WHAT IS MONTH OVER MONTH GROWTH RATE?

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Month-over-Month (MoM) is the lowest unit of measurement used to objectively reflect the pace of growth in a firm. This statistic scales up to Quarter on Quarter and Year on Year growth tracking to give us an understanding of rates of increase across varying time intervals. It’s most typically utilized by early-stage organizations, such as San Francisco startup entrepreneurs, for predictions.

The basic MoM formula is applicable to anything from users to customers to revenue. Having a hold on our growth statistics is a task that should be implemented across all departments in our company, not simply the product and finance teams.

It’s worth noting that MoM data are rather detailed, and they should be utilized to ladder up to Quarterly and Annual growth metrics for a more high-level view. 

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IMPORTANCE OF MONTH OVER MONTH GROWTH RATE

  • Illuminates the ROI achieved by our sales and marketing team.
  • Calculates the entire value our organization receives from each client in relation to the cost invested to acquire that new customer.
  • Assists us in finding the middle ground by keeping this ratio within a reasonable range, neither too high nor too low.

WHAT METRICS COMPLIMENT MONTH OVER MONTH GROWTH RATE?

Tech firms, particularly those with recurring income, such as SaaS, have their own set of KPIs that supplement MoM numbers. For good reason, the following are generally the ones who receive the most attention:

  • ARR and MRR (Monthly and Annually Recurring Revenue)

How much money will we generate from our present customer base in the coming year? This might be computed monthly, quarterly, or annually.

  • Churn

How many clients are canceling their subscriptions?

  • LTV (LifeTime Value)

How much money will a single client produce before canceling their subscription?

  • CAC is an abbreviation for the acronym (Customer Acquisition Cost)

How much does it cost to bring on a single new customer?

  • TROI (Time to Return on Investment)

How long will it take for us to see a return on our marketing investment?

Outside of the SaaS model, some overlapping metrics rely on or supplement MoM growth calculations for any type of company seeking venture capital or angel investment.

These are some examples:

  • MRR (Monthly / Annually Recurring Revenue) laddering up to ARR (Annually Recurring Revenue)
  • churn (Rate of Customer Loss)
  • CAC (Customer Acquisition Cost) month-over-month increase may also be used to assess team expansion and staffing, for example, by businesses attempting to determine whether their staffing matches their ticket or customer growth. Companies frequently use staff augmentation or other scaled recruiting strategies in response to abrupt changes in the month-over-month growth rate.

Again, following these indicators will help us to iterate on our exponential business solutions and correct issue areas that are impacting growth and make more reliable projections even if your company is not reliant on or seeking outside money.

Exploratory Research Guide

Conducting exploratory research seems tricky but an effective guide can help.

HOW TO CALCULATE MONTH OVER MONTH GROWTH RATE?

Fortunately, there are plug-and-play formulas for MoM computations, so we don’t have to continually call our management accountant for assistance.

The formula version for obtaining a percentage output for month-specific data is as follows:

(Month 2 – Month 1) / Month 1 * 100 = % growth (or decrease).

If we choose a more simplistic approach, we may do it like this:

x = (y – z) / (y – z) * 100

All we need to do is enter our monthly data into the appropriate variable in the calculation, and we’re done.

HOW TO CALCULATE MONTH OVER MONTH GROWTH RATES FOR MULTIPLE MONTHS?

When working with numerous months of data, we’ll need to “flatten” it to get an overall Month-over-Month growth rate.

CMGR, or compounded monthly growth rate, is the most commonly used statistic in this context. Basically, we’ll need to compare our starting and finishing month data and figure out what percentage monthly rise would cause the starting figure to expand to the ending figure.

It’s worth noting that this can be deceptive because we’re disregarding fluctuation in monthly growth rates and “flattening” it to a single compounded figure each month.

This is beneficial if we are seeing compounding growth (like a retirement account, which increases faster when we have more money).

It’s useless if we’re just witnessing linear progress (like our income, which stays the same amount each month regardless of how much we have stocked up). If our growth curve is linear, this is a misleading figure and should not be used for projecting future growth. 

COMPOUND MONTHLY GROWTH RATE FORMULA

CMGR reflects our growth rate over a certain time period, assuming that growth occurs at a steady pace every month throughout that time period. Assume that your active users increased in the following manner:

Month

January 2018

February 2018

March 2018

April 2018

May 2018

June 2018

Active Users

100

110

150

190

201

248

 

To determine your CMGR, enter the following numbers into the following formula:

For example, here:

Even though it changes from month to month, CMGR averages 20% for the whole time. For example, the MoM growth rate from January to February is just 10%, but it increases to 36% from February to March. With CMGR, we assume that from January to June, we will increase at a steady monthly pace. In our case, this entails the following:

Let’s go on to the next phase. We calculated the CMGR for a historical time period above. Assume we want to build a five-year business plan and forecast how our company will appear in five years. We’ll have 500,000 active users by December 2022.

TRACKING SHORT TERM GROWTH CAN SET UP FOR LONG TERM SUCCESS

When used to properly estimate present performance as well as measure and forecast success, month-over-month growth is the gift that keeps on giving. It conveys the sense that we know what we’re doing and are devoted to our company’s long-term success.

  • Earn the trust of investors

Most likely, this isn’t our investors’ first rodeo. Investors and startups often have long-term relationships, so be honest and accountable. This is true for growth data: If we misrepresent your MoM, even if it is unintentional, it might ruin our image in the eyes of some of our most essential stakeholders.

Regardless of the nature of our growth statistics, how we show it is a chance to gain the respect of investors. Even if our growth data isn’t rocketing at a 35 percent MoM pace, we may amaze investors by delving into why that is and giving practical insights to remedy the issue.

  • Keep our long-term goals in mind

Month-over-month growth gives only a snapshot of what’s going on with growth by comparing what happened this month to last. However, it does not reveal the entire tale. Remember to zoom out every now and then to connect monthly patterns to our company’s KPIs and long-term strategy. This can assist us in being goal-oriented by determining whether we’re on track to reach broader goals such as YoY benchmarks, as well as quarterly or yearly KPIs. 

  • Don’t presume success straight away

While flat or declining growth rates may appear discouraging, keep in mind that there is value in all of our data—even if it isn’t the data we want to see. Even for unicorns, exponential growth does not occur overnight, and particularly not on its own. To seek success aggressively, adopt the principle of being brutally honest with ourself, and pay attention to what our development rates are telling us. That will almost certainly assist us in identifying fresh areas to improve.

  • Quality output starts with quality input

“Create a better forecast by focusing on inputs, not outputs.”

—Andrew Chen, General Partner at Andreessen Horowitz

The quality of our output is only as excellent as the quality of our intake. Rather of concentrating all of our efforts on the figures we want to see at the end, make a commitment to getting the initial procedures correct.

When we’re continually sorting through low-quality data, it becomes far more difficult to effectively evaluate critical indicators like MoM. Before we delve too far into the weeds of doing any analysis, we’ll need to first build a solid data system—our minimal viable instrumentation (MVI). This will assist us in determining the exact data procedures we should employ in order to achieve our business and analytics objectives.

Begin by defining two terms:

  • Important phrases like “daily active users”
  • Our precise business objectives

COMMON MISTAKES MADE WITH MONTH OVER MONTH GROWTH RATE

  1. Absolute tiny numbers represented by growth

It is quite simple to demonstrate impressive growth stats with tiny numbers. Any change will be significantly more dramatic if it is based on a tiny absolute foundation.

It may be tempting to leverage MoM growth in the early stages of our firm, but try to avoid doing so. It is preferable to be realistic and provide absolute numbers. Instead of displaying a 20% increase on 100 users, show this as 20 new users in a month.

Once our company reaches a certain size, it will be difficult to sustain those first artificially high growth rates, and who wants to indicate that their growth rates are steadily decreasing?

If we have received or are attempting to get investment from venture capital or angel investors, it is a better strategy to only introduce growth figures once we have scaled past a certain size.

Until then stick to absolute figures so that we don’t set ourself up for a downward growth graph and some unnecessary explaining.

  1. Inconsistent growth rates

So, we know that compound growth rates flatten our monthly increase over a certain time period into a fixed percentage. If our monthly growth rates fluctuate a lot, we might want to express our compound growth rate as a range to be more accurate when reporting to investors or our board.

  1. Using compound growth rates to describe declining linear growth rates

The compound growth rate for the months in the table below is 12%. That is a deceptive statement because the growth rate is lowering on a monthly basis. It decreased from 20% to 17%, then to 14% and finally to 12%. Don’t make the mistake of inflating your growth stats, even if it’s unintentional. It constantly makes an appearance in the end. 

Jan 2022

Feb 2022

Mar 2022

Apr 2022

May 2022

5,000

6,000

7,000

8,000

9,000

0

+20%

+16.67%

+14.29%

+12.5%

Adding 1,000 per month is a linear growth, meaning that the percentage increase Month over Month is decreasing in each period.

If we notice that our growth is decreasing in a linear fashion rather than exponentially, use this information to investigate why this is happening and to devise a better growth model.

  1. Vanity Metrics

Don’t bother with vanity metrics that aren’t important to our investors, accounting staff, or board of directors. Depending on our company strategy, we will have many key performance indicators (KPIs) that are directly tied to revenue and growth. Maintain our focus on the measures that are important.

Growth numbers for measures like traffic or bounce rates may be relevant at the top of the funnel or at the campaign level, but they have no direct influence on our business’s performance. The following are some metric blunders to avoid:

  • To demonstrate a larger number, we are focusing on page views rather than active users
  • Reporting on newsletter subscribers rather than subscribers
  • Showing growth of total users instead of active users
  1. CMGR is used to calculate the month-over-month growth rate

Unfortunately, this one does not work backwards. So, we know that we can include MoM data into our CMGR formula, which shows the growth that has occurred over a specific time period and flattens the oscillations between months.

However, if we try to go backward to deduce the growth difference of a certain month or months based on our CMGR, chances are we’ll get a huge discrepancy between what we get and what the original individual MoM was.

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