What is ARPA? So it’s time to explain what ARPA is, one of the main indicators for the segment. In English, the term means Average Revenue Per Account and serves to measure how much, on average, each account generates revenue for a company on a monthly basis.
Calculating this metric is simple: you must divide the amount of your recurring monthly invoicing (MRR) by the number of active customers in the company.
How to calculate ARPA
The standard time per month is used, as most subscription businesses operate within this period. However, if you offer quarterly, half-yearly, annual options, among others, you can always calculate ARPA from that.
Why use ARPA?
As we have already said, it is essential to monitor the respective indicators in the recurrence market. Therefore, identifying the average revenue per account is a great way to understand the evolution of the values that are made in the contracts, as well as business growth.
Another reason for applying ARPA is the possibility to distinguish which products generate the highest revenue, and which generate the lowest. In addition to recognizing what makes some more accepted in the market than others.
Attention when interpreting ARPA
That ARPA is an essential metric for segments that deal with recurrence, there is no doubt. However, you must be careful when interpreting your results!
Have you ever heard of vanity metrics? It is favorable data for a given indicator, which is not used for decision making. This means that she will not be able to indicate how, in fact, the health of your business is.
When working with ARPA, you will be dealing with customers that generate very high revenues, as well as those accounts that have lower revenue. In order not to distort the metric and make ARPA a vanity indicator, you should pay close attention and use other SaaS indicators to clarify your company’s context.
Want an example? Imagine that your biggest customer pays 5 times more than your other buyers. This grandiose account could give a false impression of a positive result for your enterprise. And this usually happens when companies establish a very wide price range, for example, from US$100/month to US$10,000/month.