What is SaaS Growth Rate?

The growth rate is a business metric used by SaaS companies to quantify how much a particular variable has increased or decreased to its baseline value. Its calculation method depends on the events considered.

The formula for calculating the SaaS growth rate depends on what metric you’re measuring. Here’s a breakdown of the general formula and some common SaaS metrics:

General Growth Rate Formula:

Growth Rate = [(Current Value – Previous Value) / Previous Value] * 100

Common SaaS Metrics and Their Growth Rate Formulas:

• Monthly Recurring Revenue (MRR) Growth Rate: 

MRR represents the predictable and recurring income from monthly subscriptions.  

MRR Growth Rate = [(Current Month MRR – Previous Month MRR) / Previous Month MRR] * 100

• Annual Recurring Revenue (ARR) Growth Rate:

ARR is the annualized value of your MRR, providing insight into the long-term health of your business.  

ARR Growth Rate = [(Current Year ARR – Previous Year ARR) / Previous Year ARR] * 100

• Customer Churn Rate:

The churn rate measures the percentage of customers who cancel their subscriptions.  

Churn Rate = (Number of Churned Customers / Total Number of Customers at the Start of the Period) * 100

• Customer Acquisition Cost (CAC) Growth Rate:

CAC is the average cost of acquiring a new customer.  

CAC Growth Rate = [(Current Period CAC – Previous Period CAC) / Previous Period CAC] * 100

Growth rates are effective measures of economic well-being. Growth rates are effective measures of economic well-being. They provide a method for quantifying alterations in an economic variable over an extended period, characterized by its relative ease of application. The benefits include:

• Understanding trends: Growth rates help in understanding the changing patterns of economic performance and discern what is working and what is not.
• Benchmarking: They enable inter-industry and inter-country comparisons that are useful for benchmarking and competitive analysis.
• Investor appeal: High growth rates are attractive to investors.
• Identifying areas for improvement: Growth rates can pinpoint specific areas of the business that are excelling or need attention.

Simple and compound growth illustrate two different ways of expressing growth.

• Simple growth: While it is simple to calculate and understand, it is applicable for short-term financial scenarios, having a limited scope.
• Compound growth: This is the process of reinvesting profits, potentially generating further returns, but it requires a more complex calculation methodology.

A growth rate calculator is a tool employing mathematical and statistical frameworks to analyze data and offer financial projections. These tools are practical and represent a business asset in predicting trends as long as the calculation model and data used are reliable and accurate.

CAGR, or the compound annual growth rate, is a rate that is generally used to determine the annual compound growth rate of an investment across a period of time. This ratio will show a steady annual value. This is a better metric than arithmetic averages of growth.

CAGR is especially helpful when comparing how quickly an investment is growing during a specified time frame or when comparing similar competitors in the same industry.

The formula used to calculate CAGR is:  CAGR = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] – 1

*where:

The ending value represents the final value of the investment.    The beginning value is the initial value of the investment The initial value of the investment or metric.    The number of years represents the period measured.

Keep in mind that determining CAGR can be a complex process if the investment is question is subject to market volatility.

Negative growth, alternatively referred to as contraction, refers to a decrease in revenue over a set period. This contraction period can be explained by looking at several factors:

• High churn rates: When the number of customers canceling their subscriptions is higher than the revenue gained from existing customers.
• Low acquisition rate: When a company fails to acquire a high number of new customers.
• Market contraction: When the demand for a SaaS product is low due to the shrinking of the market itself.