Originally published on August 21, 2018
Exponential growth is one of the best indicators that you’re nailing product-market fit. It’s among the first trends that investors look for when deciding whether to fund a company. And it’s one of the hardest metric outcomes to achieve.
Sustained exponential growth is essentially the golden standard of growth marketing. You can’t fake exponential growth. Plus, even if you do, you really won’t get much for it because the truth will eventually come out, and that discrepancy can give potential investors the signal that you don’t know what you’re doing. Instead, it’s better to start from the beginning to build a repeatable engine for exponential growth from the ground up.
Related Reading: What Exponential Growth Really Looks Like (And How to Hit It)
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.
Month-over-month growth is often used to measure the growth rate of monthly revenue, active users, number of subscriptions, or other key metrics. If you’re working on a digital product, such as a mobile app, SaaS product, or website, you probably care about MoM active user growth—it’s the most common way to talk about your product or company’s traction and success.
Absolutes and MoM growth are not interchangeable; they speak to two very different cases. If you walk into a room and announce that you’re acquiring 500 monthly active users (MAU) a month—a linear growth trend—don’t expect to turn many heads and don’t be surprised if investor meetings are hard to pin down.
But if you waltz in and share that your compound monthly growth rate is 20%, now we’re talking! A 20% compound monthly increase is exponential. Even if you started with a modest 100 users in January 2018, a sustained 20% monthly growth rate puts you in the realm of over half a million users by December 2022. That is how you prove the potential value of your company, and that is the magic of month-over-month growth.
How to calculate your MoM growth rate
But we’re getting ahead of ourselves. Let’s rewind to start at the beginning. To calculate month-over-month growth for a single month, simply take the difference between this month’s total number of users and last month’s total number of users, and then divide that by last month’s total.
You can use the same formula to calculate your week-over-week growth or year-over-year growth. Say you want to calculate your MoM growth rate over six months instead of calculating your growth rate for one month. That’s when you want to calculate your compound monthly growth rate (CMGR).
Related reading: Who Are Your Active Users? Strategies for User Analysis
Compound monthly growth rate formula
Your CMGR describes your growth rate over a given period, assuming that your growth happens at a constant rate every month during that time. Imagine that your active users were growing as follows:
To calculate your CMGR, you’d plug the numbers above into the following formula:
For example, here:
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:
Now, let’s take the next step. Above, you’ve been calculating the CMGR over a historical time period. Let’s say that you want to create a five-year business plan and project forward to what your business will look like. By December 2022, you’ll have crossed 500,000 active users.
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
When building out your growth model, it’s surprisingly easy to make careless mistakes. While the most common pitfalls are small, they can quickly add up and snowball into existential problems that are much harder to fix down the line. Here are the top three errors people make in 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.
In this example, you’re seeing 20% growth every month from January 2018 to June 2018. But in absolute numbers, you’re only talking about growth from 100 active users to 249 active users.
The problem here is that this percentage growth doesn’t scale; you can get from 100 to 120 monthly active users with a single press mention. But to get the same 20% increase from 1,000,000 to 1,200,000 active users in a month, you need a powerful growth engine.
Key Takeaway: When you’re working with small absolute numbers, you can keep an eye on MoM but avoid talking about it until you have a higher, steadier volume of users. Until then, your better bet is to focus on the underlying mechanics that inform whether growth will continue for the long term by looking at engagement metrics, stickiness, and user behavior data.
2. Inconsistent growth modeled as MoM growth
Growth can be unpredictable. One month you can double your MAU and the next month you can stay totally flat. If that’s happening, it’s a mistake to flatten your fluctuating growth by modeling it as a consistent CMGR.
Let’s imagine here that you have a 20% CMGR, but you’re only in the vicinity of 20% during one period (from May to June). Outside of that, 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 consistent 20% MoM growth. While the growth rate is all over the place, the data is still telling you something: 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 discuss your growth as a range than as a single CMGR number. That prevents you from deluding yourself, your team, and any outsiders into believing that you’ve figured out your growth engine (fake it till you make it doesn’t apply when it comes to growth rates).
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.
Let’s say 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 stick to absolutes by saying that we’re adding 2,000 active users per month instead of saying that we’re growing 15% MoM.
Key Takeaway: Not all growth is 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, use those insights to identify opportunities to unlock nonlinear growth.
Related reading: Should You Adjust Your Core Metrics Over Time?
Tracking short-term growth can set you up for long-term success
Month-over-month growth is the gift that keeps on giving when you use it to accurately model current performance as well as benchmark and forecast success. It sends the message that you know what you’re doing and that you’re committed to the long-term future of your company.
Earn the respect of investors
Chances are, this isn’t your investors’ first rodeo. The relationship between investors and startups is typically long-term, so be sure to stay honest and accountable. This applies to growth data: If you misrepresent your MoM—even accidentally—you can tarnish how you look in the eyes of some of your most important stakeholders.
How you present your growth data is an opportunity to earn the respect of investors, regardless of what it is. Even if your growth data isn’t skyrocketing at a rate of 35% MoM, you can impress investors by digging into why that’s the case and proposing actionable insights to address the issue.
Keep sight of the long-term vision
Month-over-month provides just a snapshot of what’s going on with growth by looking into what happened this month compared to last. It does not, however, tell the full story. Remember to zoom out once in a while to tie monthly trends back to your company’s KPIs and long-term vision. This can help you stay goal-oriented by identifying whether you’re on track to meet larger goals such as YoY benchmarks, as well as quarterly or yearly KPIs.
Don’t assume success right off the bat
While flat or downward growth rates might seem disheartening, remember there’s value in all of your data—even when it’s not the data you want to see. Even for the unicorns out there, exponential growth doesn’t happen overnight, and certainly not on its own. To aggressively pursue success, embrace the practice of being brutally honest with yourself, and listen to what your growth rates are telling you. Chances are, that will help you find new opportunities to improve.
Quality output starts with quality input.
“Create a better forecast by focusing on inputs, not outputs.”
The quality of your output is only going to be as good as your input. Rather than focusing all of your energy on the numbers you want to see in the end, commit to getting the beginning processes right.
It gets much harder to accurately interpret important product metrics such as MoM when you’re constantly sifting through low-quality data. Before you get too far into the weeds of running any analyses, you’ll first need to create a robust data system—your minimum viable instrumentation (MVI). This will help you identify the specific data processes you should follow to reach your business and analytics goals.
Start by defining two things:
- Important terms such as daily active users
- Your specific business goals
Pinpoint which events you want to measure by carefully considering the paths along the customer journey that will steer your customers in the right direction for hitting these targets (such as conversion). These are the touch points you want to track. Remember, simple is better: Focus only on what matters for reaching your goals, and get rid of the rest.
Here are five key principles to follow to avoid a serious data-validation problem on your team:
- Avoid tracking everything. Noisy data is messy and almost impossible to keep track of. Instead, consistently track between 20 and 200 events.
- Stay organized. Your data should be exceptionally clean and easy to understand for any member of your team.
- Define the data from day one. Many variables = mass confusion. Consider creating some documentation to explain your data structure.
- Understand how user identification works within your analytics platform. You should also have a system in place that can recognize anonymous users by their device or other credentials to avoid false repeat “new user” entries. For example, Amplitude addresses this problem with the “amplitude_ID” identifier, which catches repeat users even if they’re anonymous.
- Autoformat variables such as numbers, dates, international characters, and geocoding values so they’re consistent and can be accurately analyzed.
Related Reading: The Foundation for Great Analytics is a Great Taxonomy
Your product is your baby, and you want to get it out to as many customers as possible. But you need to be patient with growth and resist the temptation to jump ahead. A false narrative of your month-over-month growth is more likely to hinder rather than help your long-term chances of success.
Even the best products need accurate growth models. So if you create an honest growth model and come out empty-handed, don’t be discouraged. Be patient, be honest, and use whatever growth data you have to find opportunities that will create an engine for sustained exponential growth.
