SaaS metrics are game-changers. Some of them being more important than others depending on your business model and your calculations; all of them, at some point, are relevant and extremely important factors for every 21st-century software business.
Today, I will be talking about one of the most calculated and used SaaS metrics - the Average Revenue Per Account- and tell you:
▶️ Its definition,
▶️ Its key benefits,
▶️ How to calculate it,
▶️ What a good ARPA for SaaS Businesses is,
▶️ What the difference between ARPA and ARPU is,
▶️ The quick tips to Increase Your ARPA
Let's begin with the definition.
What is ARPA in SaaS?
The Average Revenue Per Account (ARPA) is a revenue metric that measures the average monthly revenue that an existing customer base is currently paying. Wildly used by companies focusing on social media and telecommunication, it's generally calculated on a monthly or annual basis and is usually segmented into separate groups of clients.
Let me explain further and give details about the key benefits of paying attention to the valuable ARPA.
Benefits of Measuring ARPA
ARPA is a highly valuable indicator that's primarily useful for revealing trends in accounts regarding their expansion and contraction, in addition, to understanding pricing plans and making relevant business decisions as a result.
The most common benefits of this metric are:
1- You can easily compare your growth with that of your competitors. 📌
Thanks to ARPA, you will be able to make a comparison between your average revenue and the average revenue that's generated by your top competitors - evaluating your position in the market. Of course, not every competitor out there will announce their revenue for you to compare, but you can always have a number in front of you - at least approximately- that you can use to come up with more efficient business decisions.
2- You can see which pricing works the best. 📌
Here comes the number one question: Which pricing plan of yours brings the highest revenue? 📌
With the help of ARPA measurements, you can easily learn which product/pricing plan of your company works the best and thus brings the most income for your business. You just need to pay attention to this key indicator and analyze its results for different and separate pricing plans. And voila!
3- You get to know more about your Customer Lifetime Value. 📌
With ARPA, you can track and measure another essential SaaS metric which is the LTV, aka the Customer Lifetime Value. Since the most common formula for LTV is ARPA/Customer churn rate, you can easily understand how much revenue a customer will generate for your company before they end their relationship with you.
4- You will know where to invest. 📌
Similar to the pricing plans, ARPA enables you to have the opportunity to find out which resources bring the most revenue - social network, referrals, direct, etc.
Meaning that you will be able to know where to invest your revenue and focus on more resources while ignoring some channels that don't need your valuable attention for a while.
How Do You Calculate ARPA for SaaS?
The calculation of ARPA is quite easy. All you need to do is divide your company's total amount of revenue for a specific period of time (month/year) by the total number of accounts for that SAME period.
Mathematically, this formula can be put together this way:
✏️ ARPA = Monthly Recurring Revenue (MRR) / Total Number of Active Accounts
This equation suggests that in order to calculate ARPA, a certain time period should be picked; it can be done on a monthly or yearly basis. After the first step, in this case the first criteria being the MRR - the amount of money your current customers bring each month - is being divided by the number of active accounts for that given month.
▶️ And to calculate MRR, you can multiply your average revenue per user by the number of your monthly clients.
For example, if your variables are as the following:
Number of customers: 16
Total MRR = $1600
$1600/16 = $100
And if you wish to calculate your ARPA on an annual basis, you only need to know your:
- The total amount of customers for that given year
▶️ And to calculate ARR, you just need to multiply your MRR by 12.
What Is a Good ARPA for SaaS Businesses?
A good ARPA for SaaS businesses is very likely to depend on location, industry, pricing model, and many other things. Therefore, there can't be a single correct answer to this question.
To be able to identify a ''good ARPA'' for your SaaS business, you can try observing your top competitors, in addition to all the big names in the industry that everybody knows about. This approach will enable you to calculate the benchmark ARPA for your specific work field, and you can act accordingly after that.
❗️However, in any case, you must always aim for a higher ARPA than what you have right now - this makes perfect sense since ARPA is all about maintaining revenues, and if it's starting to decline, it might be a challenge for you to change that. This is why you'll usually want to see your ARPA going upward.
ARPA vs. ARPU - what's the difference?
In most cases, the two key metrics, ARPA and ARPU, are used interchangeably. However, the difference between these two can actually be quite a game-changer under specific circumstances.
Measuring ARPU gives you the average MRR per user. Naturally, mistaking ARPA and ARPU or using the terms interchangeably can cause problems since a single customer of yours can be the owner of multiple accounts - which is a very common situation for B2B companies.
You can think of ARPU as a zoomed-in view of ARPA since accounts are made up of many users. (Even the calculation says so; you just need to substitute ''accounts'' for ''users'' while dividing.) So, if you're in the B2B business and have usage or seat-based pricing, it would be a good idea to track both of these metrics.
4 Quick Tips to Increase Your ARPA
You need to increase the amount of income you gain from your clients per month if you wish to increase your ARPA.
And to do that, there are a number of strategies you can follow:
1- Try Upselling ✅
It's a common mistake for businesses to focus on gaining new customers while not paying enough attention to existing ones. Figuring out more efficient ways to add more value to your existing customer base can, in fact, increase your ARPA to a great extent.
This is where ''upselling'' comes in.
Upselling simply means selling more of the existing product. And there are several ways to upsell to your existing clients, but usually, all you need to do is focus on assisting your customers in becoming more successful with your product ( improving/increasing their subscriptions, getting more bookings, etc.) - resulting in more usage and naturally, appreciation of your service.
Here are a few tips to achieve this:
- Product webinars for your existing customer base that demonstrate new features tell them about success stories, best practices, and more.
- Scheduled customer meetings with customer success and account management teams.
- In-product messaging to encourage the usage of premium features or increase activity.
- Advanced notifications for tracking product usage and upselling potential.
Creating opportunities for upselling to increase your MRR while encouraging your customers to upgrade their plans and offering supplementary services in addition to new features will slowly but progressively impact your ARPA. Give it a try yourself!
2- Restructure Your Pricing Plans ✅
In some cases, the pricing plans might not be correctly aligned with usage patterns and different kinds of clients. When this happens, you need to ensure that every pricing plan fits correctly to a certain client type ( for example, a specific plan for startups and for larger enterprises would be different than one another)
The best way to make this happen is to analyze the current customer behavior and focus on the usage of several features. At some point, you will start seeing certain patterns that tell you which feature is almost never used by a specific group and which features are only used together by others, etc.
Once those patterns are tracked and known, you can then restructure your pricing accordingly.
3- Retain Customers and Reduce Churn ✅
Do you know what's directly connected to your ARPA?
Having your customers leave you might seem inevitable; however, taking on a solid customer retention strategy for your existing customers can enable you to minimize the churn risk.
Obviously, this requires offering brilliant customer service, providing just as good user onboarding, preventing the possibility of involuntary churn, or even reaching out to your customers to see if they're experiencing any problems with your services!
4- Know Your Audience ✅
Having crystal-clear buyer personas and building your sales and marketing strategies around them can help you decide which prospects are most likely to stick with your product and keep purchasing your services for a long time.
By further targeting and selling to these prospects, you can create more opportunities than ever to increase your overall ARPA since you will no longer be paying unnecessary attention to prospects who will come to your services with a low price point and show no sign of upgrading any soon.
Long story short, your ARPA is a growth metric and a critical indicator of your business's profitability. This is why it's always a good idea to track and measure its results and use the information gained to come up with better and more effective business decisions. 💯