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Estd 4.22.2023
In the fast-paced world of Software as a Service (SaaS), tracking the right metrics can mean the difference between strategic growth and stagnation. Among these metrics, revenue growth rate stands out as one of the most crucial indicators of a company's health, potential, and trajectory. For SaaS executives, understanding this metric is not just beneficial—it's essential for making informed decisions that drive long-term success.
What Is Revenue Growth Rate?
Revenue growth rate measures the percentage increase in a company's revenue over a specific period. This straightforward yet powerful metric reveals how quickly your business is expanding its top line, indicating market acceptance, product-market fit, and overall business momentum.
The formula is simple:
Revenue Growth Rate = [(Current Period Revenue - Prior Period Revenue) / Prior Period Revenue] × 100
For example, if your SaaS company generated $2 million in the current quarter compared to $1.6 million in the previous quarter, your quarterly growth rate would be:
[($2,000,000 - $1,600,000) / $1,600,000] × 100 = 25%
Why Revenue Growth Rate Matters for SaaS Companies
1. Investor Attraction and Valuation
In the SaaS industry, growth rate often outweighs absolute revenue numbers, especially for early and growth-stage companies. According to data from KeyBanc Capital Markets' SaaS survey, companies growing at 40%+ annually typically command valuation multiples 2-3 times higher than those growing at 20% or below.
"Growth is the primary value driver for SaaS businesses," notes Alex Clayton of Spark Capital. "It's not uncommon to see investors pay 15-20x ARR multiples for companies growing 100%+ year-over-year, while similar companies growing at 30% might fetch only 5-8x multiples."
2. Operational Planning and Resource Allocation
Understanding your growth rate helps determine appropriate hiring paces, marketing budgets, and infrastructure investments. A company growing at 100% annually has fundamentally different operational needs than one growing at 15%.
3. Competitive Positioning
Industry benchmarks from OpenView Partners show that top-quartile SaaS companies maintain annual growth rates of:
- Early stage (under $10M ARR): 100%+
- Growth stage ($10M-$50M ARR): 60%+
- Scale stage ($50M+ ARR): 40%+
Tracking your position relative to these benchmarks provides critical competitive intelligence.
4. Forward-Looking Indicator
Unlike many financial metrics that are lagging indicators, growth rate can function as a leading indicator when analyzed properly. Acceleration or deceleration trends often precede other business changes.
How to Measure Revenue Growth Rate Effectively
Choose the Right Time Frame
Different time frames reveal different insights:
Annual Growth Rate: Provides the big picture view, smoothing out seasonal fluctuations and showing longer-term trends. This is typically what investors focus on most.
Quarterly Growth Rate: Offers more timely feedback on recent strategic changes and emerging trends.
Month-over-Month Growth Rate: Provides granular visibility but can be noisy due to billing cycles, seasonal effects, or outlier events.
According to Tom Tunguz, venture capitalist at Redpoint, "The ideal cadence is to track all three, using monthly for operational adjustments, quarterly for tactical shifts, and annual for strategic planning."
Calculate Year-over-Year vs. Sequential Growth
Year-over-Year (YoY): Compares the same period across different years, effectively normalizing for seasonality.
Sequential Growth: Measures growth from one period to the next consecutive period, highlighting immediate momentum.
For SaaS businesses with seasonal patterns, YoY analysis typically provides a clearer picture of true growth. However, sequential growth becomes particularly important during rapid scaling or when implementing significant strategic changes.
Account for Different Revenue Types
For comprehensive analysis, consider separating:
New Business Revenue: Revenue from newly acquired customers
Expansion Revenue: Additional revenue from existing customers
Renewal Revenue: Recurring revenue from existing customers
According to Bessemer Venture Partners' State of the Cloud Report, top-performing SaaS companies typically generate 15-40% of their new ARR from existing customers through expansion.
Apply Appropriate Adjustments
For the most accurate growth calculations:
- Normalize for Contract Length: Especially if you offer incentives for longer commitments
- Adjust for One-Time Payments: Focus on recurring revenue for the clearest growth picture
- Consider Currency Fluctuations: For international businesses, currency-adjusted growth provides a more accurate view
Advanced Revenue Growth Rate Analysis Techniques
Growth Efficiency
Beyond just tracking raw growth, sophisticated SaaS executives analyze their growth efficiency:
Growth Efficiency = Net New ARR / Total Operating Expenses
According to Tomasz Tunguz, "The median publicly traded SaaS company requires $1.50 in operating expenses to generate $1.00 in new ARR. Top quartile companies achieve $1.00 in new ARR with just $0.80 in expenses."
Cohort Analysis
Analyzing growth rates by customer cohorts reveals important patterns:
- Are newer customers growing faster than older ones?
- Is product adoption improving over time?
- Which customer segments show the strongest expansion potential?
David Skok, venture capitalist at Matrix Partners, notes that "understanding growth patterns at the cohort level often reveals opportunities invisible at the aggregate level."
Rule of 40
The widely adopted "Rule of 40" (where growth rate + profit margin should exceed 40%) provides context for your growth rate:
- High growth (80%) + negative margins (-40%) = 40 (healthy)
- Moderate growth (30%) + healthy margins (15%) = 45 (healthy)
- Low growth (10%) + strong margins (20%) = 30 (concerning)
Challenges in Measuring Growth Rate
The Law of Large Numbers
As companies scale, maintaining high growth rates becomes mathematically challenging. A $10M ARR company needs just $5M in new ARR to grow 50%, while a $100M company needs $50M—a much more substantial achievement.
This natural deceleration means evaluating growth rates relative to company size is crucial. According to data from SaaS Capital, the median growth rate for companies with:
- $1-5M ARR: 70%
- $5-10M ARR: 48%
- $10-20M ARR: 37%
- $20-50M ARR: 30%
- $50M+ ARR: 25%
Accounting for Deferred Revenue
SaaS subscription revenue is often recognized over time rather than upfront, creating complexity in growth calculations. Using bookings metrics alongside recognized revenue provides a more complete picture.
Conclusion: Turning Growth Rate Insights into Action
Understanding your revenue growth rate is just the first step. The true value comes from using these insights to drive strategic decisions. High-performing SaaS companies:
- Set growth targets based on company stage and market conditions
- Break down growth goals into actionable drivers (acquisition, retention, expansion)
- Create team accountability with growth-focused KPIs
- Regularly reassess growth strategy based on performance data
- Balance growth with unit economics as the business matures
By mastering the measurement and analysis of revenue growth rate, SaaS executives can make more confident decisions, secure better financing, and ultimately build more valuable businesses. In an industry where growth often determines winners and losers, this metric deserves its place at the center of your analytical dashboard.