You don’t have to do complicated gymnastics or pull in your favorite financial tools to figure out where your business is — in fact, you may be able to find a ton of useful information in a very simple spreadsheet. Tracking three basic metrics can help you determine whether or not your business is growing and help you spot problems if they arise.
Without access to your company’s financial reports, you can use these three tried-and-true revenue growth calculation methods that take into account what’s happening in your business.
What is Revenue Growth?
Revenue growth measures the sales or sales volume that a company generates over time, and we sometimes refer to it as the top line. Revenue growth is an important metric for businesses because it represents their ability to survive and scale. Growing businesses are more likely to attract investors, hire new employees, and deliver consistent profits.
Three Methods to Calculate Revenue Growth
Calculating revenue growth is one of the easiest ways to show your ROI. While percentage growth is a simple way to measure growth, incremental revenue shows the impact of specific products or services. The latter strategy helps you identify which products are driving the most sales and traffic.
1) Incremental Revenue
You can calculate revenue growth by using incremental revenue or percentage growth. Let’s say your business brought in $100,000 last year. If you sell $110,000 next year, your revenue is up 10 percent ($10,000 divided by $100,000). Incremental revenue takes things a step further by calculating how much of an increase was due to just one product or service sold.
2) Average Revenue Per User
Sometimes referred to as ARPU, average revenue per user is a measurement of how much money you bring in per customer. Calculate it by dividing your monthly recurring revenues (MRR) by your number of active users. For example, if you have 100 active users who make you $10,000 a month, your ARPU is $100. Remember that ARPU doesn’t include any discounts or bonus plans, so it’s just an easy way to compare companies with different pricing schemes.
3) LTV/CAC Ratio
LTV (Lifetime Value) / CAC (Customer Acquisition Cost), commonly used by startups, is a great way to determine how effective your company’s growth strategy is. To calculate, divide your revenue by how much you spent on acquiring new customers in a given period. This metric will tell you whether you’re spending too much on the acquisition and may be better off cutting marketing spend if it’s greater than $1 or $2 per customer.
Conversely, if it’s less than $1 or $2 per customer, then you know your marketing strategy must be good since it brings in more revenue than what you paid for each lead.
Following the three methods above should give you a good idea of calculating your business’s revenue growth. But if you’re ever curious about the health of your business and don’t want to revert to a 10th grader to find it, consider tracking your revenue growth rate by using quality content management systems (CMS) like SharpSpring and ParaForm.