As a business owner, you’re responsible for keeping track of a variety of performance metrics, one of the most important being revenue growth.
In simple terms, revenue growth represents revenue increases or decreases over time. It’s essentially a measure of how fast your business is expanding.
Now, why is it that some businesses thrive, bringing in revenue growth year after year, while others fall flat? What causes a decrease in revenue and how can you grow your business’ revenue instead?
That’s exactly what we will be covering throughout this guide, along with everything else you need to know about calculating revenue growth and building a successful revenue growth strategy.
In this guide, you will find:
- What Is Revenue Growth?
- How to Calculate Revenue Growth?
- Revenue Growth Example
- How to Grow Your Revenue
- What Causes Decrease in Revenue?
- Revenue Growth for Subscription Businesses – What You Need to Know
What Is Revenue Growth?
Revenue growth is a key performance indicator expressed as a percentage, representing how able your company is to grow its revenue over a period. This time frame could refer to a monthly, quarterly, semi-annual, or yearly period, depending on how often you want to calculate said growth.
So, for instance, if the company’s revenue doubles from 200k in October 2021 to 400k in October 2022, your revenue growth is 100%.
Before diving into the formula and how exactly to calculate revenue growth, we must make a distinction among revenue, sales, and earnings, as it is common for the three terms to be confused.
Revenue refers to the money a business earns from all sources, including sales, investments, interest, royalties, and more, before any expenses are deducted.
Sales are the amount of money a business earns solely from selling goods and services – before any expenses are subtracted. If a business’ only source of revenue is sales, then revenue and sales can be used synonymously.
On the other hand, profit, or net income, is what’s left after you subtract your expenses.
How to Calculate Revenue Growth?
To calculate rate growth, each period that you decide to measure should be of equal length, so last month to this month (October 1st to November 1st), last year to this year (January of 2014 to January of 2015), and so forth.
Once you have these two figures, you have to subtract the previous period’s revenue from that of the current period. Then, you divide that number by the previous period’s revenue and multiply it by 100, to get your revenue growth percentage.
Revenue Growth Formula
As a formula, revenue growth is expressed as follows:
Revenue Growth = (Current Period Revenue – Previous Period Revenue) / Previous Period Revenue x 100
So, for example, if you earned the following revenue:
Year 2016: $235,000
Year 2017: $360,000
Your revenue growth for 2017 would be:
Revenue Growth (2017) = ($360,000 – $235,000) / $235,000 x 100 = 53.19%
How to Grow Your Revenue
Trying to find new organic revenue drivers but have no inspiration?
Here are 4 marketing channels for revenue growth that you can tailor to your product or service to organically boost your revenue:
- Email marketing. When done efficiently, email marketing can be far-reaching; it raises brand awareness, strengthens customer relationships, enhances business engagement, increases the number of sales, and, consequently, increases revenue and ROI.
- Social media. There were 3.6 billion people worldwide using social media in 2020, and Statista predicts this number will grow to 4.41 billion in 2025. Hence, social media is a great tool you can utilize to engage with customers and grow your brand.
- Content marketing. Content marketing requires a lot of commitment, however, it helps you drive organic and relevant traffic to your company website, generate new leads, instill trust in customers, and in the end, turn readers into buying customers, increasing revenue.
- Affiliate marketing. Statistica expects marketing spending for affiliate marketing in the U.S alone to reach $8.2 billion this year. Affiliate programs are low-cost, low risk, able to reach the intended target audience, and when done right, guarantee a high ROI.
What Causes Decrease in Revenue?
If you want any of the above revenue growth strategies to work, you first have to figure out the underlying cause of your decrease in revenue.
Here are some reasons for poor sales performance that you might be currently overlooking:
- Unclear or undefined goals and objectives. Strategic planning, budgeting, talent development, and organizational structure are all driven by company goals. Without clearly defined and communicated goals and objectives, it’s difficult for departments and personnel to produce consistent, high-quality work that draws in customers and generates revenue.
- Poor marketing and communication. A lack of investment in market research results in limited development of a product or service – you might be offering a good or service of great value for your target audience, but they just don’t know it.
- Poorly trained staff, in any area of the business, can directly harm your business’ ability to generate revenue. A customer service representative with poor communication skills, for instance, can misinform or unintentionally offend a potential customer.
- Pricing issues. Overpricing your product can harm your business as your customers may decide to turn to competitors. Underpricing, on the other hand, not only decreases your revenue streams but may also undermine the brand image of your products.
- No unique value proposition. Having an ineffective value proposition can make your target customers turn to your competitors simply because they don’t immediately understand that what you´re offering fits their needs.
- User experience. Is your product performing at the right level? Are your customers satisfied with its performance? Is the product visually appealing? Are you updating regularly? All of those things impact user experience and, in turn, revenue growth.
Revenue Growth for Subscription Businesses – What You Need to Know
Subscription businesses don’t just hope to sell a singular product or service. They are entirely dependent on sales from long-term, recurring customers that repurchase their subscriptions regularly.
Hence, subscription businesses put major effort into a KPI known as the churn rate. Churn, or the churn rate, is the rate at which customers stop doing business with an entity.
There are two main types of churn: voluntary and involuntary. A voluntary churn happens when a customer decides to stop a subscription because they might not be happy with the product, or did not receive the expected value. As a business owner, you have to be extremely committed to providing value to your customer and reducing this voluntary churn.
You can do this by actively:
- Identifying and solving problems related to customer experience
- Defining a roadmap to guide new customers through the product features
- Offering incentives such as promos, discounts, loyalty programs, etc.
- Continuously asking for feedback to discover any possible confusion around a product or service or a lack of helpful support around a particular issue that customers might be experiencing.
Involuntary churn, on the other hand, happens when your clients unintentionally lose access to your service for various reasons, such as losing their credit card, having it stolen, maxing out their limit, or not updating their subscription billing information.
You can decrease involuntary churn by:
- Sending pre-dunning emails or in-app notifications that let the customers know when a subscription is about to expire.
- Include card/account updaters like Stripe that automatically update the cards in your system.
- For potential first try fails, set up backup payment methods for each customer to immediately fall back on in case the first payment fails.
- Consider an annual billing cycle to reduce chargebacks and churns altogether, and boost your ARR.
If you’re a SaaS business struggling to identify what metrics can best help you measure your business’ growth, head on over to our guide on 11 Important SaaS Metrics to Track in 2022.
Revenue Growth FAQ
#1. Why is Revenue Growth Important?
The purpose of a business is to make a profit. And the main driver of profit is revenue. The more you grow your revenue the more likely you are to grow profits. Consequently, the bigger the profits, the more opportunities you have to take advantage of the benefits and rewards of running a business.
Additionally, revenue growth is crucial as it provides valuation. To secure funds, sell your business, buy another business, take out a bank loan, or make your company public, you need to prove that what you’re selling can generate revenue. Hence, revenue growth – and especially steady and significant rates of revenue growth – are important elements in establishing a valuation for your business.
#2. What is a Good Revenue Growth Rate?
Generally speaking, a good revenue growth rate exceeds the overall growth rate of the economy. For instance, if a country’s economy falls within 2% to 4%, your company has a good revenue growth rate if it is growing at 5% or more.
This isn’t the only factor, however, as a good revenue growth rate is not always tied to economic conditions. Many companies in highly competitive industries, for instance, often grow over 100% in revenue during their startup phase.
#3. What is Revenue Growth Management?
Revenue growth management is a strategic analytics discipline that seeks to continuously maximize a business’ revenue stream. This discipline requires real-time insights that businesses can utilize to identify a problem or opportunity, address it and immediately measure its impact.
#4: What Are the Main Revenue Growth Strategies?
We typically divide revenue growth strategies into two broad categories: organic growth and inorganic growth.
A business implementing organic growth seeks to maximize its revenue growth by expanding its capacity. Growing organically is generally a slow-paced process, however, it is the safest way for a company to achieve sustainable growth. Examples include product promotions, increased brand awareness, new market entrances, innovative features, seasonal discounts, a gradual rise in prices, and more.
Contrarily, inorganic growth involves acquiring or merging with other businesses (M&A) as a method of generating more revenue. This strategy is a much faster way to achieve growth – after engaging in M&A businesses often double, or triple their client list, and gain an immediate increase in market share. Unfortunately, though, funding a merger or acquisition comes at a very high upfront cost, and brings many integration risks, management challenges, and corporate culture clashes.