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Definition

There are two common measures of growth. Year-on-year percentage growth (annual growth %) uses the prior year as a base for expressing percentage change from one year to the next. Over longer periods of time, compound annual growth rate (CAGR) is a generally accepted metric for average growth rates. In a survey of nearly 200 senior marketing managers, 69% of people responded that they found the "annual growth %" metric very useful.[1]

Purpose

Growth is the aim of virtually all businesses. Indeed, perceptions of the success or failure of many enterprises or businesses are based on assessments of their growth. Measures of year-on-year growth, however, are complicated by two simple factors:
  • Changes over time in the base from which growth is measured. Such changes might include increases in the number of stores, markets, or salespeople generating sales. This issue is addressed by using 'same store' measures (or corollary measures for markets, sales personnel, and so on).
  • Compounding of growth over multiple periods. For example, if a company achieves 30% growth in one year, but its results remain unchanged over the two subsequent years, this would not be the same as 10% growth in each of three years. CAGR, the compound annual growth rate, is a metric that addresses this issue.

Construction

Percentage growth is the central plank of year-on-year analysis. Dividing the results for the current period by the results for the prior period will yield a comparative figure. Subtracting one from the other will highlight the increase or decrease between periods. When evaluating the comparatives, one might say that results in Year 2 were, for example, 110% of those in Year 1. To convert this figure to a growth rate, one need only subtract 100%. The periods considered are often years, but any time frame can be chosen.

References

  1. ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc. <http://www.amazon.com/Marketing-Metrics-Definitive-Measuring-Performance/dp/0137058292>

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