Compound Annual Growth Rate, or CAGR, represents the average rate of growth over a period of several years (typically five). This measurement can be useful in evaluating growth potential for multiple geographic areas.
One of ASBTDC’s numerous market research resources offers CAGR variables for several key demographic characteristics:
- population
- households
- household income
- housing units
CAGR can also be calculated for other demographic factors such as disposable income, net worth, and home value.
In Arkansas, for example, the 2022-2027 CAGR for median household income is 2.6% – although this measure ranges by county from more than 5% to less than 1%.
But CAGR is by no means limited to demographic characteristics.
Since all consumer spending variables include current-year estimates as well as five-year projections, CAGR can be calculated for hundreds of items, such as:
- medical services
- furniture and appliances
- housekeeping services
- entertainment/recreation
- vehicle maintenance and repairs
- pet services
For example, the CAGR for spending on medical services (3.2% statewide) varies by county from 4.3% to less than 1.5%.
How reliable are these spending figures? All consumer spending data are sourced from the U.S. Bureau of Labor Statistics, so you can be confident they’re reliable.
A Case for Using CAGR
Here’s an application of CAGR data: An ASBTDC client was planning to open a women’s clothing store. The client requested assistance evaluating the relative desirability of several prospective locations.
By looking at consumer spending data for women’s apparel, we were able to calculate the CAGR for each location and determine where growth potential was greatest. This wasn’t the only determining factor in the client’s site-selection decision. However, it was a valuable tool for comparing the proposed locations.
Also, it’s worth pointing out that the fastest anticipated growth often isn’t where spending is highest. Returning to the medical services example, total spending is highest in Pulaski County, while CAGR is highest in Benton County (due to faster population growth).
Contact ASBTDC today to explore how CAGR data can help small business owners make strategic decisions and become more profitable.