To have a healthy SaaS, it’s not enough to simply see your revenue go up. You need to know how fast it’s growing, whether that pace is sustainable, and when to adjust your growth tactics.
You need to know your revenue growth rate.
What is revenue growth rate?
Revenue growth rate is one of the most important metrics SaaS companies can track.
It shows the evolution of a company’s revenue over a certain period. How fast a company’s month-to-month and year-to-year revenue grows, is an indicator of whether the company will be profitable in the long run and thus whether it has a good chance of survival. This makes revenue growth rate a tool to predict future performance as well as issues that may arise.
Why should you measure revenue growth rate?
The internal importance of revenue growth rate
It’s important to consistently measure and track your revenue growth rate to know how healthy your company is, whether your current growth is sustainable, and if you need to make any adjustments.
Your growth rate influences how fast you’ll hire new people, when you need to change your operational setup, and where you’ll allocate your resources.
The importance of growth rate for investors
Because revenue growth rate gives both insight into how a company grew to where it is today and how much potential it has to keep growing in the future, it’s one of the most important things investors take into account when valuing a company.
How to calculate revenue growth rate
While there are various ways to calculate revenue growth, one of the simplest and most crucial calculations for SaaS companies is that of their monthly growth rate:
(Revenue of Month X – Revenue of Month X-1) / Revenue of Month X-1 * 100 = % Revenue Growth Rate
The percentage resulting from this calculation indicates how much your overall revenue has grown from one month to the other.
Here is an example:
If your total revenue is $6,000 in February and it was $5,000 in January, then your revenue growth rate from January to February is ($6,000-$5,000) / $5,000 * 100 = 20%.
Monthly growth rate for SaaS companies is often also referred to as MRR growth rate, or “Monthly Recurring Revenue growth rate”.
Note: A monthly growth rate based on overall monthly recurring revenue can give the impression that your SaaS is performing better than it actually is, as this number doesn’t tell you if you’re losing customers faster than you’re gaining them, or how much of your revenue growth comes from new customers versus existing customers. That’s why it’s important to have a look at other revenue-related SaaS metrics as well.
Forecasting revenue growth
One of the most common ways to forecast revenue growth for SaaS is by calculating the expected Annual Recurring Revenue, also referred to as Annualized Run Rate (ARR). To do so, simply take your current MRR and multiply it by 12.
While this formula is rather conservative in that it’s based on customer (and revenue) retention rather than growth, it’s the easiest way to get an idea of where you’ll be a year from now and make sure you don’t incur costs you won’t be able to cover.
Speaking of expenses, these should also be taken into account if you want to forecast for success. No, they’re not part of your revenue forecast, but if you know what your monthly expenses are, you can hold those against your expected revenue to determine where and when you may have room to, for example, ramp up your marketing efforts.
Benchmarking SaaS growth
Comparison may be the thief of joy but when you’re growing a business, it can be worthwhile knowing the revenue growth rate of companies similar to yours. Similar means:
- of the same size.
- of about the same age.
- within the same industry.
- offering a similar type of product.
- catering to a similar type of customer.
For example, while a 50% growth rate for a $1-3 million company was well below average in 2020, it was better than average for a $10-20 million company according to data from SaaS Capital.
Two opposite situations in which benchmarking can be helpful:
- You haven’t been able to reach your revenue goals. There’s a chance that looking at the performance of other companies will show you that those goals might have been unrealistic.
- You keep surpassing your revenue goals. Comparing your actual revenue growth with that of similar companies may show that those companies are doing even better and so maybe, your goals weren’t ambitious enough.
Measuring and tracking your SaaS revenue growth rate is crucial to know if your company is growing in a healthy and sustainable way and if you need to change course at any point. It’s also one of the first metrics investors will look like to decide whether they’ll back you or not.
Create a revenue growth forecast to help you plan next steps and benchmark to avoid the risk of setting the bar too high or too low.
At Flow, we help companies increase their revenue through organic, sustainable traffic growth. Get in touch to learn more.