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Read TL;DR
- The compound monthly growth rate (CMGR) measures the average month-over-month growth while accounting for compounding. It’s a reliable metric for tracking consistent growth over time and smoothing out short-term fluctuations.Â
- While an important metric for SaaS companies to track, CMGR has a number of limitations, which makes it important to consider alongside other growth metrics for a more complete picture of growth.Â
- SaaS companies use CMGR to track a variety of performance metrics, such as revenue growth, user growth, and marketing performance. Whether you are assessing a funding strategy or tracking MRR, understanding CMGR is essential for long-term business success.
Compound monthly growth rate (CMGR) is a vital metric for your SaaS founders and CXOs leaders as it provides a clear and consistent picture of the business’ growth momentum. By providing actionable insights into month-on-month growth trends, CMGR helps business leaders evaluate their growth strategies and operational efficiency, spot performance trends, and develop better assumptions for revenue forecasting.
CMGR measures average month-over-month growth over a specific time frame. It gives an accurate picture of growth as it factors in compounding. It's commonly used to track key metrics and statistics like monthly recurring revenue (MRR), user sign-ups, active users, or other growth data critical to SaaS businesses.
In this article, you’ll learn more about the importance of CMGR in comparison with other growth metrics for SaaS businesses, how to calculate it, and its impact on SaaS growth strategies.Â
Table of Contents
What is CMGR and why is it important for SaaS businesses?
Compound monthly growth rate is an important metric for financial analysis because it measures the growth rate of your SaaS business over time. It’s typically expressed as a percentage and is based on the assumption that growth compounds each month.Â
Compounding is a powerful concept in finance and investing, wherein each month’s growth in revenue, profits, user base, etc., builds upon the previous month’s growth. It also aids in and improves forecast accuracy by smoothing out the short-term fluctuations each month and considering historical data.
CMGR tracks and shows the average growth rate you can expect for your business per month based on the data of a specified period, typically 6-18 months. For example, tracking Canva’s free-to-paid conversion rates with CMGR can reveal insights into how effectively the company is converting free users to paying customers over time. It also allows comparison between different time periods to see if there are any improvements or declines in growth rates.
A high CMGR tells investors your SaaS company has strong growth potential and consistent performance.Â
Limitations of CMGR
While CMGR provides valuable growth insights, it has does have certain limitations, based on:
- Historical performance: CMGR relies on historical growth trends, which makes the metric less reliable in dynamic or volatile markets. It does not account for current market conditions or unpredictable future events that may influence business performance.
- External factors and other risks: CMGR is purely a growth metric and does not consider the risk of potential uncertainties or external factors on business performance, such as market shifts, competition, economic conditions, or regulatory changes that impact business performance. Solely relying on CMGR to track business performance can have a negative long-term impact.
- Timeframe: A high CMGR over a short period may look promising, but it does not necessarily indicate long-term sustainability. Factors influencing growth may change over time, making short-term data potentially misleading for longer projections. Â
- Assumptions regarding growth: The CMGR calculation assumes that growth compounds steadily over time and oversimplifies complex growth patterns to fit a consistent compounding model. It overlooks fluctuations and irregularities in business performance.
Learn more about SaaS metrics here
How to calculate CMGR for your SaaS business?
The following formula is used to calculate CMGR:
General steps in the CMGR calculation:
- Determining initial and final values: Start by identifying the metric you want to use as the basis of calculating growth (e.g., revenue, active users, or MRR) and its time period. Then, find the initial and ending value of the same metric for the specific period.
- Determining the number of months: Next, calculate the total number of months within the selected time period.
- Perform the calculation: Enter the values in the CMGR formula as shown above.
Let’s look at the following example to understand CMGR calculation.
Company ABC earned $2M in revenue in January 2023 and $3M in revenue in July 2023 and wants to calculate the CMGR of the revenue.
Applying the CMGR calculation and formula:
Now, let’s walk through our example, step-by-step:Â
- Divide the revenue for the final month by the revenue for the initial month. Here, divide $3M by $2M. The result is 1.5.
- Calculate the number of months in the dataset, excluding the base month. Although the period spans 7 months (January to July), January serves as the base month, leaving 6 months in the dataset. So, divide 1 by 6, which equals 0.17.
- Raise the result you got from Step 1 to the power of the value calculated in Step 2. Using the values, calculate 1.5^0.17, which equals approximately 1.07.
- Subtract 1 from the result obtained in Step 3. In this case, 1.07 - 1 = 0.07.
- To convert the result from Step 4 into a percentage, multiply it with 100 and add a percentage sign. The CMGR of your SaaS revenue is, therefore, 7% (or 6.99% to be precise).
CMGR vs. other growth metrics
Given the limitations associated with the CMGR metric, it’s better to use it in combination with other growth metrics. Understanding how CMGR compares with other growth metrics will help you choose the right metrics to use in your financial analysis.
CMGR vs. CAGR
The compound annual growth rate (CAGR) calculates the average annual growth and provides a broader perspective on long-term growth and performance. Even though both metrics account for compounding, CMGR provides a more granular view of business performance as it tracks growth month-over-month.
You can calculate CAGR using the following formula:
CMGR vs. month-over-month growth
Month-over-month (MOM) growth rate tracks the percentage change in performance parameters in a month compared to the previous month. Unlike CMGR, MOM growth focuses on short-term growth and highlights potential areas for improvement. It does not account for compounding or adjust short-term performance fluctuations.
You can calculate MOM growth using the following formula:Â
CMGR vs. year-over-year growth
Year-over-year (YOY) growth measures the change in performance parameters from one year to another. It provides a longer-term view of growth compared to CMGR and also identifies seasonal patterns by evaluating data for consecutive years. Unlike CMGR, it provides a broader view on business performance in the long term but may miss short-term or monthly growth trends.
You can calculate YOY growth using the following formula:
CMGR vs. ARR growth
Annual recurring revenue (ARR) growth measures the change in recurring revenue from one year to another and is especially important for subscription-based SaaS business models. It considers only the recurring revenue component (and does not factor in non-recurring or one-time revenue streams) and focuses on long-term revenue predictability and sustainable business growth.
CMGR, on the other hand, tracks and measures the compounded monthly growth rate for various components, such as revenue, profit, or user base.Â
You can calculate ARR growth using the following formula:
How does CMGR influence startup and SaaS growth?
CMGR is a valuable metric for SaaS business leaders and investors to analyze growth patterns and make more strategic decisions by:
- Enabling investment analysis: CMGR aids long-term planning by providing insights into future returns based on current trends. Investors use this metric to compare the performance of different SaaS companies, identify businesses with consistent or accelerating growth rates, and allocate funds accordingly.
- Tracking startup growth: Early-stage startups use this metric to track and showcase their current growth trajectory and potential for exponential growth to investors and other stakeholders.
- Analyzing growth trends: SaaS companies use CMGR to track important growth KPIs, such as user acquisition and growth, revenue, and number of subscriptions, and evaluate business performance as well as identify scaling opportunities.
- Assessing SaaS marketing campaigns: CMGR is also useful for measuring marketing effectiveness and identifying high-impact initiatives. By tracking sign-ups, customer engagement, and conversion rates, leaders can refine existing campaigns and maximize results.Â
- Analyzing user base growth: Companies looking to scale in new regions or expand their product need to understand the growth and evolution of their user base. CMGR helps identify patterns in growth, allowing you to predict adoption rates and make smarter business decisions around expansion.
- Predicting annual return: Since CMGR measures a company’s average growth rate, business leaders can calculate the compounded growth over a defined timeline and extrapolate those insights to forecast annual returns. This also ensures more accurate assumptions and forecasts for your annual budget and financial plan.
- Tracking growth in expenses: Monitoring the CMGR for expenses helps companies assess whether expenses are growing sustainably or outpacing revenue. These insights help improve financial management by optimizing resource allocation and making operational adjustments.
How Drivetrain helps SaaS companies track and manage their CMGR
CMGR is a valuable metric that tracks your business’ monthly average growth rate to evaluate performance and generate granular insights around revenue and user growth, among other indicators, enabling businesses to make operational decisions and forecast future returns.
Since the CMGR plays a critical role in financial analysis, it is important to ensure that the data used for the calculation is accurate and the calculation itself is correct. Financial planning and analysis software like Drivetrain does both.Â
Drivetrain is a robust SaaS financial planning software with a comprehensive suite of FP&A features, enabling finance teams to seamlessly consolidate and analyze the relevant data and generate insights for more informed decision-making for business success.Â
Drivetrain allows you to easily track and monitor your CMGR metrics and optimize your growth strategies with:Â
- Seamless integrations with all the different business systems and apps to consolidate the data you need into a single source of truth.
- The ability to slice and dice that data and track business performance across different parameters in real time.
- The ability to track and analyze historical data to provide a consistent view of your long-term business performance in accordance with your strategic growth objectivesÂ
- Custom financial analysis reporting capabilities so you can easily show CMGR trends for revenue, user growth, or any other growth metric.Â
- Dynamic dashboards for presenting complex data through easy-to-understand charts and graphs that you can directly interact with. Â
- The ability to generate more accurate assumptions for budget and financial forecasts and set realistic benchmarks for growth based on historical data and current market conditions.
Simplify CMGR tracking with Drivetrain and transform your SaaS growth strategy.
FAQs
A key SaaS metric, compound monthly growth rate (CMGR) measures your company’s growth (e.g., revenue, users, profitability, etc.) over time but on a month-to-month basis and is presented as a percentage.
CMGR is important for SaaS companies as it measures the growth rate of monthly recurring revenue (MRR) over time and provides data-backed insights to support financial forecasting and resource allocation and fuels investor interest.
While CAGR tracks the average yearly growth rate of your business over a specific period and provides a broader view of performance, CMGR considers the average monthly growth rate and shares a more granular view of short-term business growth.
