As SaaS solutions become increasingly viable as third-party alternatives for organizations in need of sophisticated functionality but unwilling or unable to foot the bill for in-house implementations, providers in the space should continue to benefit from annual market growth. However, a rapidly evolving market and a tidal wave of new customers can spell trouble for those who are ill-equipped to optimize for profitability.
Especially in the early stages of a SaaS company’s development, the costs of acquisition and retention for new customers can prove to be higher than expected—this can potentially set otherwise healthy companies up for sudden failure. This is because the actual revenue they bring in from each client in their customer base ends up being insufficient to match the outpouring of resources used to reel in leads in the first place. Finding the right pricing strategy may turn out to be a major conundrum if boosting prices results in customers jumping ship.
Gaining a clearer perspective on the needs of your organization at any stage of its growth matters, but more so when you’re just getting started. The right metrics can make a real difference to your team and shine a light on the rocky shores of an ill-conceived pricing plan before you sink too much money into the wrong activities.
What is the ARPA metric?
ARPA stands for average revenue per account. This metric helps measure the total amount that your company is making from each customer account it currently has open. ARPA measures revenue, not profit, so it doesn’t tell you directly what your average profit per customer is. Instead, it helps you keep track of the total inbound cashflow you can expect from the customers you take on.
You should keep in mind that ARPA is meant to represent the average revenue per account as opposed to the average revenue per customer or user. This means a user with multiple accounts with your company will actually be counted more than once. This can be both beneficial and a bit of a logical burden, depending on what you choose to use this particular metric for.
Calculating your company’s ARPA is relatively easy to do. The full formula is as follows:
Monthly recurring revenue / total number of accounts = ARPA
A useful variation on the standard ARPA calculation covered above is to limit the time period you apply it to—such as more recent account openings (accounts opened in the last quarter or year, etc.). You can also apply ARPA tracking to different customer groups within your organization to gain a better understanding of account dynamics as well as their longevity.
How the ARPA metric works for SaaS
Average revenue per account can be used in many ways within a given organization, depending on your team’s needs and the goals you have for your company’s growth trajectory. Companies of all kinds pay special attention to this metric to help demonstrate their overall profitability. For SaaS businesses of all sizes, keeping tabs on profitability is absolutely essential to sustaining growth over the long term. ARPA helps by demystifying your more general revenue numbers and placing them in a more useful context.
Although average revenue per account can be a tremendously powerful metric for your organization to utilize, it might not be the most appropriate to include in regulated reports. The ARPA SaaS metric is not recognized under generally accepted accounting practices (GAAP) or international financial reporting standards (IFRS). This means including ARPA figures in reports intended to satisfy the requirements of either of these two bodies would not be considered necessary or beneficial.
ARPA metric SaaS usage tips
If your team is looking to make the most of the metrics at its disposal, then putting ARPA to use could be a great idea. Here are a few tips to help you get started:
- Consider how outliers in your data will be handled before you begin tracking ARPA figures. Very high-paying accounts and unusually low-paying ones can both skew your results, leading to misunderstood readings. Eliminating outliers or segmenting your accounts in a more beneficial way can help alleviate these issues.
- Segmenting by lead source can be very useful if you have yet to refine your marketing mix. ARPA segmented in this way shows you just how much revenue is being brought in from each source, allowing your team to focus on what works and discard underperforming channels altogether.
- Use ARPA to keep tabs on major and minor revenue shifts. When revenue spikes or dips, your ARPA readings will help you track the severity of the change. Depending on the way you have segmented your accounts, ARPA could even help reveal where the shift originated as well.
SaaS metrics matter
Without the right mix of metrics at your disposal, the growth and performance of your business remain a mystery. By using ARPA and other appropriate metrics, you can track the data points that matter most to your SaaS company’s survival and success. With the right guidance, your team can choose the best metrics, tools, and strategies to capture market share and reach milestones.
VeryCreatives can help.
By partnering with VeryCreatives, you can count on the kind of industry intel only a digital product agency specializing in SaaS can provide. Book a call with our team today to learn more about what we can do for you.