Trying to estimate how much revenue your SaaS company will generate over the next year? You should consider using the revenue run rate formula.
If you want to learn more about what an annual revenue run rate is and why it matters to SaaS founders and investors, you've come to the right place.
Let's dive straight into the basics.
This is a financial forecasting method used to create revenue projections. It enables you to predict the financial performance of your SaaS based on past earnings data.
Calculating your SaaS company's run rate is remarkably easy. However, the simplicity of this formula does come with some downsides.
When you estimate your run rate, you fail to account for variables such as customer churn and expansion revenue.
With this in mind, you should remember that this financial forecasting method has the potential to produce widely inaccurate estimations.
Despite this shortcoming, the revenue run rate formula is still an immensely valuable tool for SaaS entrepreneurs and investors.
To calculate the annual revenue run rate, you must take your revenue over a certain period and multiply it by 12 to find your annual revenue run rate.
Here is the revenue run rate formula:
Annual Revenue Run Rate = Revenue In Period x Number Of Periods In The Year
Now that you understand the basics, let's take a closer look at some of the reasons why revenue run rate is important.
Calculating your company's annual revenue run rate is important for a few key reasons.
If your SaaS business has only been operating for a relatively short period of time, you can use the revenue run rate formula to create performance estimates. This will give you a better understanding of how your business may grow in the future.
Revenue run rate is a useful benchmark metric for SaaS companies that are constantly pivoting and running experiments. If you're trying to evaluate the success of a new add-on tool or the restructuring of a department, you could look at your revenue run rate to see whether your changes have been effective.
As we've said, the scope of this metric is limited. However, it can be a helpful tool when you're trying to get a snapshot view of how your business is doing. If your revenue run rate has suddenly declined, it could be a sign that recent changes have had a negative impact on your business.
The revenue run rate can also help you make strategic decisions about your company's future. For instance, if you're considering a new pricing model, the revenue run rate calculation can give you an idea of how that change may impact your business.
The revenue run rate is a valuable metric to keep in mind when you're forecasting your company's future. By understanding how to calculate your annual revenue run rate, you'll be able to make more informed decisions about the trajectory of your business.
Here is a clear example of run rate revenue:
If a SaaS company posted revenues of $10,000 in April, you would need to simply multiply this figure by 12 to reach the annual run rate.
Annual Revenue Run Rate = $10,000 x 12 = $120,000
The revenue run rate calculation is limited in a few ways.
It doesn't take into account the seasonality of a business. If your company's revenue fluctuates significantly from month to month, the revenue run rate is unlikely to offer an accurate picture of how things are actually going.
The revenue run rate calculation doesn't account for customer churn. If you lose customers at a faster rate than you're acquiring new ones, your revenue run rate will be overestimated.
The revenue run rate calculation is based on a company's historical data. If a business is growing rapidly, the revenue run rate calculation may not provide an accurate estimate of the company's future performance.
Despite these limitations, the revenue run rate calculation can still provide you with a useful snapshot view of your SaaS company's performance.
Seasonality can have a significant impact on a company's annual revenue run rate. If your company experiences a seasonal slowdown, the annual revenue run rate will be lower than if you averaged the company's revenue over the entire year.
One-time sales and expiring contracts can also impact a company's revenue run rate. If your company has a significant one-time sale, the annual revenue run rate calculation will be inaccurate. Similarly, if a large portion of your company's contracts are set to expire in a particular month, this could scramble your numbers.
The run rate formula is most useful when you have a relatively small amount of data to work with. This calculation can give you an idea of how your business may grow in the future. We would recommend that SaaS companies consider this metric alongside a wide range of other performance indicators.
Solely relying on your revenue run rate to indicate performance is risky. As we've outlined, there are several limitations to this calculation.
To ensure all your SaaS metrics are strong, you must have access to robust tools and solutions that are designed to reduce churn. This is where Raaft comes in - as an effective tool for reducing and combating SaaS user churn.
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Customer churn prevention is a process by which SaaS businesses can keep their customers from leaving to competitor companies.
With Raaft, you can collect feedback from customers who have used your product and offer them custom responses to keep them around longer. Improve your customer experience and lower churn.