metricaas

Growth and efficiency

How fast the SaaS grows and how much capital that growth consumes.

4 terms

Illustration of a growth rate: a revenue curve rising between two periods, with the percentage change highlighted.

Growth rate

Growth rate measures how fast a SaaS revenue (or customer base) moves between two periods, expressed as a percentage. It can be monthly (MoM), yearly (YoY) or quarterly, and the formula is always the change divided by the starting value. The YoY view smooths seasonality, while compound MoM reveals whether the business is accelerating or slowing down.

Illustration of the compound annual growth rate: a smooth curve rising from a starting value to an ending value over several years.

CAGR

CAGR (Compound Annual Growth Rate) is the compounded annual growth rate: the constant average rate that, applied year after year on a compound basis, takes a value from its starting point to its ending point over N years. The formula is (ending value ÷ starting value) to the power of (1/N), minus 1. It condenses several years of uneven growth into a single, comparable annual rate.

Illustration of the Rule of 40: a scale balancing revenue growth on one side and profit margin on the other, adding up to 40%.

Rule of 40

The Rule of 40 is a health check for SaaS companies that adds the revenue growth rate to the profit margin: the result should be 40% or higher. It balances two goals that usually compete, growing fast and turning a profit, into a single number. Above 40 the business combines growth and profitability sustainably; below it, a warning light comes on.

Illustration of the SaaS quick ratio: recurring revenue gained on one side and lost on the other, weighed on a growth-efficiency scale.

SaaS quick ratio

The SaaS quick ratio is a growth-efficiency measure: it divides recurring revenue gained (new plus expansion) by recurring revenue lost (churn plus contraction) over the same period. A result above 4 signals efficient, healthy growth; near 1, the company gains about as much as it loses. Despite the name, it has nothing to do with the accounting quick ratio of liquidity.