Growth Rates: Understanding Seasonal Growth
In our exploration of growth rates so far, we’ve made an implicit assumption that your business would grow at roughly the same rate all year. This is not true for most businesses! Some business will grow rapidly during some months and contract during others. Take the example of an ice cream truck: during the summer months business will be brisk and grow rapidly, only to shrink in the fall and winter as the weather gets colder outside.
In highly seasonal businesses, understanding growth is even harder but also more important. It won’t be obvious from your charts whether you are growing, as evidenced by the following revenue chart for a seasonal business over two consecutive years:
We need to rethink our original assumption about growth, since in these businesses calculating growth by comparing one month to the previous month is not a good measure of growth. If you don’t believe me, this is the naive growth rate for the business in the example above in the second year:
It is hard to make much from that chart as it jumps from positive to negative growth rates and back again. All we can discern is that the summer months are bad for business, but are we growing?
We can do much better than that! Let’s compare each month to that same month from the previous year, which was the same time of year (season). You can see that below:
Our growth ranges from 20% to 30% reliably until December when it jumps significantly.
That is much more useful and something we can work with to understand how our decisions are impacting the business. If your business is seasonal you might want to use a similar approach as it makes growth easier to understand and more relevant for your business.
Tomorrow we’ll finish our series on growth by discussing how to predict your growth rate into the future.
Quote of the Day: “To everything / There is a season (turn, turn, turn)” The Byrds (adapted from Pete Seeger)