Month-over-month growth shows the change in the value of a statistic as a percentage of the previous month’s value. This method is used to track growth in the value of stocks, the number of visitors on a website and the sales revenue for a business, etc. To calculate month over-month-growth, we subtract the previous month’s value from this month’s value, then divide the result by the previous month’s value and multiply it by 100 to express it in percentage terms.
Table of Contents
- 1 How to Calculate Month-over-month Growth?
- 2 Percentage Changes
- 3 Month-over-month growth for Multiple Years
- 4 Using Month-over-month for Future Projections
- 5 Cautions while using Month-over-month Growth
(This month – Previous month) x 100 / Previous Month= Percentage Growth
Month-over-Month measures tend to be more volatile than Year-on-Year measures as month-over-month measures are affected by one-time events such as months with natural disasters, months with many people on vacation, months with peak demands due to the seasonality of the business, etc.
How to Calculate Month-over-month Growth?
Let’s understand this with the help of an e.g. Suppose John had started a new business of selling burgers in his locality in the month of January. In January he sold a total of 300 burgers. On February 28th, he calculated the month’s total sales which stood at 500 burgers. So, what is John’s month-over-month growth? His growth can be calculated as follows:
(Burgers sold in the month of February – Burgers sold in the month of January) x 100/Burgers sold in the month of January
=(500 – 300) x 100/300
= (200/300) x 100
So, the Month-over-month growth in John’s business has been 66.67%, not a bad number.
We express the change in terms of percentage rather than absolute figures. We do so because most times, month-over-month growth is calculated to analyze business statistics such as revenue growth. So, when the objective is to analyze business situations, it becomes easy to understand change/growth when it is expressed in percentage terms rather than absolute values.
Suppose Smith wants investors to invest in his digital marketing website. He walks into the office of one investor and tells them that he has received 50 monthly active users this month. Nobody seemed to be impressed with this figure. Then, Smith tells the investors that they have seen 40% month-over-month growth for this month. Suddenly everyone was impressed as a 40% MoM means that there will be more than 7 lakh monthly users two years from now. This is how growth in terms of percentage change gives meaning to the otherwise meaningless data.
Month-over-month growth for Multiple Years
Suppose the investors in the above example think a single month’s growth cannot justify the huge investment they will make. They ask Mr. Smith to get a month-over-month growth rate for the past 6 months. What they are asking for is basically Compound Monthly Growth Rate which is obtained using the formula
|(Last month)^1/ number of months difference|
Imagine that the number of monthly users Mr. Smith has got for the past 5 months are as follows:
His Month-over-month growth rate for the past 5 months is:
= 0.49 or 49%. The rate is even greater!
Using Month-over-month for Future Projections
Suppose the investors of Mr. Smith in the previous example are taking a 2 years horizon. They want to calculate how many monthly users Mr. Smith will be getting after 2 years from now. To make such future projections, the formula is:
Present Month’s value (1+ CMGR)^Number of months difference
Present month’s value = 50
CMGR = 49%
Number of month’s difference = 36
Number of contracts in May after 2 years = 50(1 + 0.49)^24
Cautions while using Month-over-month Growth
There are some cautions which one should take note of while dealing with month-over-month growth. They are:
Small numbers give a huge Month-over-month growth rate
When the values are small, MoM is generally high. For e.g. it is very easy for Mr. Smith to get a 50% MoM when the number of active users is 100. He can easily get those additional 50 users by a single newspaper advertisement. But to achieve the same 50% MoM growth when the number of monthly active users are, say 5,00,000, you need a really strong marketing team to add those additional 2,50,000 users in a month. The key takeaway here is to check the fundamentals of the business when the numbers are small so as to ascertain whether the MoM Growth rate will continue for a long time or not.
Inconsistent growth is not visible in Compound Monthly Growth Rate (CMGR):
Suppose that the business is so fluctuating that one month you get a 100% MoM Growth and next month you lose the existing users. If this is the case with your business, it will be a mistake to flatten your growth rate with a consistent CMGR.
|Month||Monthly Active Users||MoM Growth|
The point is that you don’t know how many active users you will get in the upcoming month. You may double the existing 35000 users or may end up with some 1000 more users. If you use a CMGR in such cases, you may end up fooling yourself, your team and the investors. Never use CMGR in such cases.
Declining Growth is not Visible in MoM Growth Rate
Suppose you have a business scenario like the one mentioned in the table below. As can be seen, in the given table, Month-over-month growth rate is constantly declining.
|123Month||Monthly Active Users||Growth|
From 66% in the month of February, it came down to 20% in the month of April. Now if you calculate a Compound monthly growth rate here, which comes to be 30%, it won’t be fair of you as the month-over-month growth rate is constantly declining. Going with the trend of the last 3 months, the growth rate is expected to be below 20% and not 30%. In such cases, it will be more appropriate to speak in terms of absolute. For e.g. in the above example, it will be more appropriate to say that the business is adding around 1 lakh active users per month.