Welcome to our startup dictionary! Let's explain the difference between ARPA (Average Revenue Per Account) and ARPU (Average Revenue Per User). These two metrics may seem similar at first glance, but they actually measure different things and provide valuable insights for your startup. As a startup founder or early stage entrepreneur, understanding these metrics can help you make better decisions for your business and track your progress towards growth and profitability. More on ARPA vs ARPU below.
ARPA or Average Revenue Per Account is a metric used most often by subscription and SaaS based companies that represents the average revenue generated per customer account per year or month. Typically in the SaaS / Subscription world it’s referring to the average monthly recurring revenue (MRR) per account. It’s a powerful metric because it can be used by businesses to get a clear understanding of profitability on a granular level.
ARPU or Average Revenue Per User is a company’s generated revenue that is averaged across all users and reported as a monthly or yearly value. Typically in a SaaS / Subscription businesses this can be thought of as the average MRR per user.
The key difference between ARPA and ARPU is in the level of granularity each metric represents. It’s common in the B2B world that some of your customers may have multiple users in their organization. Measuring both ARPA and ARPU becomes especially useful to companies that have subscription pricing based on usage or per seat.
For example, Slack, the popular meeting space software charges per user for use of the platform. A team of Slack users within a company may have a low monthly subscription cost given the discounts for the overall account, but Slack can sill measure both the revenue derived from the total account with ARPA and at the individual user level with ARPU. Measuring both of these metrics gives Slack more granular insights into revenue, especially when comparing one customer organization to another.
The calculation for both ARPA and ARPU are essentially the same.
*ARPA* is calculated by dividing total revenues over a period of time by the total number of customer accounts during that same period of time.
For example, consider company A has 1,000 customer accounts and is generating $100,000 in total revenue per month. Average Revenue per Account (ARPA) would be = $100,000 / 1,000 = $100 per account per month.
*ARPU* is calculated in a similar way, substituting the accounts variable for users.
For example, consider company B has 1,000 individual users and is generating $200,000 in revenue per month. Average Revenue per User (ARPU) would be = $200,000 / 1,000 = $200 per user monthly.
First and foremost they can be a key indicator of profitability and growth. Second, they can allow you to drill down and understand each of your customers on a more granular financial level. If your ARPA increases over time it may be an indicator that your sales and marketing efforts are having a positive effect.
The ARPA formula is quite simple and easy to calculate. To determine ARPA, follow these steps:
ARPA provides numerous benefits as a key financial metric for businesses, aiding in revenue optimization and decision-making. Here are the main advantages of utilizing ARPA to enhance business performance and growth.
Granular insights: ARPA provides a granular view of the profitability of each customer account, which can help businesses identify high-value customer segments and tailor their sales and marketing efforts accordingly.
Performance measurement: By monitoring ARPA, businesses can evaluate the success of their pricing strategies, promotional offers, and discounts, and adjust them as needed to optimize revenue.
Benchmarking: ARPA can serve as a benchmark for comparing the performance of different customer segments, products, or services, allowing businesses to focus on areas with the highest potential for growth.
Revenue forecasting: Tracking ARPA over time can help businesses predict future revenue trends and make more informed decisions about resource allocation and investment.
Though ARPA is a helpful financial metric for businesses, it's essential to be aware of its limitations. Here are some drawbacks of relying solely on ARPA for decision-making and revenue optimization.
Lack of user-level data: ARPA focuses on customer accounts rather than individual users, which may limit the understanding of user behavior and preferences, especially in businesses with tiered pricing or per-seat subscription models.
Incomplete picture: ARPA alone may not provide a comprehensive view of a company's financial health, as it does not account for other key metrics such as customer acquisition cost (CAC), customer lifetime value (CLV), and churn rate.
Variability: ARPA can be influenced by factors such as seasonal fluctuations, one-time promotions, and discounts, which may make it challenging to discern long-term trends and patterns.
Despite these limitations, ARPA remains a vital metric for businesses looking to optimize revenue generation, particularly when used in conjunction with other financial metrics like ARPU.