Though tracking sales metrics isn’t necessarily the most glamorous part of working in sales, having a solid understanding of how the deals you close impact your company’s bottom line and future growth is a critical part of the job.
For companies that are focused on growing and scaling, an essential metric to keep an eye on is the sales growth rate.
Sales Growth Rate
The sales growth rate measures the rate at which a business is able to increase revenue from sales during a fixed period of time.
Understanding the sales growth rate is a critical metric that empowers companies to make data-informed decisions. If this rate decreases compared to prior periods, that can be an indication that the sales team needs to take a different approach to drive revenue growth. Conversely, a high sales growth rate is often seen as a good sign for company stakeholders.
Now that we understand what sales growth rate tells us, let’s review how to calculate it.
Sales Growth Rate Formula
To calculate the sales growth rate for your business you’ll need to know the net sales value of the initial period and the net sales value of the current period. These values should be easy to find on an income statement. Once you have these values, you can use the following formula:
Sales Growth Rate =
(Current Period Sales — Prior Period Sales) / Prior Period Sales *100
Let’s walk through an example of how to apply the sales growth rate formula.
Serial Juice Co. is a startup that delivers custom pressed fruit and vegetable juices to its customers. The Serial Juice Co. sales team wanted to measure their sales growth rate from their fiscal year that ended April 30, 2019, to their fiscal year that ended on April 30, 2020.
During the fiscal year that ended on April 30, 2019, the company reported bringing in $750,000 in sales. The following year, they reported bringing in $1,000,000 in sales. Let’s use the sales growth rate formula with these figures.
That means Serial Juice Co. had a sales growth rate of 25% during this time period.
Average annual sales growth rate
When assessing sales growth rate many companies choose to measure how much their sales have grown over a number of years, which is known as the average annual sales growth rate.
To measure your company’s sales growth performance over a number of years, begin by using the previous formula to calculate the sales growth rate of each year you would like to assess. Once you have those values, you can use the following formula:
Average Annual Sales Growth Rate =
(Sales Growth Rate A + Sales Growth Rate B + Sales Growth Rate C + [Any other periods you would like to measure]) / Total Number of Periods
Let’s apply this to an example. The company in question — let’s call it GSD Company — would like to measure their average annual sales growth rate over the past four years. Here are the annual sales values and growth rate year over year for GSD Company:
Now let’s apply these values to the average annual sales growth formula:
Average Annual Sales Growth Rate =
(5.26% + 12.5% + 6.67% + 16.7%) / 4 Years = 8.62%
From 2015 to 2019, GSD company had an annual sales growth rate of 8.62%.
What Is A Good Sales Growth Rate?
There are no hard and fast values that indicate a “good” or “bad” sales growth rate because the rate of growth is relative for each company. Here are a few factors that can impact how much a company can expect to see sales growth from year to year.
A small business may experience a higher sales growth rate than a larger business because a small business is working with smaller dollar values, therefore it takes fewer sales to influence a change.
For example, a small company that pulls in $500,000 revenue one year, and $750,000 of revenue the next year will experience a sales growth rate of 33%. A large company that brings in $10 million in sales one year, and $12 million in sales the next year has a sales growth rate of 20%. Though the actual sales growth rate for the larger company is lower, this company had to bring in significantly more money than the smaller company.
A successful sales growth rate can also depend on how well a company’s competitors are performing and the overall growth of its industry.
In 2019, U.S. eCommerce sales grew by 14.9% from the prior year and retail sales grew by 3.8%. With these figures in mind, companies that sell products and services online likely saw higher individual sales growth rates than retail companies because at an industry level, there were more opportunities for growth for eCommerce companies.
Lastly, a successful sales growth rate will largely depend on the unique sales goals of the company. Each company has its own set of goals and strategies that are highly influenced by the factors above, as well as the company’s leadership, stakeholders, and sales team bandwidth.
Understanding sales growth rate can provide valuable insight into the current and future performance of your company. Check out The Ultimate Guide to Sales Metrics to discover what other valuable sales metrics your team should be measuring.
Originally published May 20, 2020 7:30:00 AM, updated May 20 2020