How to calculate market growth

Zeelee Blog

How to calculate market growth

Posted 04 October 2020

While most in growth marketing roles will have access to a data team or at least an analyst they canutilise, we've been surprised how many candidates at an early stage in their careers are unsure how to quantify and calculate market growth.

The basic calculation for growth rate is straightforward. Deduct your current revenue from last month’s revenue and then divide by last month’s revenue. Using this calculation, the growth rate is the change in percentage terms in revenue from one month to the next.

While a simple growth rate like this can provide a useful snapshot, it doesn’t offer the kind of detail that can tell a more complete story. For instance, many things may have changed in the latest month. What if you lost or gained customers during the previous month?

One way to smooth out your growth rate to provide a more realistic snapshot is to subtract your ‘churn’ rate from the simple growth rate formula. To calculate the churn rate, simply divide the number of customers lost during the previous month by the total number of customers you had at the beginning of that month. This will provide a more accurate picture of growth.

Compound considerations

Thinking about growth from one month to the next may be natural, but it can be more effective to consider growth over a longer term, and this is where compound growth comes in. Let’s say a company is increasing revenue by the same amount each month. This will effectively mean a slowing in the rate of growth in the long term because that amount of revenue will become a smaller and smaller percentage of the company’s overall revenue over time.

So in order to have a consistent growth rate, rather than simply a consistent revenue rate, your company needs to be increasing revenue each month in order. This hidden trap can sometimes catch out companies who set long term growth rate plans, so it is important to remember that the farther your predictions go into the future, the harder that growth rate will be to maintain.

Seasonal growth

In many businesses, growth doesn’t take place evenly around the year. In businesses where there is a clear seasonal pattern, it is necessary to calculate growth in a different way. Instead of taking a month by month figure, which will show peaks and troughs, according to the season, in a seasonally affected business, it makes sense to compare a month with the same month in the previous year, giving a clearer and more consistent picture of growth.

Projecting growth

After calculating growth, the next step is naturally to aim to project that figure into the future. The more accurately you can do this, the better you are able to allocate resources and to make plans. There are many ways to do this, including with slightly more complicated techniques such as Linear Regression or Double Exponential Smoothing, but if, as with most businesses, your organisation shows a cyclical pattern of revenue and activity through the week, you can develop a more accurate and precise picture of growth by treating each day separately.

Calculating your company’s growth rate is an important aspect of growth marketing leadership and business success in general and time spent learning to do this effectively can prove invaluable in the long term.

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