In the dynamic world of SaaS, mastering a wide range of metrics is strategic to track the performance of recurring revenue activities. Among these essential SaaS KPIs, ARPU (average revenue per user) stands out as a fundamental element. This article delves into ARPU’s definition, calculation, and its distinction from ARPA, offering insights on how to leverage it to improve your SaaS performance.
1 - Defining and Calculating ARPA
While often confused, ARPU and ARPA are distinct terms with specific calculations and implications for KPI fluctuation.
1.1 - What is ARPU?
ARPU stands for "average revenue per user", representing the average revenue generated per user (not customer) over a given period. It’s a critical metric for growth across any service offering, with various commercial and pricing strategies available to optimize this ratio, including upsell and cross-sell.
1.2 - ARPU vs. ARPA: Understanding the Difference
ARPA (average revenue per account) measures the revenue per account over a period of time, focusing on subscription revenue from clients. Unlike ARPU, which applies to all users of a SaaS, ARPA provides insights into revenue split by client accounts, as a single client company may include multiple users.
1.3 - Calculating ARPU and ARPA for a SaaS - example
Consider a company with the following subscribers and subscriptions:
- 10 clients opted for the premium annual subscription at €3,600 for 100 users each;
- 3 clients subscribed to the premium monthly package at €400 for also 100 users each;
- 20 small business clients, with a single user, picked the monthly "essential" service package at €8 per month.
To calculate ARPU or ARPA, we must first determine the MRR (Monthly Recurring Revenue) for the period. In our example, the total MRR amounts to:
(10 × (€3,600/12)) + (3 × €400) + (20 × €8) = €3,000 + €1,200 + €160 = €4,360.
Here are the ARPA and ARPU metrics:
ARPA (Average Revenue Per Account): €4,360 / (10 + 3 + 20) = €132.12.ARPU (Average Revenue Per User): €4,360 / (10 × 100 + 3 × 100 + 20) = €3.30.
1.4 - Factors Influencing ARPU and ARPA
The example shows how client type and product offerings can affect ARPA and ARPU. Different client segments, like small businesses or freelancers, typically subscribe to cheaper plans with fewer users, whereas bigger companies choose more comprehensive, higher-end services with more users, highlighting the importance of segmenting ARPU and ARPA by client or product type.
2 - The strategic role of ARPA and ARPU in a SaaS business
These metrics are vital for improving a recurring revenue company’s performance, offering various applications.
2.1 - An indicator of your ability to sell at various prices
In the previous example, the SaaS offering includes both a basic service level and a premium level, as well as pricing tiers according to the number of users. Segmenting ARPA and ARPU by customer type gives you more detailed and interesting data to track over time. These indicators inform you about your ability to sell more expensive or more comprehensive subscriptions.
Whether it's moving customers up to a higher tier (upselling) or enhancing subscriptions with additional services (cross-selling), you're increasing MRR. Analyzing the evolution of ARPA helps to measure the effectiveness of your sales and marketing strategy. It aids in assessing your pricing position.
2.2 - Monitoring Churn by ARPU Size
As a reminder, churn rate measures attrition, that is, the loss of customers over a period, either by number (churn rate) or by MRR amount (revenue churn). Segmenting customers increases relevance for tracking both ARPU and churn.
A high churn rate for a high ARPU has detrimental consequences ARR growth. Monitoring these two indicators simultaneously helps to determine the actions needed to retain strategic subscribers.
2.3 - ARPA and ARPU’s impact on company LTV
LTV (lifetime value) represents the revenue a customer is expected to generate over the whole duration of their relationship with a company. The higher the ARPU and ARPA, the greater the LTV, especially if the churn rate remains below the SaaS metrics defined for the company.
2.4 - Strategies for Increasing ARPA and ARPU
To wrap up, if you want to maximize ARPA and ARPU, here are some strategies:
- Enhance your understanding of customers through segmentation to identify the best pricing plans or optimize them, using ARPU and ARPA by customer type;
- Analyze churn and its reasons to adapt the product offering, through a better understanding of user needs;
- Implement new sales strategies, such as sales incentives or cross-selling.
ARPU and ARPA are excellent ways to measure the sales performance of a SaaS. They also help to ensure that the available subscription plans align with customer needs. If you're looking to regularly track these indicators, Fincome offers a platform to automate the calculation of KPIs. Focus on your business; we'll handle your reporting. With an online demo, you'll quickly see the efficiency of our tools.
