How do you drive success in terms of sales and growth? Are you looking at average revenue per client (ARPC) as a key metric?
To be fair, ARPC is a metric often prioritized by software companies, but in this day and age, firms can learn a lot from this simple yet valuable metric. And yes—we know that it’s often overlooked or regarded as a vanity metric...but we also know that’s not the whole story!
ARPC is actually one of the most valuable metrics for piloting business growth.
Tracking it can tell any organization (including accounting firms and other service-based businesses) a lot about their business model and customer base. In this article, we’ll review how to calculate ARPC, why it’s an important metric for accounting firms to track, and a few strategies for how to improve it.
How to Calculate Average Revenue per Client (ARPC)
Average revenue per client is easy to calculate, and you can do it based on annual or monthly recurring revenue (ARR and MRR, respectively):
[Total Revenue (ARR / MRR / etc)] ➗ [# of customers]
However, because it’s so simple and considers a longer time period, it’s worth spending some time cleaning the data to get a more reliable and specific number.
Simply dividing total revenue by total customers can be misleading, especially if you have some one-time effects or your customer base is changing. For example, it might be worth considering only revenue from existing customers, excluding any one-off payments or extraordinary engagements.
To gain the most insight through tracking ARPC, it helps to segment your customers and products to enable drilling down.
Consider segmenting your customer base by:
- Client size or industry
- Services used (tax, advisory, bookkeeping, etc)
- Other segments or product types important to your firm
Why is Average Revenue per Client Important?
Like a software company, or any business using a subscription-based service model, an accounting firm has a core customer base paying for service on an ongoing basis. Whether charging monthly flat fees or an hourly rate, accounting isn’t typically a one-and-done kind of arrangement.
Tracking ARPC over time is important because it allows you to see changes as they develop in your business model and client profile.
And why is it important for an accounting firm?
ARPC can indicate the financial health of your business. Seeing the average value per customer, and how that figure is developing, can help you determine if the business is on stable footing. Was ARPC at one time increasing, but now you see an unintended decline in revenue per customer?
How many clients do you need to cover your costs and get a return on your investments?
Do you want a client base of many smaller businesses, or would you rather service a small number of sizable clients?
ARPC can help you validate the alignment between service offering, pricing, and value created. Which of your services seem to be most popular? Are customers happy to pay your prices, certain that they’re getting a great value? Do you feel like you’re giving your services away, or that your prices are fair?
Growing ARPC can help you confirm that you’re pursuing the right deals and offering the right services to the right customers.
But more than that, ARPC can help you take a strategic view in determining what type of accounting firm you’d like to be.
ARPC can help you make strategic decisions about the direction of your firm. Perhaps your ARPC is growing steadily for a certain segment of clients who really seem taken with your advisory service. By paying attention to growth in revenue per customer in this area, you can decide where to focus your team’s attention.
ARPC can also aid you in defining how you market your services to potential clients.
How to Increase Revenue per Client
Imagine now that you’ve calculated your ARPC across your customer segments and services—are you satisfied with your growth? Is your ARPC where you want it to be, or at least moving in the right direction?
Chances are, especially if you’ve never looked into it before, there are a few things you’d like to improve.
How can you improve ARPC?
As is the answer to many business strategy questions: that depends on many factors. But here’s a brief list of the major levers you have to improve your revenue per client.
Probably the simplest and most obvious method for increasing your revenue per client is simply to raise your rates.
But proceed cautiously here: depending on how you’ve positioned yourself in your market and how you advertise the increase, you could create some backlash and temporarily increase churn.
To adapt your pricing strategy correctly you’ll need to make some assumptions about the value you’re providing. While not necessarily the benchmark, analyzing the prices similar firms in your market are charging can give an indication of what you should charge.
You can also lead with value. Most firms who increase their rates are able to do so by showing clients that they’re continuously creating additional value for them; it justifies the increase.
What’s your current revenue model and pricing strategy? Are you charging clients a fixed monthly fee based on the services they’re using (i.e., productized service)? Or are you operating with an hourly billing model?
A productized model with flat fees and bundling of services can help you increase your recurring revenue. You’ll also reap benefits from standardizing your services and improving internal efficiency. Of course, you can also offer ad-hoc and bespoke services on top of a standard service package.
As a bonus: through tools, automation, and the outsourcing of simple tasks (like data entry), you can take on more clients without inflating your team size.
Keep Clients Longer (Reduce Churn)
Most businesses experience some customer churn. Customers leave to try something new, change service providers for a more fitting deal, or just find a better price somewhere else. Whatever the reason, it’s normal. But that doesn’t mean you should be okay with any increase to your firm’s turnover rate.
Reducing churn means you’ll have to work less hard to attract new customers. Lowering churn rates also means that when you do sign new customers, you’re growing your revenue, not scrambling to replace lost revenue in order to maintain your business.
Target Specific Industries with Tailored Services
To stay competitive (especially when you’re up against big, venture-backed accounting firms), it helps to pick a target market in a specific niche. For example, you might see an opportunity to specialize in serving dentists who perform a lot of elective services and have multiple locations in the Tampa Bay area—this is the kind of specificity that will help you succeed!
Whatever you choose, here’s the gist about getting specific with your targeting:
Choose a market that’s large enough to have at least a few ideal clients in an industry you understand.
Identify clients who are in that sweet spot of having growth potential without an in-house CFO/advisor.
Market to these clients where they are (i.e., consider a direct mail campaign over Facebook ads if you know they aren’t active on Facebook). Be sure to emphasize your expertise and specialty.
At the end of the day, you want to zero in on the specific services you provide, and work hard to give them the best service possible—just like you do with every client!
Increase Your Profit Margin
Although improving your margins is not technically increasing the top line, it’s good for the business. It also accomplishes the same end goal as increasing your revenue per client. And while it might be easier said than done, increasing your profit margin is likely already a part of your growth strategy, and focusing on it can lead to a greater ARPC.
There is, of course, more than one way to do it, including creating efficiency improvements and decreasing overhead. We’re talking about performing process audits and becoming a stickler for standardizing work processes, automating or outsourcing low-value activity.
The key takeaway is that the more value you’re able to bring to your clients through efficiencies and dedicated, value-focused services, the more likely you are to increase your ARPC.
Rev Up Your Revenue per Client With Automation Technology
One sure-fire method for increasing your revenue per client (and your profit margin) is through implementing AI technology to increase the value you’re providing clients. This also prevents complicating your processes, and it makes your business run smoother—with higher returns.
AI-powered bookkeeping tools allow you to reduce overhead and scale your business by 10x, and to put it simply: they make you a better accountant.
But automation doesn’t just benefit accountants—it works for everyone at your firm. In fact, we wrote a book on who actually benefits the most from automation in accounting and how it strengthens your firm from every angle. Click below to get your copy!