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Estd 4.22.2023
In the competitive SaaS landscape, growth metrics dominate boardroom discussions and investor presentations. While there are numerous ways to measure business expansion, organic growth rate stands out as perhaps the most meaningful indicator of sustainable success. For SaaS executives focused on building enduring companies, understanding this metric isn't just important—it's essential.
What Is Organic Growth Rate?
Organic growth rate measures the increase in revenue, customers, or other key business metrics that comes from your core business operations—without the influence of acquisitions, mergers, or other inorganic activities.
In other words, organic growth represents how well your business is expanding through:
- Natural market adoption of your product
- Improvements to your existing offerings
- Expansion within current customer accounts
- New customer acquisition through regular sales and marketing efforts
For SaaS businesses specifically, organic growth typically manifests in:
- Net new customer acquisition through your sales and marketing funnels
- Expansion revenue from existing customers upgrading or purchasing additional seats/modules
- Improved retention rates leading to higher customer lifetime value
Why Organic Growth Rate Matters for SaaS Executives
1. It Reflects True Business Health
Unlike total growth figures that can be artificially inflated through acquisitions or one-time events, organic growth provides the clearest picture of your core business performance. According to McKinsey research, companies with strong organic growth deliver shareholder returns 3.8 times higher than industry averages.
2. It's More Capital Efficient
Growing organically typically requires less capital than growth through acquisitions. In the current economic climate where capital efficiency is paramount, this advantage cannot be overstated. Tomasz Tunguz, venture capitalist at Redpoint, notes that "organic growth is 5-7x more capital efficient than inorganic growth for most SaaS companies."
3. It Indicates Product-Market Fit
Strong organic growth signals that your product addresses a genuine market need. When customers seek out and purchase your solution without excessive marketing or sales pressure, you've found product-market fit—the holy grail of SaaS.
4. It's Favored by Investors and Acquirers
In a 2022 survey by Battery Ventures, 78% of SaaS investors identified organic growth rate as the most important metric when evaluating potential investments. Similarly, strategic acquirers typically pay higher multiples for companies demonstrating sustainable organic growth.
5. It's More Predictable and Sustainable
Organic growth tends to be more stable and predictable than growth through acquisitions or other one-time events. This predictability is invaluable for accurate forecasting and strategic planning.
How to Calculate Organic Growth Rate
While the concept is straightforward, measuring organic growth requires careful consideration. Here's a step-by-step approach:
Basic Organic Growth Rate Formula
Organic Growth Rate = [(Current Period Organic Revenue - Previous Period Revenue) / Previous Period Revenue] × 100%However, this simple formula requires refinement to be truly useful.
A More Sophisticated Approach
To accurately measure organic growth, SaaS executives should:
Establish a clear baseline: Identify your starting point revenue, excluding any one-time or non-recurring revenue.
Isolate organic components: Separate revenue into organic and inorganic categories:
- Organic: Revenue from existing products and services through standard operations
- Inorganic: Revenue from acquisitions, major partnerships, or non-core business lines
- Apply the formula to organic revenue only:
Organic Growth Rate = [(Current Period Organic Revenue - Previous Period Organic Revenue) / Previous Period Organic Revenue] × 100%- Consider time periods carefully: Monthly calculations can be noisy; quarterly or annual measures typically provide more stable insights.
Best Practices for Measuring Organic Growth Rate
1. Segment Your Analysis
Don't just look at aggregate numbers. Break down organic growth by:
- Customer segments
- Product lines
- Geographic regions
- Customer acquisition channels
- New vs. expansion revenue
This granularity helps identify the true drivers of organic growth.
2. Account for Seasonality
Many SaaS businesses experience seasonal fluctuations. Compare year-over-year periods (e.g., Q4 2023 vs. Q4 2022) rather than sequential periods to neutralize seasonal effects.
3. Track Contribution to Overall Growth
Calculate what percentage of your total growth comes from organic sources versus inorganic. According to OpenView Partners' 2023 SaaS Benchmarks report, best-in-class companies maintain organic growth contribution of at least 70% of their total growth.
4. Monitor Organic Growth Efficiency
Pair your organic growth rate with efficiency metrics like:
- CAC Payback Period
- LTV/CAC Ratio
- Rule of 40 Score
This provides context for how efficiently you're generating organic growth.
How to Improve Your Organic Growth Rate
For SaaS executives looking to enhance organic growth, consider these proven strategies:
1. Double Down on Customer Success
According to Gainsight, companies with formal customer success programs achieve 30% higher organic growth rates than those without. When existing customers succeed, they renew, expand, and refer others.
2. Invest in Product-Led Growth
Companies employing PLG strategies consistently outperform their peers in organic growth. Pendo's State of Product Leadership report indicates PLG companies achieve organic growth rates 15% higher than traditional sales-led organizations.
3. Optimize Your Pricing Strategy
ProfitWell research suggests that companies that review and optimize pricing at least quarterly see 30% higher organic growth rates than those that adjust pricing annually or less frequently.
4. Focus on Expansion Revenue
According to SaaS Capital, companies deriving 30% or more of their growth from existing customers show 19% higher overall organic growth rates than those primarily focused on new customer acquisition.
5. Improve User Activation and First-Time Experience
Amplitude data indicates that companies in the top quartile for user activation achieve organic growth rates 2.5x higher than those in the bottom quartile.
Common Pitfalls in Measuring Organic Growth
Avoid these common mistakes when assessing your organic growth:
Failing to exclude one-time revenue spikes: Large, non-recurring deals can distort your true organic growth trajectory.
Not accounting for customer churn: High growth can mask high churn. Net revenue retention is a critical companion metric to organic growth.
Ignoring the impact of pricing changes: Price increases can create an illusion of organic growth without actual business expansion.
Overlooking channel mix shifts: Moving from partner sales to direct sales isn't truly organic growth—it's a change in distribution strategy.
Conclusion: Making Organic Growth Your North Star
In the SaaS world where metrics abound, organic growth rate stands as perhaps the most meaningful measure of sustainable business health. By accurately tracking, analyzing, and optimizing for organic growth, executives can build more resilient companies, attract premium valuations, and create lasting value.
The most successful SaaS companies don't just track organic growth—they make it central to their operating model. They align team incentives around it, regularly communicate progress to stakeholders, and use it to inform strategic decisions from product development to market expansion.
As you refine your approach to measuring and improving organic growth, remember that the goal isn't just growth at any cost, but sustainable, efficient expansion that can weather changing market conditions and create enduring competitive advantage.