You have no doubts – your startup is born to be successful.
You want it to grow fast, but what does this "fast" mean? And how can you understand your company is on track? Among various business metrics, there is one that should always be top of mind. In this article, you will learn about the growth rate and how to use this indicator to measure your business results.
What is SaaS revenue growth rate?
The growth rate shows a company's revenue increase over a certain period. It's one of the most important business metrics, as it indicates how quickly your startup is growing. For investors, the revenue growth rate is the most significant factor in the startup's valuation process. The increasing revenue trend is evidence of the company's sustainability and profitability.
Paul Graham, VC and co-founder of Y Combinator says:
"If there's one number every founder should always know, it's the company's growth rate. That's the measure of a startup. If you don't know that number, you don't even know if you're doing well or badly… The best thing to measure the growth rate is revenue..."
Understanding the growth rate will help you:
- To ensure funding from investors, who look at this metric to evaluate a startup's potential
- To develop and quickly adjust operational plans based on weekly, monthly, or longer-term growth rate trend
- To determine how to allocate resources wisely depending on whether the business grows fast or slows down
Let's dig deeper into the growth rate metric to make things clear.
How to calculate revenue growth rate
While a number of options exist to calculate the growth rate of SaaS companies, I would recommend keeping things simple.
Here is the basic formula to calculate the monthly growth rate:
(Second Month Revenue – First Month Revenue) / First Month Revenue * 100 = % Revenue Growth Rate
For example, if the first month you got $1000 revenue and $2500 the second month, your growth rate made up 150%.
($2500 - $1000) / $1000 * 100 = 150%
This way, you can know your revenue growth using actual data. If you want to make future revenue estimations, you will need to build a financial forecast, starting with planning your company's expenses. When your business is in the startup stage, forecasting expenses is usually much easier than revenues.
We will come back to the revenue forecast a bit later.
Before that, let's get to know how fast SaaS companies usually grow.
SaaS growth benchmarks
SaaS company growth rate depends much on a company development stage.
On average, the revenue increase falls into the 15% to 45% year-to-year growth range. According to a Pacific Crest SaaS Survey, businesses with annual revenue less than $2 million have much higher growth rates than those who surpassed the $2 million income threshold.
SaaS Capital conducted another survey of SaaS growth metrics and displayed the results on the chart below.
This chart demonstrates the average and median ARR growth of private SaaS companies with different revenues.
To understand how fast your business grows is possible only when compared to similar-sized companies. An 80% growth rate for a $3 million startup is below average (on the graph, the average growth rate for the $1 - $3 million group is 93%). At the same time, the 80% growth for a $20 million business is twice the average (the graph shows that the $10 - $20 million group has a 43% average growth rate).
Some other findings:
- Company age and growth rates have an inverse correlation until a company is 12 years old. For businesses older than 13 years, the typical growth rate is around 20% year-to-year
- High growth is usually associated with high customer retention
- The companies reach $1 million ARR approximately in 5 years
Early-stage startups growth specifics
The studies above took companies' annual revenue growth results for a reason.
The MRR growth rate can be deceptive for early-stage startups. You may expect that, in the future, the initial exponential growth will stay the same or increase.
For example, a startup may grow by 150% and more over the first months. Though, as the company matures, the growth rate decreases. That's why to see an accurate SaaS growth curve, some experts recommend calculating a 12 – 18 months trend.
Paul Graham of Y Combinator, whose words I cited at the beginning, has a different view on the startup growth rate calculation. He says startups should target 10% weekly growth in the early stages if they want to go up fast.
How to forecast revenue growth
And now, when you know what growth rate you may benchmark at, I want to talk about the importance of building a proper financial forecast. Forecasting revenue and expenses during the startup stage should be even more vital than selling.
If you want to get funded, few investors will take a risk and put money in your business unless you persuade them by thorough planning and thoughtful forecasts.
Also, accurate projections will help you develop reasonable operational and staffing strategies, which are essential business success components.
Here are three pieces of advice you may find useful when building your financial forecasts from the ground up.
Start with expenses
To accurately estimate your SaaS company growth opportunities, list the most common expenses, and think how much money they will "eat" from your budget.
For example, it can be something like that:
- Office rent
- Utility bills
- Accounting & Legal fees
- Advertising & Marketing
These are the most typical fixed costs. On top, you will more likely have some variable costs according to your business specifics. Add them to your estimation as well.
It will be smart to double estimates for advertising and marketing as they always go beyond expectations. Also, keep some extra budget for just-in-case. You never know what can happen, so money reserve wouldn't hurt.
Think both conservatively and aggressively
If you want to grow big, think big!
Don't worry. Your most aggressive dreams will be balanced with the conservative reality. However, to be ready for both "reasonable" and "ambitious" scenarios, spend time creating two sets of revenue forecasts.
For instance, your conservative plan may look like this one:
- One product or service a year
- Low price point
- One marketing channel
- No sales staff
And your aggressive dreams will include:
- One product or service introduced in the first year, three more products for different market segments during the next three-four years
- Low price for the basic plan and higher price for the premium
- Two to three marketing channels managed by a dedicated marketing manager
- Several sales working with the leads
By giving room to think ambitiously, you unleash your power to create revolutionary ideas for your business's rapid growth.
Mind your margin
And finally, we came to margin, the result of all company's efforts.
When you set a desirable margin level, you may find your aggressive assumptions become unrealistic. And this is OK. The final goal of each business is to make a profit. Even if you can't realize your ambitious dreams quickly, but your margin is thick – you are on the right path.
You should always target an increasing margin trend. Even though many entrepreneurs balance on the break-even point with the hope to improve their balance-sheet later, let's be prudent.
The SaaS revenue growth rate is one of the crucial business metrics you should continuously keep an eye on. The growth rate shows a company's revenue increase over a certain period. The increasing revenue trend is evidence of the company's sustainability and profitability.
It's typical for many startups to grow fast in the early stage, with the ARR growth by 144% on average. As the company matures, the growth rate slows down and falls into the 15% to 45% year-to-year growth range.
For the early-stage startups, some experts recommend calculating a 12 – 18 months trend to see an accurate SaaS growth curve.
Alternatively, you can target the 10% weekly growth in the early stages if you want to go up fast.
It's also vital to build a reliable financial forecast paying attention to expenses, margin, and business development scenarios.
Now when you know the revenue growth rate fundamentals, learn about one more essential startup metric in the SaaS churn rate article.