Are your company’s growth rate and goals truly based on solid data and insights?  According to a study by McKinsey & Company, companies that make data-driven decisions are 23 times more likely to acquire customers, six times as likely to retain them, and 19 times as likely to be profitable.

What does this suggest about your business growth?

That relying solely on intuition when formulating business growth strategies will not make you “grow.” But embracing a data-driven approach can propel sustainable growth. So, yes. This blog post will talk about another metric to measure business growth. And this one reveals your true current revenue growth trajectory

In this post, we’ll cover the following discussion topics:

  • Understanding of revenue growth 
  • What is a good revenue growth rate (RGR)
  • And how to calculate and leverage your RGR to sustain growth

What is revenue growth?

Illustration of pie charts and bar graphs that calculate growth rate

Revenue growth is the increase in a company’s total revenue over a specific period, typically calculated monthly, quarterly, or annually. It measures the profitability of a business—meaning how much more money your business brings in. Generally, we can categorize it as organic and inorganic. And here’s how they’re different: 

  • Organic revenue growth comes from a company’s existing operations, products, and services. It’s driven by internal factors like increasing sales (upselling and cross-selling) of existing products to existing customers. Another example is entering new geographic regions or targeting new customer segments.
  • Inorganic revenue growth, on the other hand, comes from acquisitions, mergers, joint ventures, or other business collaborations that add new revenue streams from external sources.

For subscription-based businesses like yours, revenue growth shows whether you’re attracting more paying customers or expanding its recurring revenue stream. So basically, we’re talking about SaaS MRR/ARR growth. It’s a must to have good growth and remember that positive revenue growth signals a healthy, growing SaaS business.

How is revenue growth measured?

A team studying numbers and formulas that show cash flow management and various growth rates

As stated earlier, revenue growth rate is measured as a percentage change over a specific period. This rate shows how quickly the subscription revenue is growing or declining. Its formula is expressed as:

(Current Period Revenue – Previous Period Revenue) / Previous Period Revenue * 100%

Hence, to paint a clearer picture, we’ll illustrate for each period: month-over-month (MoM), quarter-over-quarter (QoQ), and year-over-year (YoY). 

Let’s say a SaaS company had the following revenue data:

Monthly revenue:

  • January 2024: $100,000
  • February 2024: $120,000

Quarterly revenue:

  • Q2 2023 total revenue: $350,000
  • Q1 2023 total revenue: $280,000

Annual revenue:

  • 2022 $1,000,000
  • 2023: $1,200,000

To further calculate growth in the MoM revenue growth rate from January to February:

MoM growth rate = (February Revenue – January Revenue) / January Revenue * 100

= ($120,000 – $100,000) / $100,000 * 100

= 0.2 or 20%

So the month-over-month SaaS growth rate from January 2024 to February 2024 was 20%.

Meanwhile, here’s the Quarter-over-Quarter (QoQ) growth rate calculation:

QoQ growth rate= (Q2 Revenue – Q1 Revenue) / Q1 Revenue * 100

= ($350,000 – $280,000) / $280,000 * 100

= 0. 25 or 25%

That makes the SaaS growth in terms of revenue up by 25%.

Lastly, we calculate the YoY growth:

YoY growth rate = (2023 Revenue – 2022 Revenue) / 2022 Revenue * 100

= ($1,200,000 – $1,000,000) / $1,000,000 * 100

= 0.2  or  20%

YOY revenue growth for the SaaS company is 20%.

Revenue growth can also be compared against other operational growth rates like growth in sales, customers, and ARPU so you can better analyze the key factors and drivers behind increases or decreases.

  • Sales growth rate: If revenue growth is higher than sales growth, it means you’re making more money than just direct sales. On the flip side, if sales growth outpaces revenue growth, it suggests you’re running promotions that temporarily lower the total revenue brought in.
  • Subscriber/Customer growth: Simply put, this encompasses the user growth rate. If the number of customers is growing faster than your revenue, it means you need to work on a few things with its current customers—upselling them additional products/services to increase their spending, cross-selling them complementary offerings to purchase more, and improving customer retention so fewer people cancel or leave.
  • Average Revenue Per User (ARPU) growth: Shows the growth in the average revenue generated per customer unit. Comparing revenue growth to ARPU (average revenue per user) growth shows if higher revenue is from more customers spending the same amount or existing customers spending more per person.

It’s important to note that revenue growth doesn’t automatically translate to increased profits or cash flow. Revenue recognition is an accounting principle for when and how you should record revenue in its financial statements. 

What is a good revenue growth rate?

Sales and marketing teams discussing trajectory of their revenue growth rate during financial planning

When it comes to what defines a “good” revenue growth rate, no single percentage applies across the board. The healthy growth rate is not a universal figure and should be evaluated in the context of the specific business and goals.

Also, you should take into account your:

  • industry
  • stage of growth
  • and market conditions

Here’s what the analysis from Equidam concludes, 

“The average company forecasts a growth rate of 268% in revenues for their first year,144% annual growth rates for the second, and 71% for the third.”

Here’s our interpretation: As companies mature, revenue growth rates slow down. For early-stage startups, revenue growth rates north of triple-digit year-over-year is possible. Maturing companies maintaining revenue growth annually can be viewed as healthy. 

The bottom line is that good revenue growth lets a company grow market share, invest in potential growth initiatives, and increase shares. What qualifies as “good” simply depends on your benchmarks.

What are the factors that influence or impact revenue growth?

Marketing team discussing pricing strategies and how they affect company growth rate

From this point forward, let’s be clear that we’re referring to organic revenue growth. So, here are the common internal factors that can influence your company’s revenue growth. 

  1. Sales and marketing: A successful sales and marketing strategy is one that can help boost the acquisition of new customers, make greater sales volumes, and increase revenue in an organization.
  2. Customer service: Excellent customer service is a major factor in attracting and retaining customers. High-quality support boosts positive word-of-mouth, repeat business, and customer lifetime value.
  3. Pricing strategy: Proper pricing and packaging is important, especially for subscription businesses. If you can raise prices while keeping customers, that’s a great growth lever. 
  4. Operational efficiency: Reducing costs, streamlining operations, and improving efficiency drive higher profit margins.
  5. Product-market fit: When the product-market fit isn’t strong, RGR suffers. If the product doesn’t fully meet the needs of the target market, it becomes difficult to attract subscribers.
  6. Retention strategies: Beyond customer service, having effective strategies to retain customers and lower churn is crucial. Here’s proof—In eCommerce, the top 5% of loyal, repeat customers generate 35% of revenue.
  7. Payment failures: Involuntary churn due to failed payments can significantly impact RGR. Implementing robust payment recovery processes is essential. In almost 50% of cases, failure to pay causes churn.

Bonus (other major external factors):

  • Customer needs and preferences influence market demand for your products, and those can change.
  • The overall market landscape and economy play a big role. When the economy is booming, companies tend to see higher revenue growth, while if there is a recession or downturn, they tend to see lower revenue growth.
  • Competitiveness affects pricing, market share, and revenue growth.

5 quick steps to achieve and sustain growth

Person holding up a hand signifying five items or five steps to achieve a sustainable growth rate

Now, what if there’s a systematic approach to understanding your growth levers and maximizing their impact?  To simplify achieving it, here are five steps you can take. 

Step 1: Understand your current revenue growth rate (RGR)

This is your starting point. Calculate your RGR to assess your starting value and your current growth trajectory. Then you can identify areas for improvement.

Step 2: Develop a strategic growth plan

First, establish a clear strategic plan and the initiatives to pursue growth. This could include expanding product lines or making acquisitions. Align the entire organization around executing this growth strategy.

Step 3: Prioritize both customer acquisition and retention

Acquiring new customers is important, but retaining them is even more crucial for sustainable business growth. Invest in customer success tactics like loyalty programs, and personalized communication.

Step 4: Invest in customer experience

Prioritize delivering an excellent customer experience through product quality, responsiveness, support, and ongoing value delivery. Nurture customer relationships and have a solid focus on keeping customers happy.

Rid the world of bad customer experiences, outsource your customer service to LTVplus, and achieve higher customer satisfaction scores for your future growth.

Step 5: Analyze and improve 

You should continue to monitor your RGR and other key performance metrics so that you can identify trends and areas for improvement. Take advantage of these insights and gain better understanding of how to boost your marketing, sales, and product development.

It’s time to focus on your revenue growth

Failed payment recovery specialist conducting a recovery sequence for a brand

Data-driven goals are crucial for accountability and success. As a subscription business leader, metrics like revenue growth rate are just as vital as revenue itself. Without a clear handle on RGR, you can’t make informed decisions that optimize financial performance.

If unexpected customer churn is putting the brakes on your revenue growth, involuntary churn is likely the culprit. Even minimal churn from failed payments and billing issues creates a constant revenue leak. And they make it harder to sustain consistently high SaaS growth rates.

But there’s a simple workaround: Partner with a failed payment recovery solution like Recover Payments. Our team is laser-focused on getting back your (almost) lost revenue. Reach out today and see how we can improve your RGR by stopping revenue leakage.