MoM Growth

What is MoM growth?

MoM growth (month-over-month growth, growth compared with the previous month) is the percentage change in a metric from one month to the next. It is usually measured on monthly recurring revenue (MRR); for platforms, transaction volume or the number of active customers may be used instead. Other common terms are monthly growth and monthly growth rate.

The metric forms part of the monthly reporting (management reporting) of young technology companies with recurring revenue. It appears in the investor update, in the pitch deck and in the financial model; in a funding round, investors request it as a complete monthly series. As a company grows and its history lengthens, the comparison with the same period of the previous year (YoY growth) moves into the foreground, because it smooths out seasonal patterns.

Calculating MoM growth: formula and reference value

The rate results from the ratio of the current month's value to the previous month's value.

Formula: MoM growth = (value of the current month ÷ value of the previous month) - 1, expressed as a percentage

If monthly recurring revenue rises from EUR 100,000 in April to EUR 105,000 in May, the result for May is: 105,000 ÷ 100,000 = 1.05; minus 1 = 5%.

The reference value matters more than the formula. Monthly recurring revenue is a point-in-time figure at month end: the sum of all running subscriptions, converted to a monthly amount. Revenue according to the monthly closing, by contrast, is a period figure that also includes one-off income. The two series can produce very different rates in the same month.

The change in recurring revenue is always a net figure made up of new business, expansion among existing customers, contraction and cancellations. A high rate can therefore result from strong new business combined with high customer attrition. For assessment, the rate is broken down into these four components, the so-called MRR bridge, and viewed together with the cancellation rate (churn rate).

Converting MoM growth into an annual rate

Monthly growth works like compound interest, because each month builds on the already increased base of the previous month. At 5% a month, EUR 100 becomes EUR 105 after one month and EUR 110.25 after two months. Conversion into an annual rate is therefore done by exponentiation, not by multiplying by twelve.

Formula: annual rate = (1 + monthly rate) to the power of 12 - 1; conversely, monthly rate = (1 + annual rate) to the power of (1/12) - 1

The differences are considerable. Monthly growth of 2% corresponds to about 26.8% a year, 5% to about 79.6%, and 10% to about 213.8%. Conversely, doubling within a year requires average monthly growth of about 5.9%, and tripling about 9.6%. A planning error of one percentage point a month shifts the annual figure by far more than twelve percentage points. At 6% instead of 5% a month, annual growth rises from about 79.6% to about 101.2%.

For assessing a trend, the average monthly growth rate over several months (compound monthly growth rate) is more informative than any single value. It answers the question by what percentage the value would have had to rise evenly each month to get from the starting value to the end value. It is calculated by the same rule: end value divided by starting value, to the power of (1/number of months), minus 1. Set side by side over three, six and twelve months, it shows whether the pace is holding or weakening. The counterpart over several years is the compound annual growth rate (CAGR).

Distortions from base, season and one-off effects

Small starting values

If recurring revenue rises from EUR 2,000 to EUR 4,000, growth is 100%, although a single additional customer may be enough to achieve this. As the base grows, rates usually fall, because the same absolute increase makes up an ever smaller share. A falling monthly rate is therefore not in itself a warning sign. What is more informative is whether the absolute increase per month is rising.

Season and calendar

In business with corporate customers, contract signings often cluster at the end of a quarter and at year end, while holiday periods can be weaker. For usage-based revenue, the number of calendar and working days has an effect; February has up to three days fewer than January and March. The comparison of two consecutive months contains these effects in full; only the year-on-year comparison or smoothing over several months evens them out.

One-off effects and accruals

Set-up and consulting services, one-off licence sales and project revenue do not belong in a rate that describes ongoing growth. Distortions also arise when annual contracts are invoiced in advance. In the annual financial statements under the German Commercial Code (Handelsgesetzbuch, HGB), such a prepayment is spread over the contract term through a deferred income item (passiver Rechnungsabgrenzungsposten), a balance sheet item for payments received in advance. In monthly recurring revenue it counts at one twelfth. During the year, the accrual is not infrequently omitted, and the BWA (betriebswirtschaftliche Auswertung, the accounting department's monthly management report) shows the full invoice amount in the billing month. A rate based on this then shows a spike and, in the following month, an apparent decline.

The monthly series in a funding round and due diligence

In a funding round at Series A, the first larger round after market entry, the monthly series of recurring revenue is often the most important growth metric. The history is then often still too short for a series of year-on-year comparisons. Investors pay more attention to consistency than to the highest single value: steady growth points to a repeatable sales process, while strong fluctuations point to dependence on individual deals. The monthly rates assumed in the financial model must connect to this series or the deviation must be justified.

In due diligence, buyers and investors reconcile the series with the revenue recorded in the bookkeeping, with contracts and with invoices. The reviewers also look at how discounts, trial periods and terminated but still running contracts were treated, and whether the definitions remained the same over the entire period.

Worked example: calculating and extrapolating MoM growth

A software company reports monthly recurring revenue at the end of each month. It stood at EUR 50,000 in June of the previous year, EUR 76,000 in March, EUR 80,000 in May and EUR 88,000 in June of the current year.

• Growth in June: 88,000 ÷ 80,000 = 1.10; minus 1 = 10.0%
• Linear extrapolation of this month, methodologically wrong: 12 × 10.0% = 120%
• Extrapolation of this month with compound interest: 1.10 to the power of 12 = 3.138; minus 1 = 213.8%; EUR 88,000 would arithmetically become about EUR 276,200 after twelve months
• Average monthly rate of the last three months, i.e. from March to June: 88,000 ÷ 76,000 = 1.1579; to the power of (1/3) = 1.0501; minus 1 = 5.0%
• Average monthly rate over twelve months, i.e. since June of the previous year: 88,000 ÷ 50,000 = 1.76; to the power of (1/12) = 1.0482; minus 1 = 4.8%
• Check: 1.0482 to the power of 12 = 1.759, rounded 1.76; this corresponds to growth of 76% compared with the same month of the previous year
• Projection using the twelve-month rate: 88,000 × 1.76 = EUR 154,880 after a further twelve months

June alone suggests annual growth of over 200%. The average rates over three and twelve months, by contrast, agree at about 5% a month. April and May together reached only about 2.6% a month; June was an upward outlier. Extrapolating the single month overstates monthly revenue after twelve months by about EUR 121,300. Only the average rate is therefore suitable for planning.

Distinction: MoM growth, YoY growth, average rate and ARR

• YoY growth: compares with the same period of the previous year and evens out stable seasonal patterns. MoM growth shows the current pace, YoY growth the development over a full annual cycle.
• Average monthly growth rate: combines several months into a smoothed value and is less sensitive to outliers than the rate of a single month.
• ARR: annual recurring revenue, usually twelve times MRR. Under this definition, the growth rates of ARR and MRR are identical.

Common mistakes

• Best month as evidence. If a single strong month is presented as the growth rate, investors reconcile it with the complete series. The discrepancy comes to light at the latest in due diligence.
• Linear extrapolation. Multiplying the monthly rate by twelve underestimates annual growth; extrapolating a peak month with compound interest overestimates it. Neither replaces an average rate over several months.
• Rates without amounts. High percentages on a small base say little about the size of the business. Revenue in EUR belongs next to every rate.
• Mixed reference values. If growth in recurring revenue, in revenue and in user numbers are presented side by side without labelling, the rates are not comparable.
• Retroactively changed definitions. If, for example, trial customers are later included in recurring revenue without recalculating the previous months, earlier and later months are no longer comparable.

Frequently asked questions

How is MoM growth calculated?

The value of the current month is divided by the value of the previous month, 1 is subtracted, and the result is expressed as a percentage. In a spreadsheet such as Excel, with the previous month's value in cell B2 and the current value in cell B3, the formula is =B3/B2-1, formatted as a percentage.

What is a good MoM growth rate?

There is no universally valid benchmark. The assessment depends on stage, size and business model. As a rough rule of thumb, double-digit monthly rates are achievable on a small base, while at several million euros of recurring revenue single-digit rates are the norm. More informative than a comparison value is whether a company's own rate remains stable over several months and whether the absolute increase rises.

When does the year-on-year comparison become more informative?

As soon as the history clearly exceeds twelve months and allows a series of year-on-year comparisons. For business models with a pronounced season, it is then the authoritative view, while the month-on-month comparison continues to show the current pace.

Does the rate have to be calculated after cancellations?

Yes, if it is meant to describe the growth of recurring revenue. The change in MRR already includes cancellations and contraction. A rate that reflects only new business must be labelled as a gross figure and does not replace the net rate.

How many months belong in investor materials?

As a rule of thumb, the last 12 to 24 months, supplemented by smoothed average rates. A shortened series is requested in full in due diligence anyway.

The Roemer Capital view

Roemer Capital does not present monthly growth rates to investors as a single value but as a complete series with the amounts in EUR. This includes the breakdown into new business, expansion and cancellations as well as the average rates over three, six and twelve months. This presentation answers in advance the questions that are asked in due diligence anyway.

In the financial model, which Roemer Capital builds with clients over at least three years in a base case, a cautious case and an optimistic case, the planned monthly rates are derived from the historical series. Where the plan lies clearly above the historical pace, the difference is justified with concrete measures, such as additional sales capacity paid for from the funding round.