by Sam Franklin | August 09, 2022 | 10 min read
SaaS metrics 101 – How to calculate growth rateGet funded
Last updated: September 27, 2022
Software as a service (SaaS) businesses have become a necessity in most industries and sectors. Most organisations have transitioned into subscription-based services, contributing to increased competition among SaaS companies. Statistics show that in 2022, there will be approximately 17,000 SaaS companies in the United States, with about 59 billion customers worldwide.
Currently, the SaaS industry itself has an annual growth rate of 18%. As the demand for Saas services grows, these companies have to adopt different strategies to introduce new products, reach and retain customers and boost their growth rates. By understanding the company's growth rates, it becomes easier to identify the approach to take going forward.
Calculating your SaaS company growth rate helps you understand whether the company is on track. In addition, it comes in handy if you need to make adjustments to predict future company growth. Therefore, as you run the SaaS company, it's vital to know the different ways to calculate this growth rate.
In this article, we’ll look at the growth rate for SaaS businesses, the most important SaaS growth metrics and some of the reasons why you should track this growth rate.
Table of contents
- What is growth rate in business?
- Why is tracking SaaS growth rate important?
- Calculating growth rate
- Growth rate analysis
- How do you calculate year-over-year growth?
- Tips to evaluate SaaS growth rate
What is growth rate in business?
Growth rates refer to the measurement of a particular metric within a specific time period. Often measured in a percentage, it can be used in different settings from economic to population. In business, the SaaS growth rate will measure the rate of change for particular variables. This change can be measured over a month or year.
When calculating the SaaS growth rate, professionals convert it to a percentage to make the interpretation by other parties much easier. For most SaaS companies, the most tracked growth rates pay attention to the popularity of the service. The most common measurements include how many users are engaged with the software service or how much revenue is being generated.
Growth rates are used to determine if the business is changing or growing. Therefore, if you are considering whether you need to invest your money in a certain area, this is an ideal way to measure. Additionally, investors can use this percentage to predict future performance and make investment decisions.
If you run a SaaS company, it's important to track the different growth rates to understand the areas that are blossoming or what needs improvement.
The most important SaaS growth metrics
For SaaS companies, growth rates are calculated for different metrics. For instance, if you are calculating the growth rate of active customers, this will differ from the growth rate of bookings. Here are the most important growth rates in SaaS:
The growth of active users
SaaS companies have to pay attention to active users who interact with their platform during a specific period of time. To keep track of this growth metric, you need to avoid the mistake of lumping together users on a free trial with paying customers. There’s a difference between these two categories of users.
While users on a free trial might eventually become paying customers, the paying ones keep the company revenue coming in. As a SaaS business owner, you need to know who your active customers are because they are a good indicator of the company’s health.
For instance, if you notice that your active users have decreased, you can strategise on how to target new customers and increase future subscriptions.
Changes in Monthly Recurring Revenue (MRR)
The total revenue gained from your business every month is known as the Monthly Recurring Revenue. This includes recurring charges such as monthly subscriptions from your active users. Keep in mind that the MRR does not include one-off payments like consultation charges and setup fees.
MRR tracking helps you in determining the growth rate of your monthly revenue. With this calculation, you can compare MRR from several months and see whether it's increasing, decreasing, or remaining constant. If the MRR has decreased significantly, this could be a sign that your customers are churning at a higher rate; therefore, you might need to focus your efforts on bringing in new customers.
In addition, you need to use this MRR data to create a growth strategy. You need to check the channels bringing in a bigger ROI and those that are not and use this to your advantage.
When calculating MRR, also remember that it’s not an independent metric. It’s connected to other metrics in your business. Therefore, you should use it together with the other metrics to get an overall view of how your business health is doing.
Also known as attrition rate, churn rate is the percentage of people or revenue lost within a specific time frame. There are two types of churn:
Revenue churn: This measures the percentage of revenue lost when customers abandon your services every month.
Customer churn: This measures the percentage of customers lost or accounts abandoning company services each month as a percentage of the overall customer count.
Churn is checked monthly, and it helps you understand whether customers are satisfied with your services and what areas need improvement. This metric is very important because it indicates how well your SaaS company retains customers. If your churn rate is low, you are doing a better job at retaining users.
As the SaaS company enters the growing phase, it becomes more critical to measure churn. This is because if the churn rate is high, the replacement of customers becomes unsustainable for the business. Therefore, measuring this metric is very important to sustain your revenue and number of customers.
Why is tracking SaaS growth rate important?
Tracking your SaaS growth rate is important because it measures how well the company performs. With this figure, a company can determine whether it needs to implement any long-term or immediate changes to the service delivery or marketing strategies.
Additionally, it comes in handy when making decisions about expansion or funding, especially if the company has stakeholders and investors that need this information. Therefore, you need to measure the different growth rates to have this data readily available.
Calculating growth rate
If you want to calculate revenue growth rate for your SaaS company, the standard formula is a simple one to use.
Growth rate formula
To use this formula, you need to know the starting value and present value of the metric you need to measure. For instance, if you need to determine the MRR, refer to the company’s manual records or the tracking applications.
Once you have both the present and starting value, subtract the starting value from the current value, then divide the difference by the previous value and multiply it by 100. This gives you the percentage growth.
Growth rate = Current Value - Starting Value) / Starting Value x 100
You can use this formula for most growth rates, such as revenue growth, market growth, and user growth. This figure can be used to improve the SaaS’s future performance.
Here’s an example of how to calculate revenue growth rate for your SaaS company. For instance, if your June monthly revenue is $50,000 and your May revenue was $35,000, here’s how to get the growth rate.
(($50,000 - $35,000)) /$35,000 x 100 = 42%
Growth rate analysis
Once you have your growth rate percentage, you can use this to make decisions for your SaaS company.
How to track and interpret growth rates
The main advantage of calculating the growth rates is to track and compare the growth over a certain period of time. For instance, if the growth rate in the previous year was 5% and in the current year the rate is 3%, it does not necessarily mean that the current year is worse.
A deeper analysis could reveal that the SaaS company has less churn and more long-term customers in the present. Therefore, you have to look at other metrics before coming to a conclusion.
What is a good growth rate in SaaS businesses?
An ideal growth rate differs for each company because it depends on the stage your SaaS business is in. If you are competing against well-performing companies, you can benchmark and compare your numbers with theirs to determine if your growth rate is ideal.
However, if you are in an industry with low-cost alternatives, the best option to check your growth rate is by checking your spreadsheets to track your metrics. You can compare your past and current data to determine if your growth rate is good.
How do you calculate year-over-year growth?
Year-over-Year (YoY) growth is used to measure the change annually across two comparable periods. Typically, YoY growth looks at the difference between a company's current annual financial performance to that from 12 months back. With this figure, companies can rate how the company has grown and identify any cyclical patterns.
If you calculate YoY growth, it becomes easy to track and compare growth rates over specific periods. When this is annualised, it removes the impact of monthly volatility on the business.
The main benefit of YoY growth analysis is how easy it is to track and compare the growth rates across several periods, which if annualised, removes the impact of monthly volatility.
Tips to evaluate SaaS growth rate
Here are some tips you can use to evaluate your SaaS growth rate.
Use several strategies
To get a more comprehensive overview of your SaaS company's growth rate, you need to use multiple strategies. For instance, if you calculate the revenue growth, it shows how much the company's revenue has changed with time. On the other hand, calculating the net dollar retention shows the changes in a company's recurring revenue. Experimenting with multiple methods provides more insight.
Know other metrics
Familiarise yourself with different growth metrics to better evaluate the SaaS growth rate. Learning how to calculate different metrics like the company's customer acquisition cost or customer lifetime value provides more information on how to make improvements to your products.
Understand how to perform calculations
Although there are analytics software to perform calculations, it’s vital to know how to perform calculations manually. Understanding these numbers makes it easier to understand elements such as your revenue growth rate and what affects it.
Calculating the growth rate is an important part of measuring the performance of a SaaS company. You need this information to know how your business is performing. By calculating metrics such as revenue growth rate or churn rate, you get data on whether your SaaS business is improving, backtracking, or remaining constant.
You don’t have to rely on one metric, there are several strategies that will help you measure performance in different parts of your business. Additionally, you can measure the performance periodically by choosing to calculate either the monthly or annual growth rate. From this, you can identify if there’s any positive growth and plan for the future of the company.
Sam founded his first startup back in 2010 and has since been building startups in the Content Marketing, SEO, eCommerce and SaaS verticals. Sam is a generalist with deep knowledge of lead generation and scaling acquisition and sales.