Revenue Run Rate
It seems like every SaaS metric has a dark side – where small miscalculations can make a major impact.
Revenue run rate is one such metric.
At baseline, your revenue run rate allows you to estimate how much revenue you expect your company to generate within the next year based on previously earned revenue.
Sounds simple, right?
It may surprise you that revenue run rate can take a dark turn.
In this post, we’ll dig into revenue run rate, including how to calculate it, why it’s important, and why you need to have supplemental metrics to show stakeholders when predicting future revenue.
Let’s dig in.
Table of Contents
- What is Revenue Run Rate?
- How to Calculate Revenue Run Rate
- Revenue Run Rate vs. Annual Recurring Revenue
- Why Revenue Run Rate is Important
- How to Increase Revenue Run Rate
What is Revenue Run Rate?
Revenue run rate has many names—annual run rate, sales run rate, annual revenue run rate—however, it all boils down to predicting future revenue over a longer period of time (typically a year).
Given the simplicity of the calculation, your run rate assumes that current sales will be the same or grow. However, it does not take churn and other potential downgrades into account.
Revenue run rate is a great metric to be measuring, but it shouldn’t be the sole revenue-based metric your company is tracking against.
How to Calculate Revenue Run Rate
To calculate your revenue run rate, you’ll want at least three months’ worth of revenue (one quarter) for a more accurate calculation.
Otherwise, you run the risk of predicting a rate based on a great (or terrible) month.
Once you have one quarter’s worth of revenue at the ready, it’s a fairly simple calculation. You multiply the total revenue you received in a specific period by the same amount of time in one year.
Revenue Run Rate Formula
Revenue (during a specific time period) x # of time periods in a year
For example, if your monthly revenue for the first three months of 2021 was the following:
- January: $1,250
- February: $1,500
- March: $4,500
Then total revenue for Q1 2021 would be $7,250.
From there, you’d multiply that by the four quarters in a year to have a revenue run rate of $29,000.
However, if you were to only take the January revenue and multiply that by 12, then your predicted run rate would be $15,000.
So it’s safe to say that your revenue run rate can be a volatile metric to track on its own.
Revenue Run Rate vs. Annual Recurring Revenue
So what other revenue-based metrics should you be measuring?
If you’re a SaaS or subscription-based company, then you definitely should also be measuring annual recurring revenue (ARR).
Revenue run rate can be used for any type of revenue model, whereas ARR is strictly for companies with subscription revenue.
As mentioned above, it’s not a choice between one or the other.
Check out our post, 13 Startup Metrics to Keep a Pulse on Your Business, to learn the top metrics you should be tracking against for your company.
Why Revenue Run Rate is Important
As mentioned, revenue run rate can be helpful, but it doesn’t account for volatility or fluctuations. It assumes your revenue for whichever period you’re using will be the same for the entire year.
This is especially important for companies that don’t have subscription revenue, companies that have seasonal buying trends, or companies that typically have large one-time sales.
For instance, an e-commerce company might do $10K in revenue one month. If they calculated their run rate based on that, it’d be $120K. However, as you saw in our example above, if other months are slower or if they grow faster, that number isn’t necessarily accurate.
Revenue run rate can be somewhat helpful directionally, but it’s not a number you should rely upon for major decision-making for the company.
For early-stage companies that don’t necessarily have years’ worth of data at their fingertips, it is a great jumping-off point to build out your financial projections. But just as you shouldn’t leave your financial model to chance, you should be updating your revenue run rate on an ongoing basis as well.
Ready to start building out projections for your business? Check out How to Make Financial Projections for a Startup to get started!
How to Increase Revenue Run Rate
Increasing your revenue run rate is akin to increasing revenue. There are myriad strategies to increase revenue, but we will start with the basics of customer acquisition to increase revenue.
It goes without saying that you should be getting more customers to increase revenue. This means having marketing and sales working in lockstep to get leads in the door to close deals.
To learn more about leads, including lead generation, read our Leads glossary term.
Outside of getting more customers, what else can a startup do to increase your revenue run rate?
Upsell Current Customers
It’s a well-known fact that it costs far less to market to an existing customer than to acquire a new one.
So start selling to your customers!
Customer expansion can be in the form of upselling new add-ons, cross-selling associated product offerings, or even just adding professional service hours for additional implementation needs.
Not sure where to start? Check out these examples from Appcues on ways to sell to your current customer base.
Reduce Churn & Downgrades
Losing customers can be a major blow to your ego during the early days of your company.
But as you grow, you’ll be able to better bounce back from churned customers or downgrades. Better yet, you’ll start to understand trends from these losses to better predict and understand why customers are opting to stop using your product or service.
This historical data can serve to create new campaigns and offerings to ensure that you reduce churn and downgrades over time.
Hit the Ground Running with Finmark
Ready to add revenue run rate to the list of growth metrics you’ll want to track for your business?
Check out our financial modeling software to help streamline financial modeling and projections for your startup. Finmark is everything you need to build an accurate, customized financial model.
We make it easy to:
- Create, update and share your financial plans
- Manage your burn rate and cash
- Plan for contingencies
- Forecast your revenue and expenses