Why Growth Rate Matters
& How to Calculate It
An important KPI to learn about for success.
Ever wonder why growth rate matters and how to calculate it?
Well, having the knowledge and ability to understand your growth rate can be incredibly powerful. This will help you track progress over time and provide insight into where improvements may need to be made- giving you the necessary data to make smarter decisions for your company.
In this blog post, we'll dive deep into what growth rate is, why it's essential for success in the SaaS world, and finally, discuss helpful techniques to calculate yours!
Read on!
Well, having the knowledge and ability to understand your growth rate can be incredibly powerful. This will help you track progress over time and provide insight into where improvements may need to be made- giving you the necessary data to make smarter decisions for your company.
In this blog post, we'll dive deep into what growth rate is, why it's essential for success in the SaaS world, and finally, discuss helpful techniques to calculate yours!
Read on!
What is Growth Rate?
Growth rates measure the change in a particular metric's percentage over a certain amount of time. There are many different growth rates, ranging from corporate and industry growth rates to the economic growth of nations like the United States, frequently measured by GDP growth rates.
The growth rate is a sales KPI. This variation in growth rates exists due to various situations where growth can be measured with different variables.
Often used growth rates are:
The growth rate is a sales KPI. This variation in growth rates exists due to various situations where growth can be measured with different variables.
Often used growth rates are:
- Compound annual growth rate (CAGR) ( for calculating the value of an investment)
- Revenue growth rates (usually including sales, earnings, and cash flow)
- Market Share Growth
Why Does Growth Rate Matter?
The growth rate is an essential measure to help determine how to spend resources for the future, regardless of the type of growth you're looking at.
By accurately calculating and comprehending the business growth rate, a company's future growth rate can then be measured, researched, and predicted.
Companies must assess their financial situation at the end of each month or year to better allocate resources and plug any gaps in their operations.
Deep diving into the research after adequately assessing the business's needs offers the company an advantage in determining what it will require today to increase productivity.
In order to accurately estimate how the business will perform, projecting what will be needed in the future is the most mighty aspect of the business.
Amazon is an excellent example of a company increasing while maintaining efficiency. They knew that additional robotics and intelligent AI intelligence would be required to increase the productivity of the work. And it paid out for them to invest in these assets. Amazon can now cut its previously labor-intensive operation by more than 70%.
A company is, therefore, in a better position to allocate resources and try to create what is required to build the business by knowing a company's past, current, and future growth rate.
By accurately calculating and comprehending the business growth rate, a company's future growth rate can then be measured, researched, and predicted.
Companies must assess their financial situation at the end of each month or year to better allocate resources and plug any gaps in their operations.
Deep diving into the research after adequately assessing the business's needs offers the company an advantage in determining what it will require today to increase productivity.
In order to accurately estimate how the business will perform, projecting what will be needed in the future is the most mighty aspect of the business.
Amazon is an excellent example of a company increasing while maintaining efficiency. They knew that additional robotics and intelligent AI intelligence would be required to increase the productivity of the work. And it paid out for them to invest in these assets. Amazon can now cut its previously labor-intensive operation by more than 70%.
A company is, therefore, in a better position to allocate resources and try to create what is required to build the business by knowing a company's past, current, and future growth rate.
How to Calculate Growth Rate?
Various approaches to calculating growth rates can be used, depending on what the figure represents.
We just discussed some tracking measures, including revenue, market share, and user growth rate.
Before we come to the formula, you must decide the metric you want to measure.
Once you have chosen the metric you want to emphasize, you must determine your starting value. This figure will serve as an indicator of how well your company performed throughout that time.
Next, you must also decide what your final value will be. This figure will show how well your company performed during a specific period. This can as well be your present value.
If you have all your numbers, you can simply put them into the formula to calculate the growth rate.
The difference between the ending and starting values, or (EV-SV)/SV, is the simplest way to calculate the growth rate.
The formula:
Starting value - end value/starting value = growth rate
We just discussed some tracking measures, including revenue, market share, and user growth rate.
Before we come to the formula, you must decide the metric you want to measure.
Once you have chosen the metric you want to emphasize, you must determine your starting value. This figure will serve as an indicator of how well your company performed throughout that time.
Next, you must also decide what your final value will be. This figure will show how well your company performed during a specific period. This can as well be your present value.
If you have all your numbers, you can simply put them into the formula to calculate the growth rate.
The difference between the ending and starting values, or (EV-SV)/SV, is the simplest way to calculate the growth rate.
The formula:
Starting value - end value/starting value = growth rate
What is a Normal Growth Rate For a Company
or Startup?
Making and delivering revenue projections to investors is never easy.
If their standards are too high or their conservatism is too extreme, the other party will lose interest. In the United States, start-ups expanded by an average of 75.62% in 2016.
The typical business expects its first year's revenue to increase by 120%, the following two by 83%, and the third by 60%. As a result, any startup's optimum growth rate currently ranges from 60% to 120%.
If their standards are too high or their conservatism is too extreme, the other party will lose interest. In the United States, start-ups expanded by an average of 75.62% in 2016.
The typical business expects its first year's revenue to increase by 120%, the following two by 83%, and the third by 60%. As a result, any startup's optimum growth rate currently ranges from 60% to 120%.
Examples of Growth Rate
Revenue Growth
The most used indicator for determining a business's growth rate is revenue. In terms of growth, it basically remains supreme among all SaaS indicators.
Whether it happens over a number of years or just a few quarters, revenue growth is the rise or fall in a company's revenues between two periods. It displays how much the revenue of your business has increased or decreased over time and is presented as a percentage.
This equation can be calculated annually (annual growth rate), quarterly, and/or monthly. By accounting for both positive and negative variations in revenue growth, this method of measuring revenue growth gives you a more accurate picture of the financial health of your business.
The formula for revenue growth:
(Current Period Revenue - Prior Period Revenue) / Prior Period Revenue
You must first subtract the revenue from the prior period from the current period's revenue before dividing the result by the revenue from the prior period to get at the revenue growth percentage.
If your company made $3 million in revenue last year and $6 million this year, then your growth rate is 1 or 100 percent.
(6.000.000-3.000.000)/3.000.000=1
Calculations for this can be done yearly, quarterly, monthly, etc. Both positive and negative changes in revenue growth can be identified using the formula.
Whether it happens over a number of years or just a few quarters, revenue growth is the rise or fall in a company's revenues between two periods. It displays how much the revenue of your business has increased or decreased over time and is presented as a percentage.
This equation can be calculated annually (annual growth rate), quarterly, and/or monthly. By accounting for both positive and negative variations in revenue growth, this method of measuring revenue growth gives you a more accurate picture of the financial health of your business.
The formula for revenue growth:
(Current Period Revenue - Prior Period Revenue) / Prior Period Revenue
You must first subtract the revenue from the prior period from the current period's revenue before dividing the result by the revenue from the prior period to get at the revenue growth percentage.
If your company made $3 million in revenue last year and $6 million this year, then your growth rate is 1 or 100 percent.
(6.000.000-3.000.000)/3.000.000=1
Calculations for this can be done yearly, quarterly, monthly, etc. Both positive and negative changes in revenue growth can be identified using the formula.
Compound Annual Growth Rate (CAGR)
A variation of growth rate that is frequently used to evaluate the performance of an investment or business is the compound annual growth rate (CAGR).
The CAGR, which is not an actual return rate but rather a representation, shows the rate of growth that would have occurred had earnings been reinvested at the end of each year and the investment expanded at the same pace each year.
The CAGR calculation formula is as follows:
CAGR = (SV / BV) ^ (1 / n) – 1
SV=Ending value
BV=Beginning value
n=Number of years
In the formula above, EV represents the investment's future value, BV denotes its present value, and n is the number of years the investment will last.
Let's look at a fictitious scenario to better understand the calculation. Consider your 2015 investment of $20,000 in a mutual fund. In 2020, the investment will be worth $35,000. The methodology yields the following CAGR for this mutual fund investment:
CAGR= (35000/ 20000) ^ (1/5) – 1 = 11.84%
The CAGR calculation assumes that growth is steady over a specified period of time. CAGR is a widely used metric due to its simplicity and flexibility, and many company will use it to report and forecast earnings growth, called run rate.
The CAGR, which is not an actual return rate but rather a representation, shows the rate of growth that would have occurred had earnings been reinvested at the end of each year and the investment expanded at the same pace each year.
The CAGR calculation formula is as follows:
CAGR = (SV / BV) ^ (1 / n) – 1
SV=Ending value
BV=Beginning value
n=Number of years
In the formula above, EV represents the investment's future value, BV denotes its present value, and n is the number of years the investment will last.
Let's look at a fictitious scenario to better understand the calculation. Consider your 2015 investment of $20,000 in a mutual fund. In 2020, the investment will be worth $35,000. The methodology yields the following CAGR for this mutual fund investment:
CAGR= (35000/ 20000) ^ (1/5) – 1 = 11.84%
The CAGR calculation assumes that growth is steady over a specified period of time. CAGR is a widely used metric due to its simplicity and flexibility, and many company will use it to report and forecast earnings growth, called run rate.
Market Share Growth
Measuring the rise of your company's market share is another technique to monitor its development. You must first understand how to compute market share in order to calculate the market share growth rate. Market share is the percentage of a market that a specific business or product controls.
Now that you have the whole market size in terms of revenue, which includes total sales of the entire market with you and all competitors together, you can calculate the market growth rate. You can begin estimating the market growth rate once you have established your beginning value.
The formula for calculating market share growth is:
(Your company's total sales / Total industry sales) x 100
Let's take the scenario where you sell shoes and your quarterly sales are $100,000. The overall industry sales during that time period were $1,000,000. 10% of the market would belong to you.
The precise formula would be:
$100,000 / $1,000,000 x 100 = 10%
Market expansion may be a sign of your company's long-term viability. You can use this indicator to get a broad sense of where your business stands in the market.
If your company's sales are low compared to those of other businesses in your industry, it will be clear that you need to look into the reasons why your brand or product isn't growing.
Now that you have the whole market size in terms of revenue, which includes total sales of the entire market with you and all competitors together, you can calculate the market growth rate. You can begin estimating the market growth rate once you have established your beginning value.
The formula for calculating market share growth is:
(Your company's total sales / Total industry sales) x 100
Let's take the scenario where you sell shoes and your quarterly sales are $100,000. The overall industry sales during that time period were $1,000,000. 10% of the market would belong to you.
The precise formula would be:
$100,000 / $1,000,000 x 100 = 10%
Market expansion may be a sign of your company's long-term viability. You can use this indicator to get a broad sense of where your business stands in the market.
If your company's sales are low compared to those of other businesses in your industry, it will be clear that you need to look into the reasons why your brand or product isn't growing.
Conclusion
To sum up, understanding and optimizing your business' growth rate is essential to achieving and sustaining success.
Calculating the growth rate is relatively simple, involving taking the percentage difference between two points in time over one year and understanding why your company's growth rate matters can help you identify issues that need to be addressed for long-term success, such as scaling, reducing customer churn, and overall financial health.
If increasing your sales potential interests you, consider working with an outsourced SDR from SalesPipe to maximize opportunities for optimization and improve customers' satisfaction with their purchase experience.
Get in touch with us here!
Calculating the growth rate is relatively simple, involving taking the percentage difference between two points in time over one year and understanding why your company's growth rate matters can help you identify issues that need to be addressed for long-term success, such as scaling, reducing customer churn, and overall financial health.
If increasing your sales potential interests you, consider working with an outsourced SDR from SalesPipe to maximize opportunities for optimization and improve customers' satisfaction with their purchase experience.
Get in touch with us here!
Post by Mattes Wöstemeier.
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