Run Rate:
Definition & Examples

We've covered a variety of important KPIs - Key Performance Indicators - throughout our blog. Examples include churn rate and lead-to-customer conversion rate.

In today's article, we will be specifically focusing on the run rate KPI, diving into exactly what it is and how it plays out in real-life scenarios.

Once you've finished this article, you will understand what it is, how to calculate it, what to consider for better accuracy, and some examples to further your understanding.

Let's get started!

Run rate specifically measures how much revenue your business generates during a specific time period. In other words, it is the financial performance of your business, based on your current revenue.

This makes it one of the most insightful and significant metrics to track. Based on it, you can calculate your forecast: it provides an idea of how much money you need to be making to meet the quota as it estimates how much money you're bringing in.

By discovering your run rate, you can adjust or change your sales process accordingly to meet your goals.

This is all, of course, assuming that current conditions will continue.

They are most useful for short-term calculations and course corrections for certain departments or newer companies, or when there is a big change in business processes.

Calculating run rate is fairly straightforward, though you will need at least a few months' worth of revenue data.

Here's the formula for calculating it annually:

Revenue in period Z x # of periods Z in a year = Annual run rate

Firstly, you pick a certain time period to focus on. The easiest is a month. You focus on the revenue for that month and multiply it by 12 to get the year's worth of expected revenue.

In other words, if you made $10,000 in revenue for the month you're studying, you can multiply that by 12 to get $120,000 as your expected annual run rate and revenue based on the current conditions.

The formula may differ depending on the type of run rate you are calculating, but this is a general idea.

These calculations are straightforward and, as mentioned, assume the conditions will remain the same. If there's an increase in churn, expansion, upselling, or any changes, you will have to re-consider and re-calculate.

While it is a handy KPI to predict future growth and the size of your business to others, or when introducing it to prospective customers or investors, when it comes to crunching numbers you want to make sure you're taking everything into account.

As mentioned above, this calculation is best used for newer companies, specific changes, or smaller departments. This is because there are certain factors that must be considered when calculating the run rate, as it captures the current conditions.

Here are a few to keep in mind:

Run rates assume conditions will remain constant and stable throughout the year.

This would be inaccurate.

Trends exist and can be hugely influential to revenue for a business. Anything from the seasonality of fruits and vegetables to consumer spending more on chocolates during Valentine's Day or costumes and candy during Halloween.

For B2B, a seasonal trend is how the pipeline tends to slow down during the summer months or during certain holidays as people are more likely to be on vacation thus slowing down the sales process.

Prospective revenue can be affected by one-time events, which will affect all of your forecastings.

An example of a one-time event is a large sale that is different from your typical clientele. For example, receiving a large project of re-doing an entire website for a company or fully creating an app instead of focusing on one specific aspect.

Not acknowledging this deviation from the usual will make it difficult to properly plan and meet the quota in the following months.

This is made up of two factors.

Firstly, the assumption is that your business performance will remain the same throughout the forecasted period. This cannot be assumed, as competitors may enter the market.

Any dissatisfaction with your product or service will thus have a higher chance of resulting in customer churn as there is an alternative, meaning your revenue will go down and your previous predictions were wrong.

Upselling will be difficult, and obtaining new customers, which is already difficult in and of itself, will become harder as your new competitor will be doing the same.

We mentioned the annual run rate and its formula above, but there are others you can calculate to help you figure out more specific forecasts as well.

Here are some examples:

If you need to have a clearer picture of what your business is doing on a seasonal basis, beyond the monthly or quarterly rate, then this is what you want to look at.

More unlikely in the world of SaaS, this may still be something you encounter. The best example is for business related to particular holidays or times of the year.

For example, a tool for businesses to plan annual retreats or holiday events may see an increase in use and interest in purchasing closer to these times of the year, so the run rate would be based on the trailing 12 months of the year, or similar depending on the season and needs.

In this way, it is possible to account for seasonal changes when forecasting with your existing data and run rate. It provides a clearer understanding of how your business is doing and what to aim for.

Just as there are one-time events, a one-time run rate, and revenue can also be calculated successfully. This is generally a more realistic and conservative prediction and forecast for the incoming revenue.

Above we mentioned a one-time large sale project for a particular client at odds with the usual sales and incoming revenue. If we add amounts, their projects might usually bring in around $10,000 per month, and this larger one $40,000.

To calculate something like this for exclusion, it is possible to take the following approach:

Annual run rate = monthly recurring revenue (10,000) x 1
Annual run rate = $10,000

They now know how much is in addition to the usual, and this amount can thus be excluded when calculating the run rate more closely.

Net revenue is another realistic run rate to calculate that accounts for the expenses a business incurs in a month, not just the revenue.

If we continue with the above example, creating and designing websites comes with the cost of certain software and seats for employees to use, as well as salaries. To calculate the real net revenue run rate the company is making, and to ensure you'll be making ends meet, you can do the following:

Annual run rate (net) = (monthly revenue - monthly costs) x 12
Annual run rate (net) = (10,000 - 5,000) x 12
Annual run rate (net) = 60,000

This is how much you can expect to actually profit from this particular monthly amount assuming conditions remain the same.

It is particularly useful to calculate this run rate when considering expenses and forecasting, as it helps determine whether you're overspending on certain tools and whether they might be better options in the market to consider.

An extremely useful KPI, run rate is not without its drawbacks and is best used in conjunction with others.

Truly understanding the run rate is good for any short-term plans, but for a clearer picture, more information and more scenarios will always be better. After all, if you want to truly sell your product or service and successfully connect with your customers, you need to be able to understand what your company is doing and how the market is working.

Your run rate provides a quick data set of that in the current situation, allowing you to have some expectation of what it might look like in the near future.

This is not to say you should be content keeping all your eggs in one basket: consider your situation, any outlier large sales, any seasonal changes, or competitors coming in to truly have the information you need to make the best forecast possible.

Without calculating your run rate, you may as well be doing business blind.