Why average annual growth rate (AAGR) matters to a first-time founder
Average annual growth rate (AAGR) summarises several yearly growth rates by adding them and dividing by the number of years. It can make a trend easier to communicate, but founders should not confuse it with the constant yearly rate that would turn the starting value into the ending value after each year’s change builds on the last. When growth rises and falls sharply, the simple average can overstate that sustained rate.
Examples of average annual growth rate (AAGR)
Revenue grows 20% in year one, falls 10% in year two and grows 15% in year three. AAGR is about 8.3%: add the three rates to get 25%, then divide by three. To measure the constant yearly rate connecting the starting and ending revenue, apply each year’s percentage to the value left by the previous year; that produces a different result.
Common misunderstanding
AAGR is not year over year growth, which compares one period with the same period a year earlier. It is also not calculated by taking the total change from start to finish and dividing it by the number of years. It gives equal weight to each yearly percentage and ignores how one year’s change alters the base for the next. Results also depend on the exact start and end dates, units and whether percentage growth is meaningful when values are negative.
When to use it
Use AAGR for a simple average of comparable yearly growth rates. Show the years, underlying values and calculation. Use compound annual growth rate when the question is the constant yearly rate connecting beginning and ending values after each year’s change builds on the previous year, and do not switch labels between the two.