Monthly growth rate, calculated using Monthly Recurring Revenue (MRR), is an important indicator of the growth and viability of a startup. However, it’s not always clear how fast a SaaS firm should grow.
A good monthly MRR growth rate for SaaS is 5 – 15%. After reaching $1 million in Annual Recurring Revenue (ARR), sustaining a growth rate of 10% and above is a good indicator. You might be in trouble if you remain below 10%.
Whether a company is growing at a reasonable rate depends on the situation the company is in. Read on to learn how to assess the suitability of a SaaS firm’s growth rate. I’ll also cover tips to improve the growth rate.
Growth before & after $1M in ARR
It takes different startups different timeframes and paths to get to $1M in ARR. The main reason behind this is that each startup has to go through a unique journey to find a product-market fit.
Before a startup has found product-market fit, growth in revenue and other metrics will be slow. But once the firm finds that sweet spot, it can really take off.
Consequently, growth rate benchmarks are more relevant after a company hits $1M in ARR. Then, you should aim at a growth rate of 10 – 15%.
Growing faster than 10%
It’s possible to grow at 20%. However, not many startups do. You’re on a great path if you are above 10% and keep important metrics like churn rate within the desired range.
Growth rates of 10-15% make it easier to grow from $1M to $100M in ARR within 10 years. And that increases your chance of success – whether through acquisition or an Initial Public Offering (IPO).
Growth rate of $2M ARR
Worth noting is that as your company’s ARR grows, the growth rate may drop. It is usual for firms with an ARR of more than $2M to grow slower than companies that haven’t hit the $2M mark.
As you work on growing your startup, there are some considerations you should make.
Forecasts are crucial to success during the early stages
While working on improving your growth month over month is essential, it’s also vital to have sound forecasts.
Apart from factors such as the growth rate, investors rely on forecasts when deciding whether to invest in your startup. The better your projections are, the higher the chances of an investor taking you more seriously.
But an even more important role of forecasts is that they help you make the most prudent use of available resources.
Informed by current growth rates, you can plan for recurrent expenses and craft the best staffing strategy. Proper handling of expenses and staffing is central to success.
Building a SaaS Financial Model
Your source of funding affects your growth rate
When comparing your growth rate to benchmarks in the early stages of SaaS companies, it’s important to consider the funding source.
If your company is bootstrapped, you’ll have less capital. You’ll spend less on growth-inducing activities and likely have a lower growth rate, probably 5%. That’s normal.
For a bootstrapped SaaS company, you should target around 5% growth while reinvesting the earnings.
If you are backed by venture capital, you’ll have more money to spend. Your growth rate should reflect the additional capital. You should grow at least 10%.
Segmentation can boost your growth
While a general overview of metrics is important, taking a look at segmented data can be an even better source of actionable insights.
One approach to segmentation is building customer profiles and applying them as filters to your data. Doing this can help you realize that a specific group of customers has a heavier contribution to your growth.
You can then optimize your customer acquisition efforts to get more customers matching the preferred profile, boosting revenue growth and marketing efficiency.
Before getting to $1M in ARR, comparing your growth rate to other firms probably won’t help. At this stage, the focus is on finding product-market fit. After crossing the $1M ARR threshold, a comparison against benchmarks makes more sense. You should aim to keep your growth rate above 10%.
A 20% MRR growth rate is ambitious but possible. Segmentation and robust forecasting can significantly improve your performance in early growth stages.
Learn how to increase your MRR here with SaaS metrics.