How fast is your business growing?
It’s a big question that interests CFOs and business owners alike. And with good reason. Revenue growth is a tell-tale sign of how sustainably successful your company is.
Think of revenue growth rate as the cornerstone of your business success metrics. It’s the first benchmark investors will look to and the last one on their minds before they choose to invest or not.
In this article, we explain how to calculate revenue growth, what constitutes a good percentage, and some key strategies for improving your revenue growth over time.
What Is Revenue Growth?
Revenue growth is your company’s increase in revenue over a specific period. Typically, organizations will calculate revenue growth rate quarterly or annually in the form of a percentage increase by comparing it to a previous period.
This metric is a major key performance indicator (KPI) for all businesses. Calculating it helps you:
- Measure overall business growth: Measuring revenue growth tells you if your business is making more money over time. Knowing how much you’re making (or not) lets you strategically evaluate the success rates of your marketing, customer retention, and production initiatives.
- Improve business valuation: In the eyes of investors, revenue growth is a tell-tale sign of a sustainable, successful business worth investing in—they’ll certainly scrutinize it when making investment choices.
- Spot anomalies: Calculating revenue growth over time gives you a clear picture of spikes or dips, which could be early indicators of underlying business issues.
- Predicting needed resources: The more your company grows, the more resources it’ll need to keep daily operations afloat. Calculate your revenue growth rate percentage, and you can determine and plan for resource allocation for the following period.
Abhishek Shah, Founder of Testlify, gives his take on why monitoring revenue growth is so important:
Growth rate matters because it shows if a business is on track or falling behind. Investors look at it to see if a company has real potential. It also helps leaders make better decisions and set realistic goals instead of guessing.
What Is A Good Revenue Growth Rate?
A good revenue growth rate depends on a range of factors, many of which are constantly in flux. Anything from current economic trends to your specific industry and company stage can influence what a good growth rate is.
That being said, some general factors do exist.
A good growth rate is one that is higher than the overall rate of the economy. Check your country's GDP (Gross Domestic Product) increase over a period, and compare it to your revenue growth rate for that same time frame. Typically, this growth of a healthy economy will be between 2%–4% percent.
The economy is just one general benchmark to keep in mind during those investor meetings. Startups need a much higher growth rate to be considered attractive to investors. Some businesses even grow 100% in the startup phase. As a ballpark example, the Fintech company Ramp has more than doubled its annualized revenue repeatedly over the last few years. Yet, these growth spurts won’t last forever. As a business matures, growth rates slowly come down, and declining organizations might even experience a negative growth rate.
The nuance intensifies: some industries, like tech, naturally have higher growth rates due to the rising demand for tools, rapid development, and a wide target audience pool, which circles us back to economic conditions.
We hear you: “Folks at Cledara, all this economic circling is making me dizzy. Just give me a number!”
For SaaS revenue growth, a good place to start may be the rule of 40. It’s a general principle stating that a good SaaS service provider’s combined growth rate and profit margin of 40% is considered sustainable.
Abhishek goes on to explain: “A good growth rate depends on the industry and company stage. For startups, a monthly growth rate of 10–20% is strong, while established businesses aim for 15–30% annual growth. The key is to grow consistently without burning resources too fast.”
How To Calculate Revenue Growth
Calculate revenue growth by subtracting your previous period’s revenue from your present period’s revenue, and then dividing that number by your previous period’s revenue again before multiplying it by 100.
[(Present period revenue - Previous period revenue) / Previous period revenue] x 100
You can plug in the revenue growth formula monthly, quarterly, and annually. Just make sure you’re using the appropriate periods—e.g., this month versus the previous month, this year versus the previous year, and so on.
The Revenue Growth Formula: An Example
Let’s say you’re a SaaS company called Breaktime. You provide employee shift tracking services for small to medium-sized businesses. At one point during your business day, you get the following email:
Naturally, you take out your calculator and check the numbers. For Q1, you’ve made $3 million, while Q2 has brought you $4.8 million in revenue. Plugging in the formula gives you [($4.8 million - $3 million) / $3 million] x 100 = 60%
You breathe a sigh of relief as you reply with your availability.
Strategies To Improve Revenue Growth
Getting a 60% quarterly growth rate is exceptional and reason enough to write home. But what happens if your growth is tanking? Here are three major revenue strategies to improve your revenue growth rate and get your business expanding faster than you can say cumulative annualized growth rate of fully diluted normalized free cash flow per share excluding non-recurring restructuring expenses.
1. Expand your Product Services and Offerings
To capture more market share and increase revenue, consider introducing new products or, at the very least, rolling out major updates to your current ones. By expanding your offering, you have the opportunity to solve a new pain point, attract new customers, and ultimately increase your revenue.
One major method to do so is by analyzing the gaps in your current products and building a new, complementary service around them. Moving towards adjacent markets is yet another option. Examples include adapting your service for a new industry, region, or audience.
2. Work on Customer Retention
New customers won’t do much good unless you can keep them. High customer retention is a cost-effective way to ensure your revenue rises steadily. After acquiring new buyers, your focus should be on keeping them engaged and correcting any qualms they may have about your service. Introduce loyalty programs, invest in customer support, and maintain open lines of communication so you can improve your offering strategically.
3. Optimize Your Pricing
Adjusting your pricing is another way to facilitate growth, yet many companies are reluctant to apply this revenue growth rate strategy for fear of losing customers. However, there are many techniques and methods for optimizing your prices so as not to scare off customers.
Some methods that SaaS companies should consider are:
- Value-based pricing: Instead of pricing based on competitors and cost, conduct research to understand what your customers value the most, segment customers on their willingness to pay, and test different price points based on your results.
- Tier pricing: If you're still using a one-size-fits-all pricing model for a SaaS, consider creating multiple plans with clearly differentiated value and offerings, such as beginner, pro, and enterprise plans.
- Usage-based pricing: Let customers pay for the features they use. This includes charging based on users, feature or data usage, and transactions.
4. Cut Down on Overhead
Many teams aren’t able to address plummeting growth because they’re spread thin handling daily operations. The solution is to free up any potential resources and reallocate them towards growth. If you can free up your finance team, they can work on helping you achieve growth through higher-level tasks like forecasting and budgeting.
One way to do this is by automating tasks such as payment processing. For example, a tool like Cledara automatically matches invoices to payments and seamlessly integrates with accounting tools like Xero and Quickbooks. Instead of matching invoices, your finance teams can put all hands on deck for growth initiatives.
Revenue Growth Metrics To Consider
Revenue growth shouldn’t be considered without context. By calculating a range of different key performance indicators (KPIs), you can extract even more valuable information, such as if your growth is sustainable or if you’re spending too much on different areas of your business.
Here are the most crucial revenue growth metrics to consider.
Customer Acquisition Costs (CAC)
Customer acquisition costs (CAC) are the total costs of acquiring a new customer, including marketing, sales, and advertising expenses. Low CAC means you’re getting customers efficiently, leading to higher profit margins. If CAC grows too high, your company should ensure that customer lifetime value (CLTV) also increases to retain profitability.
If your CAC is higher than your revenue growth, it suggests you’re spending too much money on getting new customers, making your growth unsustainable.
Customer Lifetime Value (CLTV)
Customer lifetime value (CLTV) is the total revenue your business expects to earn from a customer over their lifetime. A high CLTV compared to CAC means customers are bringing in more than they cost.
If your CLTV is increasing, it means that you’re building sustainable, long-term relationships with your clients, positively impacting revenue growth. At the same time, a declining CLTV means customers are generating less for your business, slowing down your revenue growth.
Churn and Retention Rate
Churn rate refers to the percentage of people who cease to be paying customers, while the retention rate is just the opposite: it refers to the percentage of people who remain customers.
As a general rule, high retention and low churn signify sustainable growth. This means that customers are satisfied and will continue to purchase your product or service.
Monthly Recurring Revenue
Monthly recurring revenue (MRR) refers to the continuous revenue you make from subscription-based customers each month.
Applicable to SaaS brands, a high MRR suggests predictable revenue streams and sustainable growth, and stabilizes cash flow. It also allows you to forecast revenue more accurately and plan for future growth. On the other hand, low and declining MRR means your revenue is shrinking rather than growing.
Customer Satisfaction Score (CSAT)
Customer satisfaction score (CSAT) shows how happy clients are with your product. A high CSAT score suggests higher retention and increased referrals—positive indicators for your revenue growth.
A declining CSAT is a warning sign, prompting you to address user pain points that are unfulfilled. Leaving your CSAT to plummet will eventually give way to soaring churn rates and, as a consequence, less revenue growth.
Manage Your Costs, Grow Your Revenue
Calculating revenue growth tells you whether your business is making more money over time. It’s a crucial metric—one that ultimately decides if your business is worth investing in. High growth rates signify a healthy and successful business, while lower rates almost always signify an underlying problem in your operations.
The good news is that there are many ways to get your revenue rate back on track.
For example, a tool like Cledara tracks ROI for every application in your tech stack. You can single out which apps contribute to growth and which ones are making you pay unnecessary costs. With Cledara’s renewal management, you can prevent unexpected costs that can impact your finance team’s revenue projection.
By centralizing your apps and slashing software costs, Cledara frees up time, effort, and money to fuel your revenue growth initiatives.
