How to Calculate Growth Rate (and Different Types of Growth Rate)
Aug 22 2020
Momentum—the driving force of every SaaS company’s success. Growth stems from momentum, which can be measured. And we’ve covered articles about specific momentum metrics, such as monthly recurring revenue (MRR) and annual recurring revenue (ARR), extensively.
Analyzing your revenue month to month is important for judging and planning your company’s momentum. Another way to study growth in addition to MRR is by calculating growth rates. Calculating and monitoring growth in various ways will provide even more specificity, leading you to better decision making.
After reading this article, you’ll have a deeper understanding of what growth rates are, the many metrics associated with growth rates, and how to calculate it.
Simply put, growth rates measure how fast your company is growing. Yes, it’s a broad definition but it can be interpreted based on which sector of growth you are looking to assess. There are a variety of different growth rates—from industry growth rates, company growth rates, to GDP growth rates. This variety is important because different companies define growth differently.
Company growth rates can look at things like revenue, users, accounts, or levels of usage such as daily active users (DAU) and monthly active users (MAU). For example, a consumer company like Instagram likely measures growth through DAU. On the other hand, an enterprise SaaS company is more concerned with account and revenue growth.
No matter the type of growth you’re examining, growth rate is an important metric to help allocate resources for the future.
Different ways to measure a business’s growth rate
Measuring growth rate depends on which variable you are looking to assess. I’ll break down what the process looks like for measuring revenue growth, market share growth, and user growth rate.
Revenue is the most common metric used to measure the growth rate of a business. Basically, it’s the king of all SaaS metrics in terms of growth. Revenue growth is the increase or decrease of a company’s sales between two periods. It’s shown as a percentage and demonstrates the degree to which your company’s revenue has grown or shrunk over time.
This equation can be calculated annually, quarterly, and/or monthly. Measuring revenue growth in this way calculates both positive and negative changes in revenue growth—giving you a more realistic outlook on your company’s financial health.
Revenue vs net income
A brief side note here—there is a difference between revenue and net income. Revenue is the total amount of income generated by the sales of a product or service related to your company’s primary operations. Revenue is often referred to as “the top line.” On the contrary, net income is the total earnings a company receives, aka profit. Net income is referred to as “the bottom line.” This difference is important because most of the time, investors want to see a clear and shorter path to profitability, not just an increase in revenue alone. Both revenue and net income are important when examining the financial sustainability of a company, but they are not interchangeable.
Another way to track your company’s growth is by measuring market share growth. In order to calculate market share growth rate, you must first have a grasp on how to calculate market share. Market share is the portion of a market controlled by a particular company or product.
Now, to measure market growth rate, you need to know the total market size in terms of revenue—which includes total sales of the entire market with you and all competitors combined. Once you determine your starting value, you can start calculating market growth rate.
Market growth can indicate your business’ long term sustainability because if your company is experiencing low sales compared to other companies in your market, it will prove that you need to investigate why your product isn’t competing as well.
User growth rate
User growth rate is the percentage of new paying customers you gain every month.
Tracking user growth rate is important because if the trend is positive, then your company is acquiring more customers in an upward trend. It means people like your product; your marketing and sales efforts are going well. However, if at any point your calculations indicate a decline in users, it’s time to strategize to meet your goals.
How to calculate growth rate
Calculating growth rate is a fairly simple equation. Of course, the numbers you use depend on the metric you want to assess. I’ll go through each metric and how to calculate growth rate accordingly.
1. Pick a metric
We just went through different metrics you can track—revenue, market share, and user growth rate. It’s important to pick which metric you’d like to calculate. Don’t get me wrong, you can calculate all three, but not at the same time or within the same equation.
2. Find a starting value over a given time period
After you decide which metric you want to focus on, you need to determine your starting value. This number will represent the performance of your business for that period of time.
3. Find an end value over a second time period
You’ll also need to determine your end value. This number will represent the performance of your business over THAT period of time.
4. Apply the growth rate formula
As mentioned above, your end and starting values are contingent upon the metric you choose to calculate. For example, when calculating market share growth, you would use the current market size and the original market size as your starting and end values.
Growth rate is only part of the picture, Profitwell captures the rest
Calculating growth rate is one piece of the puzzle. Calculating growth rate reveals how your company is trending. However, once you know whether growth is declining or increasing, you need to act upon that information. If you calculate growth and find that it’s decreasing, you need to strategize how your company can get growth on the right track.
That’s where ProfitWell comes in. Our tool, ProfitWell Retain, helps grow revenue and sales with your existing customers. Retain combines subscription expertise with algorithms that leverage millions of data to win back your customers. Using Retain lets our team do the heavy lifting to reduce churn, so you can spend more time with your customers and product.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.