Revenue growth is a good indicator that your SaaS business is doing well, but not all revenue growth is equally sustainable, and it's important to understand what drives growth. There are fundamentally only three ways to grow revenue:
Customers paying more per month (good): Growth driven by price increases/conversions to higher priced SKU’s. Continued growth requires you to continue to increase pricing/conversions.
More customers subscribing (better): Growth driven by increased customer acquisition. Continued growth requires you to identify and scale acquisition avenues.
Customers subscribe more months (best): Growth driven by increased retention. This indicates better product market fit, which will likely continue to drive growth without further action.
Breaking revenue growth into the three drivers of monetization can provide an early warning system of slow down in growth, as illustrated below:
At first glance, our business looks healthy, with 30% overall revenue growth. However, the revenue breakdown reveals the following:
Growth this year was driven by an increase in revenue/month/user (e.g., price increase) and a growth in customers up for renewal (e.g., previous spike in acquisition)
New user acquisition dollars grew slower (10%) than the recurring user base growth (25%), and the recurring customers are subscribing fewer months, indicating deteriorating product market fit.
If we play this movie forward, we should expect to see much lower growth the following year.
In summary, not all revenue growth is created equal, and understanding the source of growth can help you provide an early warning system for your SaaS business.