According to Paul Graham, VC and co-founder of Y-combinator, if there is one metric every founder should know, it is the company growth rate. The growth rate measures a company’s revenue increase and potential to expand over a set period. To gain insights into your company’s growth rate, sign up for Baremetrics and start tracking today.
Understanding your company's growth rate is crucial. It's a vital indicator of a company's health and potential, especially for startups. In other words, a company's growth rate indicates profitability and sustainability. The percentage indicates how rapidly a company grows and its projected growth over time. It can be calculated at any stage and presented at a weekly, monthly, or annual rate, depending upon the company’s industry and stage of growth.
Investors are particularly interested in companies with high growth rates, which suggests a strong market fit and the potential for significant returns. By tracking your growth rate with Baremetrics, you can also make informed strategic decisions about product development, marketing, and staffing. A low growth rate can signal areas where the company needs to improve its efficiency or effectiveness.
There are various ways to calculate the growth rate depending upon which industry the company is involved in, the current capabilities of the company, the current funding phase, and the age of the company, among other factors.
While there are several options, this simple formula can be used to calculate revenue growth rate on a monthly basis:
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There are different approaches and several other considerations that can be taken into account when calculating the growth rates of a company. For example, experts suggest starting the math with a company’s expenses and checking “key ratios” such as the operating profit margin and the “headcount per client” (i.e., the number of employees per client).
Other rules of thumb include doubling cost estimations for advertising and tripling estimations for legal and insurance costs, as these categories often incur hidden expenses or vary from provider to provider. In addition, you can monitor customer service time to give a starting point for estimating future labor costs as the business grows. It is also suggested that you calculate conservative and aggressive growth rates to provide to investors.
Other considerations that should be considered when determining a growth rate include the retention rate, marketing techniques and their efficacy, product seasonality, and the stage of company expansion. Any one of these, or a combination thereof, could affect the growth rate.
It is also important to keep in mind that…
A company can use its growth rate for the following purposes:
Investors also use the growth rate metric to forecast growth and understand the potential return on investment. So, showing investors both short-term and long-term growth rates is imperative for startups.
Why? Because, a new business may not generate revenues that considerably affect its financials in the first year. However, the business may project to see growth during that time and begin to show a return on investment within two or more years.
Growth rates vary from industry to industry. For example, in industries that are currently billed as the “hottest” for startup companies and expansion, some examples of average growth rates include:
However, as a general benchmark, companies should average between 15% and 45% of year-over-year growth. According to a SaaS survey, companies with less than $2 million annually have higher growth rates.
Growth rates measure a company’s revenue increase and potential to expand. Therefore, your growth rate should be a key focus in your business. After all, you will need it to help plan future resource use and draw in investors looking for startups with potential.
While growth rates vary by industry, several growth strategies can grow your revenues significantly. Use growth strategies and tools like revenue forecasting and revenue dashboards from Baremetrics to stay on top of your metrics.