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What is Growth rate? (from a startup or SaaS perspective)
Hello! Thank you for your question about what a growth rate is from a startup or SaaS business perspective. The short answer is that a growth rate is a measurement of a company's potential, it should be used to convince investors to fund the business and to allocate resources, and a good rate is about 6% per week, or between 15%-45% per year. Please see below for a deep dive of this research.
WHAT IS A GROWTH RATE
One of the main metrics for assessing the potential of startup companies, growth rates measure the percentage increase in revenue for a company. This percentage is an indicator of how rapidly a company grows and its projected growth over a set period of time. Growth rates can be given as a weekly, monthly, or annual rate depending upon the company's industry and stage of growth. They can be calculated at any stage of growth given the correct data by the company or by investors wanting to understand the future of the startup.
WHY AND HOW IT SHOULD BE USED
The growth rate is an indicator of company profitability and sustainability. This is used by startups to pitch their ideas to investors or lenders to receive funding throughout the company's life. Those with capital to invest use the metric to "evaluate the startup’s current and potential growth," and there are few who will give money without some sort of forecast for the business. It is imperative to show investors both short term and long term growth rates so that, "while the new business may not generate revenues that considerably impact their financials in the first year," the company is projected to see growth during that time and begin to show a return on investment within two, or however many years. Communication of the growth rate is imperative for a business's successful future.
Beyond securing funding, businesses can use the growth rate to "develop operational and staffing plans" that will best benefit the future of the company. Since the growth rate can be calculated on a weekly or monthly or longer basis, it is easy to see how small alterations in pricing, staffing, or other day-to-day minutia can "have a very dramatic impact on startup outcomes." It should also be used to determine how best to allocate resources. If the business grows too quickly and initial resources are used up without a plan, or it grows too slowly and resources are wasted, costing money, then a company can be negatively impacted or shut down.
HOW TO CALCULATE A RATE
There are different ways to calculate a growth rate depending upon which industry the company is involved in, current capabilities of the company, the current funding phase, and the age of the company, among other factors. Experts suggest starting the math with a company's expenses and checking "key ratios" such as the operating profit margin and the "headcount per client" (i.e. number of employees per client). Other rules of thumb include doubling cost estimations for advertising, and tripling estimations for legal and insurance costs as these categories often incur hidden expenses or vary from provider to provider. Also, monitor customer service time to give a starting point for future labor costs as the business grows. Finally, it is suggested that companies calculate a conservative growth rate and an aggressive growth rate to provide to investors.
There are calculators available online, options in Excel and similar platforms, and the following formula for a revenue growth rate on a monthly basis:
{[(Second Month Revenue)-(First Month Revenue)]/(First Month Revenue)}* 100%
Other considerations that should be taken into account when determining a growth rate include customer retention, marketing techniques and their efficacy, seasonality of products, and stage of company expansion. Any one of these, or a combination thereof, could impact the growth rate. Those businesses who build from the ground up will have greater rates, as zero to any amount of revenue is a large increase. The specific industry and advertising for a company plays into the "different setup times, adoption speed, sales cycles and market opportunities," which again all vary based on the stage of growth. As a company grows, to maintain a rate over time, they need to "increase growth faster".
WHAT IS A GOOD RATE
As growth rates vary from industry to industry, the range of a good rate is broad. However, financial experts give the range as "between 15% and 45% for year-over-year growth" with those companies that make less than $2 million annually in revenue at the higher end of the range as they have more growing to do. If the rate is calculated on a weekly basis, the aim should be 6% growth per week to maintain a steady increase in business, and to show the company's potential to investors.
In the industries that are currently billed as the 'hottest' for startup companies and expansion, some examples of average growth rates include: 2.4% annually for fitness companies, 30.4% annually for drone companies, and 24.6% annually for fraud detection companies.
CONCLUSIONS
Growth rates are the measure of a company's increase in revenue and potential to expand over a set period of time. The metric is used to help companies plan resource use for the future, and to draw in investors to startups with potential. There are formulas to calculate growth rates, but many factors can influence the metric. An ideal growth rate is between 15%-45% per year, or 6% per week.
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