Month-over-Month

Month-over-Month growth is a tracking action where performance over two or more months is tracked and monitored. As we know, the performance tracking can be for any period weekly, fortnightly, monthly, quarterly, and yearly.

Under month-on-month analysis, the current month’s progress and growth are analyzed with regard to the numbers or performance achieved in the previous month or months. Moreover, simply expressing the difference in actual numbers may not convey the exact meaning or create a quick picture of the performance changes, at times. Hence, the change in the performance of the business is indicated and expressed in percentage terms.

This method is used to track growth in many diversified fields like the stock’s value, the number of visitors on a website, the sales revenue, the average revenue per subscriber, the number of units produced for a business, etc.

Formula

To calculate month-over-month growth, one needs to subtract the previous month’s value from this month’s value. The result so received or the difference in value so determined is then divided by the previous month’s value and multiply it by 100 to express it in percentage terms. Thus, the following formula is used for determining the month-on-month growth:

(Value This month — Value Previous month) x 100 / Previous Month= Percentage Growth

Month-over-Month measures are recent ones and describe the changes in the short term. Hence, it tends to remain more volatile than Year-on-Year measures. Moreover, fluctuation in monthly growth numbers varies widely. Because month-over-month measures are affected by several one-time events such as months with natural disasters, months with many people on vacation, summer vacation in schools, months with peak demands due to business’s seasonality, etc.

Example of Month-over-month Growth

Let’s understand the calculation of month-of-month growth with the help of an example. 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

= 66.67%

So, the Month-over-month growth in John’s business has been 66.67%, an excellent number.

Percentage Changes

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, production growth or increase in ARPU, etc. 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. And if he conveys to the prospective investors that his monthly active user base has seen an increase of 75 persons over the last month. This absolute number may not be able to convey to the investors the actual growth his business/website witnessed in that month. And the investor may not pay any importance to this number of 75.

Instead, if he conveys that his active user base has seen an increase of 25% over the last month, then it does make sense of this number and percentage. He can further communicate that his Month-0n-Month Growth over the last 3 months has averaged at about 20%, and this month it has been at 25%. This communication attracts the investor, gives them a trigger to think and understand the results achieved and potential for his business over the next 2–3 years if this MOM growth rate continues, and so on. The investors, based on this figure with their knowledge of competition in a similar business, the investors can take a call whether to invest or not. And if he decides to invest, then around what prices. This is how growth in terms of percentage change gives meaning to the otherwise meaningless data.

MoM Numbers for Multiple Years

As we discussed, due to seasonality, natural calamity, breakdown, and disruptions, one month or 2–3 months, figures may not throw sufficient light on the performance from an investor’s perspective. In such a situation, the investors may call for and would like to look for MOM Growth data for a longer term, from 6 months to multiple years. Therefore, MOM growth over several months or years is calculated. While attempting such a calculation, the point to note is that this calculation ultimately tries to calculate the Compounded Monthly Growth Rate (CMGR).

The formula to calculate Compound Monthly Growth Rate is given below.

(Last month)¹/ number of months difference CMGR= — — — — — — — — — — — — 1 First month

Continuing with the earlier example, suppose the number of monthly users, Mr. Smith has got for the past 5 months are as follows:

MonthMonthly UsersJanuary10February12March20April35May50

His Month-over-month growth rate for the past 5 months is:

=50^(1/4)/10–1

= (5)¹/4–1

= 0.49 or 49%. The rate is even greater!

Using MoM 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

We have:

Present month’s value = 50

CMGR = 49%

Number of month’s difference = 24

Number of contracts in May after 2 years = 50(1 + 0.49)²⁴

= 50(1.49)²⁴ = 50(14337.4)

= 7,16,870

You can also use over Month over Month Calculator

Precautions while using MoM Growth

A MOM growth factor is a good indicator to understand and appreciate the growth the business is achieving and the level where it can reach with this growth rate. However, as is generally said, these financial indicators do have some sort of inherent shortcomings. One must take a note of it and see all the results keeping in mind that. The major shortcomings of the MOM Growth rate are:

Small Numbers Give a Huge MoM Growth Rate

When the values are small, MoM is generally high. For example, 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 to ascertain the possibility of whether the MoM Growth rate will continue for a long time or not.

Inconsistent Growth is not Visible in 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.

MonthMonthly Active UsersMoM GrowthJanuary10000NillFebruary1100010%March2000081%April210005%May3500066.67%

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. Use CMGR in such cases with caution.

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, the Month-over-month growth rate is constantly declining.

MonthMonthly Active UsersGrowthJanuary3,00,000____February4,00,00066.67%March5,50,00037.5%April6,60,00020%

From 66% in February, it came down to 20% in April. Now, if you calculate a Compound monthly growth rate here, which comes to be 30%. Therefore, it would not be prudent to use the average MOM growth rate of 30% for analysis and decision. Because, in this scenario, the monthly growth rate is actually declining continuously month on month. Going with the last 3 months’ trend, 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 numbers. Thus, in the above example, it will be more appropriate to say that the business is adding around 1 lakh active users per month, rather than suggesting a MOM average growth rate of 30%.

Final Words

MOM growth rate calculation is an excellent way to track and monitor the performance of the business on various parameters. It helps in quick decision-making and corrective actions if things are not moving as planned. This indicator also gives the investors, shareholders, and lenders the monthly progress of the business. However, this indicator may sometimes give misleading results, particularly when a long-term plan or potential estimation is being done. Hence, one should note the shortcomings of this indicator and use it with similar other indicators.

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Sanjay Borad

Sanjay Borad

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