mom-growth-rates

3 Mistakes with Month-Over-Month Growth Rates That You Should Avoid

Your active users probably aren’t growing exponentially. That’s okay. What’s not okay is deluding yourself with the illusion of month-over-month, exponential growth.

When you fudge your growth models, you’re not just deluding yourself and your team. You’re not just giving potential investors the signal that you don’t know what you’re doing.

You’re setting yourself back in the search for a real, repeatable engine of exponential growth.

What is Month-Over-Month Growth?

Month-over-month (MoM) growth shows the change in the value of a specific metric as a percentage of the previous month’s value.

For example, if last month you had 100 active users and this month you have 120, your month-over-month growth in active users is 20%. That’s because the increase, 20 new active users, is 20% of the 100 active users you had the previous month.

Here’s how you calculate it:

Month-over-month growth = (This month - Last month) / (Last month)

To calculate your week-over-week growth or your year-over-year growth, you use the same formula. Just replace “this month” and “last month” with “this week” and “last week” or “this year” and “last year.”

Say instead of calculating your growth rate for one month, you want to calculate your MoM growth rate over six months. That’s when you want to calculate your compound monthly growth rate (CMGR).

Your CMGR describes your growth rate over a given time period assuming that your growth happens at a constant rate every month in that time period.

Imagine that your active users were growing as follows:

January 2016 February 2016 March 2016 April 2016 May 2016 June 2016
Active Users 100 110 150 190 201 248

Here’s how you would calculate your CMGR.

CMGR = ((Last month / First month)^(1/number of months difference)) - 1

For example, here:

CMGR = ((248 / 100)^(1/5)) - 1 = 0.2 (or 20%)

Notice that your CMGR is 20% over the entire period, even though it varies from month to month. For example, the MoM growth rate from January to February is only 10% and then it jumps to 36% from February to March.

With CMGR, you’re assuming that from January to June, you’re growing at a consistent growth rate each month. In our example, that means the following:

June = January x (1 + CMGR)^5 = 100 x (1 + 0.2)^5 = 248

Now, let’s take the next step. Above, you’ve been calculating the CMGR over a historical period of time. Let’s say that you want to create a five-year business plan and project forward to what our business looks like in June 2021. By December 2020, you’ll have crossed 500,000 active users.

December 2019 = June 2016 x (1 + CMGR)^42 = 248 x (1 + 0.2)^42 = 524,884

And that’s how you get your app to half a million active users using only a few cells in Excel.

3 Common Mistakes with MoM Growth that You Should Avoid

The fudging isn’t usually that egregious.

But it’s very easy, in the early stages especially, to make careless mistakes when you’re modeling your growth. Uncorrected, those small mistakes can snowball into existential problems.

Here are three of the most common errors people make when looking at their growth data.

1. Small absolute numbers modeled as MoM growth:

Huge MoM growth is much easier to achieve with smaller numbers. That means that it’s both easier to construct a narrative around your MoM growth for small numbers, and harder to maintain that rate as your business grows.

January 2016 February 2016 March 2016 April 2016 May 2016 June 2016
Active Users 100 120 144 173 207 249

In this example, you’re seeing 20% growth every month from January 2016 to June 2016. But in absolute numbers, you’re only talking about growth from 100 active users to 249 active users.

You can get from 100 to 120 monthly active users with a single press mention. To get the same 20% increase, but from 1,000,000 to 1,200,000 active users in a month, you need a powerful growth engine.

Key Takeaway: You’ll sound clueless at best and disingenuous at worst if you talk about your growth rate with respect to small absolute numbers. It makes more sense to talk about engagement metrics, stickiness and their behavior in the app rather than growth. Those are the underlying mechanics that inform whether growth will continue for the long-term.

2. Inconsistent growth modeled as MoM growth

Growth can be unpredictable. One month you can double and then next month you can stay totally flat. If that’s happening, it’s a huge mistake to flatten out your fluctuating growth by modeling it as a consistent CMGR.

January 2016 February 2016 March 2016 April 2016 May 2016 June 2016
Active Users 10,000 11,000 20,000 20,500 21,000 24,900
Growth Rate 10% 82% 2% 2% 19%

Here you have a 20% CMGR, but you’re only in the vicinity of 20% once, from May to June. Otherwise, you’re fluctuating wildly between 2% growth and 82% growth.

The upshot is that you don’t know what your growth rate will be next month, much less have 20% consistent MoM growth. Fundamentally, you haven’t built a consistent growth engine for your app, and it’s likely that you don’t know the difference between months with growth and months without growth.

Key Takeaway: If your growth is inconsistent, it’s more accurate to give your growth as a range than as a single CMGR number. That prevents you from deluding yourself, your team and outsiders into believing that you’ve figured out your growth engine.

3. Linear growth modeled as MoM growth

Your business is growing and it’s growing consistently. That’s amazing. Just don’t mistake linear growth for exponential growth.

January 2016 February 2016 March 2016 April 2016 May 2016 June 2016
Active Users 10,000 12,000 14,000 16,000 18,000 20,000
Growth Rate 20% 17% 14% 13% 11%

You’ve doubled from 10,000 to 20,000 users in six months, which means a 15% MoM growth rate. Look closer and an issue pops out: your growth rate appears to be decelerating.

Decelerating growth as your numbers get bigger is a signal that your growth isn’t exponential, it’s probably more linear. Here, it’s more accurate to say that we’re adding 2,000 active users per month than it is to say that we’re growing 15% MoM.

Key Takeaway: Not all growth is made equal. If your growth is happening linearly, embrace it and describe it accurately by referring to its monthly growth in the absolute number of users. Then look for a way to unlock nonlinear growth.

Incorrect Modeling Will Scare Away Investors and Demoralize Your Team

Using MoM growth rates in the wrong way can be hugely damaging for your business. Typically, you’re modeling growth in two contexts:

  1. Externally for investors: You want to make your growth look as appealing as possible.
  2. Internally for company planning: You want to set ambitious targets to challenge and inspire your team.

You’re incentivized to model growth exponentially. The problem is that if your underlying business is not actually growing exponentially, then any projections based on exponential growth will be wildly inaccurate.

With investors, you hurt your credibility when you make one of the three mistakes outlined above. You may fool some investors some of the time, but you’ll never fool the type of investor that you actually want on your side.

Instead of misrepresenting your growth rate, give an accurate depiction of your growth at the stage your company’s at. Let that spark an honest and authentic conversation with potential investors about what is most exciting about your app—whether it’s engagement, tech, vision or something else—rather than forcing an awkward and insincere conversation about how fast your app is growing.

That’s how you’ll establish rapport, build on your strengths, and bring on the right kind of investor.

For internal planning, incorrectly modeling growth as exponential “makes short-term goals too easy and longer-term goals too hard” according to venture capitalist Christoph Janz at Point Nine Capital. 6% growth from where you are now looks easy and doing it once isn’t that difficult. Doing that every month for three years means that you’ll 8x your business. Without a reliable growth engine, that’s nearly impossible to hit.

Having your growth targets get progressively farther and farther away can be hugely damaging on morale. You’ve set the expectation of exponential growth and anything less becomes a failure. Worst of all, making a mistake here can lead to incorrect budgeting which can result in your company running out of cash much sooner than expected.

Instead of doing this, base your internal projections on a quantitative model of growth that makes growth a function of your marketing, product and sales initiatives. As Andrew Chen of the Uber growth team puts it, “rather than assuming a growth rate, the focus should be deriving the growth rate” from what you’re doing to acquire and retain users.

Give Your Growth a Long, Hard Look in the Mirror

Being brutally honest with yourself as a mobile entrepreneur is one of the most important things you can do.

As Y Combinator president Sam Altman put it, “You really need to use metrics to keep yourself honest . . . [L]ook at growth and active users, activity levels, cohort retention, revenue, NPS . . . [a]nd then be brutally honest if they’re not going in the right direction.”

Fudging your growth rates are little white lies that can add up to create a massive rift between how you model the business and what reality is. That’s why you need to give your growth a brutally honest look and decide whether it can be modeled as MoM growth at all.

If not, don’t despair. By deciding to accurately model your growth, you’ve just taken the first, hard step in figuring out how you will drive exponential growth for your product.