What is Average Revenue Per Account (ARPA)?
Average revenue per account (ARPA) is a profitability measure that assesses a company’s revenue per customer account. ARPA is generally measured on a monthly or annual basis. Although the terms average revenue per account (ARPA) and average revenue per user (ARPU) are frequently used as synonyms, this is not always correct because one customer may have several accounts with a company.
The ARPA metric is mostly used by companies operating on a subscription-based business model or those providing some type of services. For example, ARPA is widely employed by telecommunication companies, social media companies, and banks.
ARPA is a profitability metric that is not recognized by accounting standards such as GAAP or IFRS. However, companies in relevant industries report the metric on their financial statements and devote a significant amount of time to discussing their ARPA results.
The metric is extremely valuable in providing an overview of a company’s profitability per account basis. In addition, it reveals which company’s products or services generate the most and the least revenue.
- Average revenue per account (ARPA) is a profitability measure that assesses a company’s revenue per customer account.
- ARPA is calculated by dividing the company’s revenue for a period by the number of accounts for the same period.
- Average revenue per account (ARPA) and average revenue per user (ARPU) cannot always be used interchangeably because one user (customer) can have multiple accounts with a company.
Why is ARPA Important?
Average revenue per account remains one of the most important profitability metrics for service providers and companies operating on a subscription-based business model. The key applications of the ARPA metric include the following:
ARPA is commonly utilized to compare a company’s performance with that of its competitors, as well as compare its performance across time.
2. Customer segmentation
ARPA can also be used to indicate the segments of the company’s revenue. The metric can help identify which service or product generates the most/least revenue or which customers (new vs. existing) produce the most revenue.
3. Revenue forecasting
Revenue forecasting is another important application of ARPA. Note that the metric is commonly used as an input for calculating a company’s recurring revenue (MRR or ARR). At the same time, recurring revenue metrics that are distinguished by their predictability and stability are generally utilized as a baseline for revenue forecasting.
The calculation of ARPA is quite simple. Just divide the company’s total revenue for a period (month or year) by the total number of accounts for the same period. Mathematically, the ARPA formula can be expressed in the following way:
Note that the number of accounts can fluctuate significantly within one time period. Due to this reason, companies tend to prefer to calculate the average number of accounts for a given period.
New Accounts ARPA vs. Existing Accounts ARPA
Revenue segmentation can be essential to understanding a company’s revenue generation dynamics. In addition to revenue analysis by a product or service, the company can evaluate its revenue generation by comparing new and existing accounts.
The revenue generation comparison between new and existing accounts allows a company to analyze the behavior of its customers. By understanding revenue trends associated with each group of accounts, a company may adjust its business strategy, as well as elaborate key decisions on its core operations.
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