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The new ‘North Star’ is apparently here. We no longer just want to look at new business revenue, upsells or churn going the other way. We put it all together and measure our Net Revenue Retention (NRR). How often have you seen a business focus heavily on New Business, and being very successful, while at the same time have customers falling off the back? The opposite is also dangerous where there is practically no new business and the business is reliant upon the existing customer base. Hence the balance and the importance of Net Revenue Retention.
So how do we calculate this relatively new metric? Very simply it is the new revenue added into a business, within a defined period (usually monthly or annually), from an existing base of customers, minus the downsells and churn that is taken out.
An example is a £100k Monthly Recurring Revenue (MRR) business that adds in £10k worth of MRR expansion and upsell revenue, whilst downsells and churn accounts for £5k MRR in the opposite direction. The finishing position of £105k MRR divided by the starting £100k MRR means the monthly net revenue figure is 105% - easy!
I know some companies like to measure churn and net revenue in various guises, some accounting for the ‘available to renew’ pot and others not counting certain segments of their base, however for the purpose of accuracy and consistency I’d recommend sticking to the above.
One reason for the importance of this is to determine how healthy your existing customer base is. A NRR of over 100% indicates that the existing customer base is growing, and the business will expand without the need for new customers to be onboarded. A result below 100% therefore indicates your customer base is shrinking, and you’re downselling and churning more than you are selling to them. The business obviously therefore needs New Business to remain in a state of growth.
Depending on your sector, and lifecycle of your product or service the results will vary but you almost certainly want to be striving for 100%+ particularly where you have contracted customers and operate a recurring revenue model. Some of the fastest growing SaaS businesses are generating 4X times the expansion and upsell versus downsell and churn, which invariably means they become a lot more attractive to investors.
As always, different metrics tell you a lot about the state of your business but if you’re not currently measuring NRR I’d be looking to get an idea quickly. It’ll tell you how much your customer base is growing or shrinking, and will ultimately give you the impotence to do something about it.
If you’d like more information or are interested in growing your NRR then please do not hesitate to get in touch. You can also find more information at: www.paullucherini.com
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