What is revenue run rate? How to calculate it for projections

Revenue run rate is a financial metric that projects a company's current revenue over a full year. It’s like taking a recent snapshot of your revenue and extending that performance for the next twelve months. It offers a quick account of the company's current scale.

Firms with recurring revenue streams often use the revenue run rate. Think companies with subscription models and direct-to-consumer (DTC) businesses. It offers a crystal-clear way to see potential annual sales based on their recent performance and recurring payments.

Read on to learn:

• Why it's a useful tool for various kinds of businesses
• The simple run rate formula and step-by-step instructions on how to calculate it
• The differences between the revenue run rate and other revenue forecasting methods
• What a "good" revenue run rate looks like
• The vital things to keep in mind — the limitations and risks — when using this metric
• Practical strategies you can use to boost your underlying revenue

It's crucial to understand that revenue run rate isn't a revenue forecast. Instead, it's a simple extrapolation. It typically doesn't factor in changes like how well the company brings in new customers or keeps existing ones. Elements such as upgrades, downgrades, coupons, and churn are usually not part of a basic revenue run rate calculation.

Despite its simplicity, revenue run rate serves many useful purposes:

• In board meetings, it can provide a quick overview of the company's financial path. 
• During fundraising, especially for newer businesses, it can give investors a fast estimate of likely yearly revenue. 
• For general revenue planning, it establishes a baseline based on the current situation.

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Run rate vs. Revenue forecast

A revenue run rate is a basic projection. It takes current revenue data and annualizes it. It assumes that the current business conditions will continue without significant change.

In contrast, a revenue forecast is generally more detailed. It aims to predict future revenue by considering various influencing factors. These might include market trends, planned promotions, new product introductions, and expected shifts in customer behavior, such as churn. 

Remember: A thorough revenue forecast considers a wider array of elements than a simple revenue run rate.

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Why does the run rate matter for SaaS companies?

For SaaS businesses, revenue run rate is a particularly useful metric for several reasons:

Showing growth momentum quickly 

Revenue run rate offers a fast and simple way to share the current growth trajectory. It annualizes recent performance, allowing stakeholders to grasp the potential scale based on current momentum. It's an easily digestible number that can underline positive trends in customer acquisition and revenue numbers, especially in rapidly scaling SaaS organizations.  

Usefulness in the early stage and usage-based environments

For early-stage SaaS companies with limited historical data, revenue run rate offers a useful initial benchmark for potential annual revenue. Even with a few months of data, it shows an extrapolated view that can be useful for internal planning and talks with early investors. 

Similarly, for SaaS businesses with usage-based pricing, where monthly revenue can fluctuate, the revenue run rate based on recent usage patterns can offer a more current outlook than older, less relevant data.  

Benchmarking product-market fit and monetization performance 

A consistently growing revenue run rate can be an early indicator of strong product-market fit. It suggests that your product and price management are working. That means your offering is resonating with the market, and that the monetization strategy is performing well. 

Tracking changes in revenue run rate after adjustments to pricing or packaging can help SaaS businesses evaluate the impact of these changes on their annualized revenue potential.

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Run rate vs. MRR, ARR, and actual revenue recognition

Revenue run rate differs from other key SaaS revenue metrics:

• MRR (monthly recurring revenue): MRR represents the predictable revenue a SaaS business expects to get every month from its subscriptions. 
  
  Revenue run rate annualizes a snapshot of total revenue, which might include non-recurring revenue as well as the recurring portion that MRR tracks.  

• ARR (annual recurring revenue): ARR focuses on the annualized value of recurring revenue from subscriptions. Unlike revenue run rate, ARR typically excludes one-time fees or usage-based revenue that isn't part of the core subscription. 
  
  ARR is generally considered a more stable predictor for SaaS businesses with primarily annual contracts.  

• Actual revenue recognition: Actual revenue recognition follows specific accounting principles that dictate when revenue can be formally recorded. 
  
  In the SaaS industry, this often involves recognizing subscription revenue over the contract term, not necessarily when cash is received. Revenue run rate is a projection and not a substitute for formal accounting revenue recognition.  

Note: Revenue run rate is a foundational element for SaaS businesses. To zoom in closer on how this metric connects with your subscription model, explore our articles on SaaS revenue models, essential SaaS metrics, and effective pricing and packaging strategies.

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How to calculate revenue run rate

The revenue run rate formula is straightforward. It takes revenue from a specific period and projects it over a year. The most common run rate formula based on monthly revenue is:

Monthly revenue x 12 = revenue run rate

Let's walk through an example. Imagine your company generated $20,000 in revenue last month. Your revenue run rate would be:

$20,000 x 12 = $240,000  

You can also calculate revenue run rate using quarterly data:

Quarterly revenue x 4 = revenue run rate  

For SaaS businesses with MRR, the revenue run rate can be calculated as:

MRR x 12 = revenue run rate

If your revenue is usage-based, calculating revenue run rate requires a bit more thought. You would typically take the revenue from a recent representative month and annualize it:

Representative monthly usage revenue x 12 = revenue run rate

Alternatively, if you have daily usage revenue, the formula is:

(Total revenue / number of days in period) x 365 = revenue run rate  

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Trailing averages vs. Snapshot numbers

Deciding whether to use trailing averages or snapshot numbers is important for an accurate revenue run rate. Let’s analyze both individually:

• Snapshot numbers: Using a single recent period's revenue (like the last month) provides a current view. It's useful when your business is experiencing rapid growth or significant recent changes. The snapshot reflects the latest momentum. However, it can be skewed by unusual peaks or dips in that specific period.
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• Trailing averages: Using an average of revenue over a longer recent period (like the last three or six months) smooths out short-term fluctuations. This approach is more reliable when your revenue is relatively stable or has predictable seasonality. A trailing average gives a more balanced picture of recent performance.  

Takeaway: The choice depends on your business's growth stage and the consistency of your revenue. If you're growing fast, a recent snapshot can be more telling of your pace. If your revenue fluctuates, a trailing average can provide a more stable view of your revenue run rate.

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What’s a good revenue run rate?

A "good" revenue run rate depends on the type of business, its stage, and the overall market conditions. Generally speaking, a good revenue run rate is one that demonstrates sustainable growth and the potential to exceed costs, ultimately leading to profitability. 

A healthy sales growth rate, strong gross margins, and manageable operating expenses often contribute to a favorable revenue run rate.

For investors, a credible revenue run rate is one supported by a consistent growth profile. This means the company should have clear opportunities to increase its customer base and pricing, as well as capture more market share. 

Comparing your revenue run rate to industry benchmarks can also provide valuable context. A revenue run rate that places you competitively within your sector is generally a positive sign.

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What’s a good run rate for early-stage SaaS companies?

For early-stage SaaS companies, the definition of a "good" revenue run rate often emphasizes growth potential over absolute revenue figures. Here’s what typically matters:

• Strong growth trajectory: Investors and stakeholders in the early stages are keenly interested in the growth rate reflected in the revenue run rate. A rapidly increasing revenue run rate indicates strong early traction and product-market fit. 
  
  Growth rates significantly above the median for similarly sized startups are generally seen as very positive. Some top-performing early-stage SaaS companies might even exhibit annual growth rates exceeding 100%.

• Demonstrating product-market fit: A rising revenue run rate, even from a small base, can be a key indicator that the SaaS product is resonating with the target market and that the initial monetization strategies are effective. It suggests that the company is successfully acquiring customers and generating recurring revenue.  
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• Efficient customer acquisition: While rapid growth is important, a good revenue run rate in the early stages is often coupled with improving customer acquisition cost (CAC) efficiency. A high revenue run rate achieved with unsustainable spending might be viewed less favorably than slightly slower growth with healthier unit economics.
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• Comparison to benchmarks: Early-stage companies are often evaluated against specific SaaS benchmarks that track growth. Reaching $1 million in ARR within a certain timeframe (e.g., the top tier achieving this in under a year) is an important milestone that influences how a company's revenue run rate is perceived.

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Monthly run rate vs. Annual run rate

There are two main ways to look at revenue run rate — monthly and yearly: 

• Monthly run rate: Your monthly run rate takes your revenue from the most recent month and multiplies it by 12. It's a very current and fast-moving metric. Startups, especially those in rapid growth phases, often find it useful. 
  
  It reflects the latest momentum and can quickly show the impact of recent changes in customer acquisition or customer retention. However, because it relies on a single month's data, it can be more susceptible to short-term fluctuations.

• Annual run rate: By contrast, the annual run rate looks at a longer period, often a quarter, and then annualizes it. It's generally better for long-term planning and strategic investor conversations. 
  
  By using a larger data set, it can smooth out some of the monthly variations and provide a more stable picture of the business's trajectory. Investors often prefer the annual view as it gives a broader perspective on potential yearly revenue.  

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Being mindful of skews: Seasonality, spikes, and usage

It's vital to interpret any revenue run rate with a critical eye due to potential distortions. Seasonality can skew the numbers. For example, a monthly run rate calculated during a peak season will likely be much higher than one from a slower period. 

Similarly, one-time revenue spikes can create an artificially inflated view that isn't sustainable. Usage swings, particularly for companies with usage-based pricing, can also lead to misleading projections if a single month with unusually high or low usage is simply annualized.

Note: As you consider different ways to project your revenue, remember that your pricing structure plays a crucial role. For hybrid pricing implementation or managing complex enterprise billing, be sure to check out our posts on those topics for more in-depth insights.

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Limitations and risks of the revenue run rate

Relying too heavily on your revenue run rate without considering other factors can lead to inaccurate projections and poor decision-making. Here are some key limitations and risks:

• Ignores customer dynamics: Revenue run rate doesn't account for crucial customer behavior like churn or expansion revenue. A high current run rate can be quickly eroded by significant churn.
    
• Doesn't factor in growth changes: The calculation assumes a static environment and doesn't consider changes in growth rate. A company's growth trajectory might accelerate or decelerate, making the extrapolated run rate inaccurate.  
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• Vulnerable to seasonality: As discussed earlier, the revenue run rate is highly susceptible to seasonal fluctuations. Annualizing data from a peak period will overstate the typical performance, while using data from a low period will understate it.  
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• Misleading with short-lived spikes: A temporary surge in usage or a large one-time sale can create a misleadingly high revenue run rate that doesn't reflect the sustainable underlying performance of the business.  
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• Potential for misuse in fundraising: The simplicity of the revenue run rate makes it easy to inflate or misrepresent in fundraising decks. Investors are often wary of run rates presented without context on churn, growth trends, and the quality of the underlying revenue.
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• Not a GAAP metric: Revenue run rate is not a recognized accounting principle (GAAP) metric. It provides a directional view but should not be used in place of audited financial statements and recognized revenue figures.

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How do you improve the revenue run rate?

While the revenue run rate itself is a projection, focusing on improving the underlying drivers of revenue will naturally lead to a better run rate. Here are some strategies:

• Increase average revenue per account (ARPA): Implement value-based pricing strategies that better reflect the value your product or service provides. Explore options for tiered pricing that let customers scale their spending as their needs grow.
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• Introduce usage-based or scalable plans: For SaaS businesses, consider incorporating usage-based pricing or tiered plans that grow with customer consumption. This can increase revenue from existing customers over time.
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• Reduce billing friction: A smooth and clear billing process can improve conversion rates and reduce involuntary churn. Addressing any points of friction in your billing platform can positively impact revenue.  
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• Improve upsell and cross-sell: Develop effective strategies to encourage existing customers to adopt more features, higher-tier plans, or complementary products. Successful upgrades and cross-sells directly increase revenue per account.  
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• Eliminate revenue leakage: Provide accurate metering and billing, especially for usage-based models. Address any discrepancies or errors in your systems to prevent loss of potential revenue.  

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How Orb helps companies scale and optimize run rate

Inconsistent revenue tracking, unclear usage visibility, rigid pricing models, slow pricing iterations, and revenue leakage can greatly hurt your growth and distort your revenue run rate. 

Orb is a done-for-you billing platform that turns these challenges into opportunities for scalable growth and optimized financial performance. Here's how Orb helps you through:

• Consistent revenue tracking: Gain a unified, accurate view of your revenue with Orb RevGraph. By ingesting and processing all your raw usage event data, Orb provides a single source of truth for all your billing and financial reporting needs.
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• Clear usage visibility: Unlock the power of your usage data with Orb. Unlike traditional systems with limited visibility, Orb RevGraph ingests all raw event data, giving you granular usage visibility. This is crucial for accurate billing, identifying growth opportunities, and understanding the drivers behind your revenue run rate.
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• Flexible pricing models: Break free from rigid billing systems that stifle innovation. Orb lets you experiment with and implement any pricing model — usage-based, subscription, hybrid, and more — without engineering bottlenecks. 
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• Fast pricing iterations: With Orb, you can rapidly iterate on your pricing. Use Orb Simulations to test and predict the impact of pricing changes risk-free before deploying them live.
  
  Business teams can launch new pricing strategies and test changes using historical data, all without requiring extensive engineering resources. This rapid iteration capability allows you to quickly adapt to customer feedback and market dynamics, driving improvements in your revenue run rate.

• Eliminated revenue leakage: Provide precise, error-free billing with Orb RevGraph. By processing all raw event data and not dropping events no matter the scale or complexity of incoming data, Orb delivers auditable invoices, preventing costly billing inaccuracies and revenue loss. This accuracy builds customer trust and helps make sure that your revenue run rate accurately reflects the value you deliver.
  
  Ready to transform your billing into a growth engine that can help you optimize your revenue run rate? Explore our flexible pricing options and discover how Orb can work for you.