NRR : the new benchmark metric for SaaS
If there was a metric that used to be an Achilles’ heel for us at Metadata, it was net revenue retention (NRR). But now we see it as a badge of honor.
NRR is a widely adopted customer success key performance indicator (KPI). It measures the performance and overall health of your software-as-a-service (SaaS) business as it pertains to its existing customers. Essentially, it’s churn minus expansions. It’s grown into a high-level metric that offers a revenue-based view of customer retention. While I mentioned it’s used for SaaS businesses, it can also be applied to any company that sells products or services and relies on repeat orders.
We know churn is the protagonist in the SaaS business story, especially marketing technology (martech). This is why I think NRR is one of the most inclusive retention metrics. It captures the negative effect of down-sells and churned customers, while also measuring the positive impact of upsells. It’s easy to be discouraged by the swings of NRR, but once you realize churn is part of the process, it’s about aggregating feedback from customers to help the company focus on strategies for improving NRR.
Measuring NRR should help your business track your customer retention efforts and their successes. While you’re inevitably going to lose customers, you should focus on your retained customers and growing that revenue to compensate — this is where NRR helps.
I’ve been asked about the process to move the needle with NRR, so I wanted to share specifics:
• Historical Data: In our process, we went back in time and analyzed our historical data. The idea was to get a baseline of the types of reasons and attributes that lead to retention vs. churn. A simple example attribute you could analyze is the length of the contract — e.g., longer term leads to higher retention.
• SWAT Team: We created a cross-functional SWAT team across our sales, operations, success, product and executive teams to meet weekly to both measure and test initiatives. When developing your SWAT team, some initiatives will be longer term (e.g., measuring customer success KPIs) and some will be tactical (e.g., executive sponsorship of accounts).
• Focus On ICP: One thing that was very important for us was to really home in on our own ideal customer profile (ICP) and steer away from distractions. This may mean saying no to revenue in the short term but achieving a much better success rate with the right customers later on.
• Blueprint: We realized that one of the main reasons for churn was a lack of expectation-setting — or a discrepancy between the buyer’s objectives and the user (within the same organization). So, we deployed a process called “the blueprint” to set up three to five key (ideally, board-level) success metrics. When setting up a blueprint, make sure to monitor your success metrics in real time.
• Retention Features: We assigned a percentage of research and development (R&D) time per release, and we identified and ranked features that will help us move the needle for customers. Taking these steps will allow you to be strategic and proactive vs. reactive when problems arise.
• Executive Support: This is important. Making NRR improvements requires a Herculean team effort. In our experience, it united us. We identified team members who are passionate about customer success and paired them for quarterly check-ins. This is one of my favorite things now, and it gets me very close with our customers.
When your business model depends on strong NRR, it has a land-and-expand go-to-market strategy
By focusing on these six things, we were able to obtain a healthy NRR to successfully adopt, retain and grow existing accounts. And looking to the future, I know I’ll focus on NRR and customer success as much as I think about net new sales.
When it comes to SaaS, sustainable growth depends on retaining and growing with your existing customer base. The way I see it, NRR is that new benchmark metric for SaaS
– Gil Allouche, Forbes Business Council