Revenue Growth Rate: the complete guide

Let's examine the single most important metric for your Saas businesses: revenue growth. I'll go over what revenue growth rate is, how it's calculated, and what's a good revenue growth rate.

Key takeaways:

• Revenue growth is the single most impactful metric when it comes to valuation and revenue multiples

• A good revenue growth rate depends on your market conditions and the type of business you are building - there is no generic benchmark

• For subscription businesses, revenue growth depends on your churn rate and looking only at revenue growth is dangerous

• VCs tend to invest more in high revenue growth companies that have the potential to reach $1B+ in valuation fast

What is Revenue Growth Rate?

The revenue growth rate is the percentage increase in your revenue from one time period to another. This metric is generally measured year-over-year or month-over-month.

It is one of the most important metrics VCs will look at to assess the potential of your company and is one of the main factors affecting your company valuation.

How To Calculate Revenue Growth Rate

The equation for revenue growth rate is quite simple:

(Current Period Revenue - Prior Period revenue) / Prior period revenue

Note: This formula can calculate both an increase and decrease in revenue.

Revenue Growth Rate Example

Let’s quickly take a look at this metric in context before we dive a little deeper.

Company J is an ecommerce brand. They want to see how they performed in 2022 compared to 2021.

In 2021, they made $500,000 in revenue. In 2022, they racked up $800,000 in revenue. Now we can plug in our revenue growth formula:

(Current Period Revenue - Prior Period revenue) / Prior period revenue

($800,000- $500,000)$500,000 = 0.6 or 60%

So the company’s revenue growth rate in 2022 vs 2021 is 60%

The importance of churn for SaaS businesses

Subscription businesses like SaaS companies rely on growing recurring revenue so they need to look at their churn rate when looking at their revenue growth.

Revenue growth alone can “hide” a growing churn rate as it includes New Revenue coming from new customers that can be higher than churned revenue.

So always keep your churn rate in check and don't rely on revenue growth as a single metric to follow.

What's a good revenue growth rate?

The answer depends on many factors, including your market, business model and company stage.

If you are playing in a small niche market, then having a higher growth rate than your competitors is enough. It means you are the fastest growing player in your niche and even a 15% revenue growth rate may be good. You can end up with a profitable small business this way and this is fine.

Most SaaS companies are competing in markets where they face a winner-takes-all or winner-takes-most situation. In these conditions, growing FAST is the only way to establish market dominance and avoid being left behind.

As companies grow, growth rates tend to go down. Established companies with a 30% yearly revenue growth rate are very unlikely to grow their revenue 100% the following year.

The T2D3 Path to $100M ARR

As revenue growth is the biggest determinant of a company valuation, a common pattern to high valuation VCs will look at is T2D3.

Introduced by Neeraj Agrawal back in 2015 it describes a revenue growth pattern VCs commonly refer to when looking at startups to invest in.

The acronym stands for “triple twice, double three times” - 200% YoY revenue growth for 2 years and then 100% revenue growth YoY for 3 years.

Once a startup reaches product market-fit and 1M in ARR, following this 6 year path leads to a $1B+ valuation, the unicorn status and opens the door to going public - and this is exactly what VCs are pursuing.

So if this is the road you want to take, T2D3 is a good benchmark to measure your performance against.