPA
ARPA, short for “average revenue per account,” refers to the subscription or contractually recurring revenue generated per account.
Like most SaaS KPIs, ARPA is one method for companies to develop a better sense of their customer base and how their spending reacts to specific changes.
Usually, ARPA is expressed on a monthly or annual basis and is calculated by dividing a company’s monthly recurring revenue (MRR) by the total number of active accounts.
The formula to calculate average revenue per account is as follows.
The monthly recurring revenue (MRR) can also be replaced with annual recurring revenue (ARR), i.e. the MRR is converted into an annualized metric.
The period chosen (i.e. monthly vs. annual) should depend on how the subscription businesses being assessed operate (monthly vs. longer-term contracts) and the purpose of the analysis (i.e. customer cohort analysis, long-term revenue forecasting).
In practice, the primary use case for calculating the ARPA is comparing cohorts of accounts, which can be categorized by customer type, the month onboarded, and various other factors.
High-growth SaaS companies frequently implement changes to maintain growth (and increase expansion revenue), so tracking ARPA in segments can bring attention to growth or contraction MRR.
Note that customers who were offered a free trial must be excluded from the calculation – otherwise, ARPA will be unnecessarily weighed down by a freemium strategy.
ARPA vs. ARPU: What is the Difference?
Often, ARPA is used interchangeably with average revenue per account (ARPU).
While the distinction is usually negligible, the distinction can be quite significant in certain cases as a single customer can be the owner of multiple accounts (i.e. per-user or per-seat pricing plans).
Having one customer owning multiple accounts is most common for B2B companies (i.e. a company purchasing licenses for multiple employees).
Since averaging the total revenue brought in can be overly simplistic – as in the case of ARPU – SaaS companies can opt to segment them into two categories.
- New ARPA
- Existing ARPA
By doing so, a company can better understand the behavior of its customers and make appropriate adjustments to its business model, e.g. setting the pricing appropriately, targeting the right customers, and identifying common causes of customer churn.
The issue with the ARPU metric for SaaS companies is that an outlier – an account in which revenue is highly concentrated – can skew the average and potentially conceal a decrease in revenue per account.