How to Calculate Growth Rate: CAGR, MoM, and YoY for SaaS

How to Calculate Growth Rate: CAGR, MoM, and YoY for SaaS

Growth metrics are a bit like the heartbeat of a SaaS company. They tell you how well your business is doing, where it's headed, and whether you're meeting the expectations of investors, customers, and your own team. But let's be real—figuring out these numbers can feel like solving a puzzle with pieces scattered all over the place.

In this guide, we'll break down the mystery of growth rates like CAGR, MoM, and YoY. By the end, you'll not only understand what these acronyms mean but also how you can use them to make smarter business decisions. So, grab a coffee, and let’s dive into the world of growth metrics.

Why growth rates matter in recurring business models

Growth rates are more than just numbers—they're a story about your business. They show the traction of your subscriptions and usage, revealing where customers are sticking around and where they're dropping off. Pair these growth figures with monthly churn benchmarks to get a clear picture of your retention strength.

Investors are always on the lookout for credibility, and consistent growth is a big part of that. Paul Graham highlights the importance of weekly growth momentum for startups. Knowing how to calculate growth rate with this method can give you the edge you need.

Higher growth percentages often signal a solid product-market fit. Understanding metrics like CMGR can help maintain consistency over months. You can compare MoM with YoY growth to plan effectively. These insights guide your ARR targets and resource planning, linking retention, expansion, and churn to ARR growth.

Here's what you should keep an eye on:

• Cohorted retention: Supports NDR goals

• Churn thresholds: Helps manage risk

• Revenue and active users: Validates growth calculations

Breaking down the main growth metrics

Let's get into the nitty-gritty of each metric:

Month-over-month (MoM) growth: This is your go-to for short-term progress. It highlights immediate performance changes, making it perfect for tracking new launches or campaigns. Dive into MoM growth to understand its impact in SaaS.

Year-over-year (YoY) growth: Offers a broader view, smoothing out those pesky seasonal spikes. It helps you uncover deeper trends that might be lurking in the monthly data. For a practical guide, check out how to calculate YoY growth.

Compound annual growth rate (CAGR): Think of CAGR as your average annual growth over several years. It strips away the noise of short-term fluctuations, revealing a steady trajectory. For a step-by-step on calculating CAGR, this resource is a must-read.

Choosing the right metric depends on what you want to learn. Need to measure immediate results? MoM is your friend. Looking for long-term health? YoY or CAGR will reveal sustainable trends.

Positioning formulas for the right stage

In the early days, speed is key. Month-over-month growth rates let you spot traction fast and test changes quickly. You can find typical benchmarks and how to calculate growth rate using simple division.

As you mature, a wider perspective is essential. Year-over-year (YoY) analysis compares performance across years, smoothing out those short-term spikes. For a detailed look, see how to calculate growth rate for YoY.

For long-term planning, compound annual growth rate (CAGR) is crucial. It's perfect for investors and finance teams. Here’s how to calculate growth rate using the CAGR formula: (Ending Value / Beginning Value)^(1/Years) - 1.

Each formula serves a different need. Pick the one that matches your stage, whether you're chasing product-market fit or mapping out multi-year trends. For more on growth rates, explore practical guides and real-world examples.

Leveraging growth insights for continuous improvement

When you stack your metrics against trusted benchmarks, you quickly spot issues. For instance, comparing your monthly churn to industry standards helps you identify retention problems.

Your growth data is a compass for resource allocation. Low user acquisition? You know where to direct your efforts. A spike in support requests? Time to enhance onboarding or documentation.

Real-time testing shows which features or campaigns actually drive results. See what moves your numbers and double down on what works. This approach helps you expand revenue and avoid wasted efforts.

If calculating growth rates feels daunting, don't worry. Practical guides, like this one or Statsig's perspective, break down the steps:

• Find your starting and ending values

• Subtract to get the difference

• Divide by the starting value

• Multiply by 100 for your percentage growth

Clear growth metrics give you confidence to prioritize, experiment, and iterate. They offer practical insight—not just more numbers.

Closing thoughts

Understanding growth rates like CAGR, MoM, and YoY is crucial for navigating the SaaS landscape. These metrics guide decision-making, from resource allocation to strategic planning. For more insights, explore growth benchmarks and practical examples.

Hope you find this useful!