SaaS metrics matter. Some of them a bit more, others a bit less depending on how you charge your customers and what you attach importance the most.
We will talk about one of the most calculated SaaS metrics – Average Revenue Per Account – and show you
1) What it is in general,
2)How to calculate it,
3) Why it is worth paying attention to a
4) And what to do to enjoy your ARPA growth.
Let’s start with the definition.
ARPA is a SaaS metric that shows the revenue you generate from your customers on average on a monthly, quarterly or annual basis. Despite providing useful data for any type of business, this metric is more commonly used among businesses operating with a subscription-based model. And SaaS is one of those industries.
You may have encountered an acronym called ARPU (Average Revenue Per Customer or User). If you want to learn the difference between the two, move to our next section.
There’s a slight difference between ARPU and ARPA. The first one is the revenue generated per user (customer). If all your customers use 1 single account while utilizing your software, you calculate your SaaS ARPU. Because 1 account = 1 customer.
Or you can combine all the accounts of your 1 customer and calculate that way. Because 3 accounts of 1 customer are still 1 customer.
The second option comes in handy when your 1 customer has 2 or more accounts. So if you consider every account as a separate customer and make calculations that way you will end up having dangerously false data.
Your ARPA/ARPU can be calculated on a monthly or annual basis. The quarterly option can be considered too, though monthly and annual are the most reasonable periods.
Consequently, you will consider one of ARPU calculation formulas depending on whether your subscription is monthly or annual. If you charge both ways, make sure to calculate your SaaS ARPU differently for customers from monthly-paying and annually-paying groups.
ARPU = MRR (Monthly Recurring Revenue) / Total # of customers in a given month.
ARPU = ARR (Annual Recurring Revenue) / Total # of customers in a given year.
As you can already guess, before your ARPU calculation you have to know your MRR or ARR. Let’s look at an example.
You have 5 customers with several monthly subscription plans.
– Customer 1 is paying $9 per month
– Customer 2 is paying $16 per month.
– Customer 3 is paying $21 per month.
– Customers 4 and 5 are paying $30 per month.
Your total MRR amounts to $106. Your ARPU per month = $106 / 5 (total number of customers) = $21.2
Note that there are two types of Average Revenue Per Account you can consider: New (focusing on new customers) and Existing (focusing on old customers). It’s up to you to decide whether targeting two customer groups and calculating two ARPAs is necessary for you. When does this differentiation make sense?
1) When you have reviewed and changed your pricing and want to know how your average revenue changes.
2) When you acquire new customers and want to know and compare the profitability of your new vs old customers.
The formula both for new and existing ARPU is mainly the same. You just have to be careful while differentiating between old and new customers not to mess up your calculations.
Are you considering to include your free trial or freemium plans users in your ARPU calculations? Don’t do that. The customer is the one who pays and brings revenue, unlike users who not only don’t pay but probably require investment from you, even financial.
ARPA is data. ARPA is money. ARPA is a revenue growth indicator. If you want to know the main benefits one by one, have a look at our 7-point list.
#1 You can identify the best-performing sources
You have the opportunity to figure out which source (social network, PPC, referral, direct) brings the most revenue. The picture will be clear once you calculate ARPA among customers from every online source separately. It will take time but you will know where to invest more resources and which channel to disregard for a while.
#2 You can make a comparison with your competitors’ growth
You will be able to compare your average revenue with the average revenue generated by your competitors and evaluate your market share. Not all of your competitors will publicly announce their revenue but you may have your own ways to reveal that amount, at least approximately.
#3 You can calculate your customer LTV
With your ARPA at your disposal, you can measure another SaaS metric like LTV (Customer Lifetime Value) too. Your LTV, in turn, can be calculated in several ways. One of the most popular formulas is LTV=ARPA/Customer churn rate. LTV shows how much revenue a customer will bring to your company before he/she walks away from you
#4 You can monitor fluctuations in revenue
ARPA itself emphasizes the word “revenue” – you monitor how your average revenue changes, does it increase or decrease. This may be useful especially if you apply changes to, for example, to your marketing tactics or your pricing strategy.
#5 You can look deeper
You monitor and analyze the growth of your SaaS company at the unit level. What types of customers contribute to your revenue growth the most, who to target to get investments faster.
#6 You can discover the pricing that performs the best
Not only you but your future investors too are interested in the question – which product/pricing plan will bring the highest revenue. With ARPU you will learn the answer once you analyze this metric for separate products and/or pricing plans.
#7 You can recognize the main contributors
When you know your new and existing ARPU separately, you can compare the profitability between your old and new customers. If your pricing/landing page/business offer has been different for old and new customers, you will know whether your changes result in success or the opposite.
Nothing is ideal. What’s the problem with ARPA in SaaS?
#1 ARPU may mislead you if you don’t track it in the context of your MRR or ARR which again changes. So calculating this metric requires calculating another metric too to stay up-to-date and precise. You put almost double efforts in revealing one single metric.
#2 High-paying customers may result in a positive ARPU, while your metric may be growing only due to a small number of customers paying extremely high. In reality, only those few customers may be “maintaining” your business. But what about diversifying revenue flow?
With your efforts, aimed at increasing MRR and ARR you automatically care about your ARPA too. Because that metric increases or decreases as a result of MRR / ARR fluctuations. Anyway, we offer 7 tactics due to which you can better your ARPU to a large extent.
#1 Customer churn ≠ customer retention, Customer retention = higher ARPA
As you can see, this is a cycle. If you don’t know how to retain your customers that will affect your recurring revenue and cause an undesirably high churn rate. If you remember, MRR is key in calculating your ARPA and your strong MRR has a direct impact on this metric.
When your customer retention is on point, your ARPU figure will probably satisfy you at least in the short run.
#2 Wrong customers ≠ higher ARPA
It may seem a no-brainer but wrong customers truly exist. They are the ones who require much investment to be acquired and never pay you back. They are the ones who walk away from you quickly. They are the ones who you wish you never met. If you are not anticipating to get thousands and millions of new customers easily and fast, then don’t chase cheap customers and junk leads.
#3 Promoting free plans ≠ higher ARPA
Free plans sometimes work and bring you paying customers but you should know all the major pros and cons of offering, moreover, advertising your freemium software.
Even if you are totally Ok with having a basic (freemium) plan and it’s available on your pricing page, don’t advertise it everywhere and every time. Put emphasis on your paid plans as active customers are only paying customers (cash drives your business, agree?).
#4 Scalable pricing = higher ARPA
Let us clarify something. For example, your pricing grows based on one main thing – the number of your customer’s contacts.
Your first plan allows your customers to send emails or invoices to 100 contacts. Your second plan – to 1000 contacts. Your third plan – to 10.000 contacts.
When your customer’s business grows, you grow too because they have to upgrade their plan to be able to send info to more contacts – no choice.
#5 High-paying customers = higher ARPA
Who do you care about more: low-paying or high-paying customers? If you were given a chance to retain your customer who pays $100 or who pays $30 per month, who would you retain?
Well, not all customers are equal and the ones in the first cluster are the cream of the crop – the very best you have. That’s why pay special attention to the ones who bring the most revenue.
#6 Up-selling and cross-selling = higher ARPA
Convince your customers to upgrade their existing plan and offer them additional services. Now you may say what is “additional services” or aren’t they included in higher plans? The answer is yes if you have separate plans with clear features.
But when you look, for example, at HubSpot’s pricing you can add “additional services” to your plan. And the price of the final plan contributes to the MRR and consequently ARPU.
Regarding upselling, you will likely upsell your clients via email marketing – well-designed messages that illustrate the benefits your customer will receive from the more advanced plan and clearly mention the new features that will be available in the higher plan.
These techniques are especially comfortable ones as you don’t invest in attracting new leads and you just “nurture” your current customers instead.
#7 High CAR (Customer Acquisition Rate) = higher ARPA
CAR shows how many customers you managed to attract in a given period, regardless of how long they are going to stay with you or how much you initially spent on them. The acquisition is a part of the revenue generation strategy alongside customer retention.
We won’t argue which one is better, we will just say that it’s a significant rate as more customers mean more growth opportunities. All this doesn’t contradict with point 2. You can reach high CAR without sacrificing customer quality or inviting unprofitable ones.
That’s all we would like to share with you regarding ARPU. Do you regularly measure your ARPU? Do you consider it a valuable metric?
The only way to beat your competitors is to know your SaaS metrics well (just like an alphabet).
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