In this comprehensive guide, we’ll explore Revenue Growth Rate – a crucial metric that determines your SaaS company’s success and valuation. You’ll learn how to calculate it, what constitutes a healthy growth rate at different stages, and practical strategies to improve it.
Whether you’re a first-time founder or scaling your existing SaaS, this article will help you understand and optimize your company’s growth trajectory.
Table of Contents
What is Revenue Growth Rate?
Revenue Growth Rate measures how quickly your company’s revenue is increasing over time. For SaaS companies, this typically refers to the growth in Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR).
Think of it as your company’s speed meter – it shows how fast you’re growing compared to where you were in the previous period.
Let’s look at a real-world example. Imagine you’re running a project management SaaS tool. In January, your MRR was $10,000, and by February, it grew to $12,000. Your monthly growth rate would be 20%.
This means your revenue is growing at a pace that would theoretically double every five months, though maintaining such high growth rates becomes increasingly challenging as your revenue base expands.
How to Calculate Revenue Growth Rate
The Basic Formula
Growth Rate = ((Current Period Revenue – Previous Period Revenue) / Previous Period Revenue) x 100
Let’s break this down with a practical example:
Example: Monthly Growth Rate Calculation
Your SaaS company’s revenue figures:
- March 2024: $50,000 MRR
- April 2024: $57,500 MRR
Plugging these numbers into our formula:
Growth Rate = (($57,500 – $50,000) / $50,000) x 100 = 15%
Different Time Periods for Measuring Growth
Month-over-Month (MoM) Growth
MoM growth is most useful for early-stage startups and for tracking short-term progress. It’s particularly valuable when you’re making frequent changes to your marketing strategy or product offerings.
For instance, if you launch a new feature or marketing campaign, MoM growth helps you quickly assess its impact.
Year-over-Year (YoY) Growth
YoY growth provides a more stable view of your company’s progress by eliminating seasonal variations.
For example, if you sell accounting software, your January sales might always be higher due to tax season. YoY growth helps you understand your true growth trajectory by comparing similar periods.
What Makes a Good Growth Rate?
What constitutes a “good” growth rate varies significantly based on your company’s size and stage. Here’s a practical breakdown:
Early-Stage SaaS (ARR under $1M)
At this stage, investors typically expect to see monthly growth rates between 15% to 20%. This means you should be roughly tripling your revenue yearly.
While this sounds ambitious, it’s achievable when starting from a small base. For instance, growing from $10,000 to $30,000 MRR in your first year would meet this benchmark.
Growth-Stage SaaS ($1M – $10M ARR)
As your revenue base grows, maintaining the same percentage growth becomes more challenging. At this stage, healthy monthly growth typically ranges from 8% to 12%.
This translates to roughly doubling your revenue annually. For example, growing from $2M to $4M ARR in a year would be considered strong performance.
Scale-Stage SaaS ($10M+ ARR)
At scale, growth rates naturally decrease. Companies at this stage often target annual growth rates of 50% to 100%.
For instance, Zoom grew from $60M to $122M in revenue between 2017 and 2018, representing roughly 100% annual growth – an exceptional performance at that scale.
Factors Affecting Revenue Growth Rate
Customer Acquisition
New customer acquisition is often the primary driver of growth, especially in early stages. For example, if your average customer pays $100 per month, and you acquire 20 new customers monthly, this adds $2,000 to your MRR. To calculate your required customer acquisition for a target growth rate, use this formula:
Required New Customers = (Target MRR Growth – Expansion MRR + Lost MRR) / Average Customer MRR
Customer Churn
Churn directly opposes growth by reducing your revenue base. If you’re growing at 15% but losing 5% of customers monthly, your net growth is only 10%. This is why reducing churn often provides better returns than acquiring new customers.
Expansion Revenue
Expansion revenue comes from existing customers paying you more over time, either through upgrades or additional services.
For example, if a customer starts with a $50/month basic plan and upgrades to a $100/month premium plan, that’s $50 in expansion revenue. This is often the most efficient form of growth as it doesn’t require additional customer acquisition costs.
How to Improve Your Growth Rate
Optimize Your Sales Funnel
Start by analyzing each stage of your sales funnel to identify bottlenecks. For example, if you’re getting plenty of trial signups but few conversions to paid plans, focus on improving your onboarding process.
A 5% improvement in trial-to-paid conversion rate could significantly impact your growth rate.
Reduce Customer Churn
Implement a proactive customer success program. For instance, if you notice that customers who don’t use a key feature within their first week are more likely to churn, create an automated onboarding sequence that guides them to that feature.
Many SaaS companies have found that reducing churn by just 1% can increase annual growth by 10% or more.
Measuring and Tracking Growth
Set up a dashboard to track your key growth metrics weekly. Include:
- MRR/ARR Growth Rate
- New MRR from new customers
- Expansion MRR from existing customers
- Churn MRR
- Net MRR Growth
Many SaaS companies use tools like ProfitWell, ChartMogul, or Baremetrics to automate this tracking. These tools can also help you identify trends and forecast future growth.
Conclusion
Understanding and optimizing your revenue growth rate is crucial for any SaaS business. Start by accurately measuring your current growth rate, then focus on the levers that will have the biggest impact on improving it. Remember that sustainable growth comes from a combination of new customer acquisition, reduced churn, and expansion revenue from existing customers. Keep tracking your metrics regularly and adjust your strategy based on the data.
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