Revenue Growth Rate: Meaning, Formula, Best Practices

Revenue growth rate measures the increase in a company's sales over a specific period. It indicates how quickly the company expands its revenue base.

In this article, you'll learn:

• How to define revenue growth
• How to calculate revenue growth
• Benchmarks so you know what good looks like
• Best practices to improve it
• How Churnkey can help increase revenue growth

What is Revenue Growth Rate?

Revenue growth rate is how fast revenue grows compared to last month, last quarter or last year.

Estimates from Sacra show these revenue growth rates:

As a company matures, revenue growth rate might fall even though revenue in absolute dollar amount increases.

This is why, you should look at revenue growth rate alongside several other metrics like gross profit, net revenue retention, and burn rate.

Having said that, revenue growth rate is still one of the most important metrics when it comes to finding your SaaS valuation multiple. Investors also look for profitability and want more efficient revenue growth.

Revenue Growth Rate Formula

Use this simple revenue growth formula: (Current Period Revenue - Previous Period Revenue) / Previous Period Revenue * 100

If your total revenue for the first year was $60,000, and you had $100,000 in the second year, your company’s revenue growth rate would be:

= ($100,000−$60,000/$100,000) × 100
= ($40,000/$100,000) × 100
= 0.4 × 100
= 40%

Why is Revenue Growth Rate Important?

Tracking revenue growth rate is important for three main reasons: understand the financial health, measure performance, and invest in new directions.

A) Understand the financial health of your business

IBM saw no revenue growth in almost a decade (read: Not Dead Yet, IBM's revenue growth accelerates). They sometimes saw negative revenue growth.

Then, they brought in a new CEO. Decided to cut losses by pulling back on bad investments and refocused their energies on their hybrid cloud revenue business.

This is the division where Red Hat lives. It reported $6.2 billion in revenue for the quarter — up 18% year over year.

Tracking revenue growth gives you a pulse of your business. Is your churn unusually high (eg, a 5% monthly churn rate means you lose half of your customers each year)? Is your net retention really good but acquisition slowing down?

B) Assess how marketing and product strategies perform

• Xiomi, the tech company, reported a record 64% revenue growth. What drove it? The U.S government sanctions against Huawei, their competitor.
• Alphabet’s 3% rise in revenue was driven by Google Cloud. Google Network and YouTube advertising incomes dipped.

Revenue growth rate helps you measure whether your LTV and Payback Period can make up for the CAC. If gross churn eats up revenue, then you'll want to invest in churn reduction tools like Churnkey.

C) Make future bets

Revenue growth is amazing.

• Some companies will invest in acquiring new companies, or selling off to other companies, or investing in new marketing channels.
• Some companies may buyback shares when they have excess revenue growth. This can increase the stock price and bring short term revenue gains. Netflix did a $15B buyback.
• Some companies may decide to invest in customer research. Capture One, a photography software company, partnered up with with schools. They saw a gap where 6% of all online returns were due to color issues. And decided to fund the development that helps bridge the gap of online colors to print colors.
• Some companies like DeBeers may buyback their own products to hold market prices (not in a very nice way).

D) Increase business valuation

Most SaaS valuation focus on growth rate and revenue. It's a quick and easy way to calculate the valuation.

We've been through the trenches ourselves. First by selling our bootstrapped company, Wavve, to Calm Capital, and more recently raising $1.5 million for Churnkey’s growth. These experiences taught us what really drives investor value in the SaaS landscape. We've covered all metrics in this LTV calculator like churn, business age, and owner dependency that decide the final valuation.

E) Identify trends and anomalies

Tracking this metric helps you measure whether something is off. If there's a sudden spike due to a macro-economic condition, revenue growth rate can help track it. It might also help show seasonality (eg, TurboTax, a tax software, should see higher revenue growth in tax seasons) so you can offer time-limited offers or run ad campaigns.

What is a Good and Bad Revenue Growth Rate?

You can read more in Bessemer's study or Lenny's. In the early stages, percentages don't mean much since the base is so small. Investors look for the growth rate as a proxy for how long it takes to hit $1m ARR. After that, companies are looking for between 10-16% month-over-month revenue growth rate.

After Launching

After $1M ARR

By Funding Round

You can compare more metrics at sacra.com (costs $50/month).

A flat revenue growth rate or a negative growth rate is undesirable. For mature companies, the percentage increases might be small but they prefer to be steady than have eye-popping growth rates.

What Metrics Affect Revenue Growth Rate?

A) Churn Rate:

Higher the churn, lower the revenue rate. It measures how many of the customers you acquire leave.

1. Convert your monthly churn rate to annual to see your true gross churn rate.
2. Breakdown by net churn and gross churn to see whether you're losing new customers or unable to reactivate/upsell existing users.
3. Map your growth ceiling so you know when churn will start capping your growth.

4. You can also breakdown by voluntary and involuntary churn to figure out what to start fixing first.
5. The easiest way to measure your churn metrics is by using Churnkey's free churn metrics.

B) Monthly Recurring Revenue (MRR)

Revenue growth rate can include both recurring and non-recurring revenue.

SaaS companies often focus on MRR growth rate.

If your business has 100 active customers that pay $20 each every month, your MRR would be 100 x $20 = $2000.

MRR provides a stable revenue foundation that compounds monthly, creating a baseline for growth calculations.

MRR Formula:
MRR = Total Number of Active Customers × Average Revenue per Customer

Read more:

SaaS MRR Calculator and Benchmarks

With our interactive MRR calculator, discover how each component—new MRR, expansion, churn, and more—affects your bottom line. Learn why reducing churn, even by a small percentage, can create significant long-term gains, and explore how benchmarks help you set ambitious, achievable growth targets.

ChurnkeyKhushi Lunkad

C) Average Revenue Per User (ARPU)

ARPU measures how much each individual customer is worth, on average. For Netflix, that might be $10/month. But for a large enterprise company like Workday, that might be a few hundred thousand dollars.

If you're competing on price, you would want to lower the cost but increase either the frequency of purchase OR acquire more market share. When competiting with a superior product, you would want to increase ARPU by upselling/expansions.

D) Customer Lifetime Value

LTV is calculated as ARPU * customer duration. It measures how much a customer pays to you during their life.

For example, the average Netflix subscriber stays for 25 months. And their LTV is $291 (roughly $11/month).

Customer Lifetime Value is a hard metric to rely on. It's hard for early stage companies to work with because there's little historical data. Even for larger companies, it's not a reliable indicator but comes close enough.

Netflix wrote,

"While customer lifetime value (LTV) is commonly used to do so, we demonstrate that LTV likely over-states the true value of acquisition or retention". 

For a business like Netflix where each new piece of content increases or decreases revenue growth, understanding their LTV was critical. You can read their research paper here.

E) Burn Multiple

Burn Multiple = Net Burn / Net New ARR.

This puts the focus squarely on how much is the startup burning in order to generate each incremental dollar of ARR.

If you spend $1M and gain $500k more in annual recurring revenue, that’s a 2x burn multiple — which David Sacks grades as “Suspect". For a startup to be interesting, investors would want to see a 2.5x burn multiple or higher. They want efficiency, not growth at all costs.

F) Retention Rate

Retention is the most important growth metric. Customer retention rate measures what % of customers stay over a period of time. The best way to measure this is to use retention curves and retention cohorts. You want to look at gross retention rate and net retention rate. Then look at both at a dollar value and a customer count value.

For example, if

• Customers at the start = 10,000
• New customers acquired = 1,000
• Customers at the end = 9,000
• Retention Rate = 80.0%

Churnkey can help you retain more customers and lower your churn rate. Just take a look: https://churnkey.co/

G) Expansion Revenue Rate

Expansion revenue rate measures the percentage of your revenue that comes from upsells or expansions. This is great for accounts that sell team seats (like Slack), an API (like ChatGPT), or a software with usage based pricing (like Stripe).

A big part of Databricks $3B business comes from expansions. Sacra reported, "Databricks reported 80% gross margins, with net dollar retention is at 140%."

How To Improve Revenue Growth Rate?

• Increase prices (if market is less sensitive)
• Decrease prices (in commodity markets)
• Layer on additional growth loops
• Cut underperforming investments
• Scale back on low performing marketing spend. Andrew Chen: "The highest ROI tends to be channels like SEO, word of mouth, and other organic efforts. The next might be paid channels like newsletters, which are hard to scale but highly productive. Then there’s highly targeted paid marketing. Usually the lowest ROI tends to be broad targeting — particularly display ads — on large advertising networks.
• Acquire companies: Instagram's acquisition by Meta and Adobe's history of acquisition right from the early days has helped them eat up market share.
• Build moats, especially distribution moats
• Strike when the iron's hot: Ramp's 4X revenue growth was partially attributed to a competitor. Brex infamously announced it would stop working with small businesses and nonfunded startups.
• Deploy Churnkey: companies save 20-40% of the revenue they would have otherwise lost to churn.

What is Churnkey?

Churnkey is a complete customer retention platform. Our churn reduction suite of products includes:

1. Churn metrics (free)
2. Omni channel dunning campaigns
3. Precision retries
4. Failed payment recovery wall
5. Customer health

and more!

We natively integrate with most billing providers and support companies at all stages of their growth.

To improve your revenue growth rate, sign up for Churnkey or book a demo.