Net Revenue Retention drives B2B success
How do $10+ billion companies like Docusign continue growing sales 30% every year? A big reason is Docusign’s high-level of repeat business. Not just repeat business, but repeat customers that keep increasing the amount they spend with Docusign.
Acquiring new customers is important to growth, but retaining customers is critical to the survival of businesses that depend on repeat sales to the same customers.
There are multiple ways to measure repeat business success, but key ones are customer retention and net revenue retention. Together they help B2B companies understand how they’re growing, improve customer acquisition and optimize customer lifetime value.
Customer retention
Customer retention is simply how many customers did you retain from one period to the next. If you had 500 customers two years ago and 400 of them bought from you again last year, then you retained those 400, or 80% of your customers from the prior year.
The 100 customers who didn’t buy again were lost, or churned. That gives you a customer (or logo) churn rate of 20%.
But tracking the number of customers retained or churned is only part of the story. Some of the 400 customers that were retained may have lowered their spending. Or maybe they increased spending enough to offset the 100 customers that churned.
Get your free Value Impact Scorecard from Tally Street and receive a 3-year history of the customer and net revenue retention rates for your business.
Net Revenue Retention
Net revenue retention (NRR) provides a revenue-based view of customer retention. Over the last 10 years, NRR became a key, high-level metric that many software-as-a-service (SaaS) companies already track, but it also works for any product or service company that relies on repeat business for its success.
NRR uses the net of revenue expansion and contraction to help businesses measure the overall success of their customer retention efforts. So while losing customers will happen, you should be growing revenues from retained customers to compensate for you what you’ve lost — and that’s exactly what NRR captures.
The two components of NRR are revenue contraction and expansion. For example, if one of your churned customers used to buy $1000 of goods or services from you, then losing them results in $1000 of revenue contraction. Or if you retained a customer, but their spending fell from $4000 to $3000, then you had another $1000 in revenue contraction.
Revenue expansion comes from price increases, cross-sells, up-sells, and sales growth across existing customers. For example, if a customer spent $4000 with you last year and spent $5000 this year, then the customer contributed $1000 in expansion revenue.
NRR = (Prior period revenue + revenue expansion - revenue contraction) / prior period revenue
This makes NRR the most comprehensive retention metric because it actually tells the complete revenue story of existing customers — it answers the question of what your top-line revenue would do if you did not gain one more customer.
Powerful boost to revenue growth
NRR becomes increasingly important as a small business grows to a midsized business (and beyond). For example, a $5 million business that churns 20% can replace that $1MM with new business when it’s growing 50%+ each year. But when it’s a $30MM business then it needs to replace $6MM, at the same time growth rates may be slowing.
NRR is also powerful because the effects are cumulative. It’s either a dividend or a tax that you pay on every group of customers that you acquire, and the more customers you acquire over time, the more this adds up.
This means that small differences in NRR add up to very large differences in total revenue over multiple years. In the following example, we assume a business had $10 million in revenue last year and consistently generates 20% of revenue from new customers. Improving the business’s NRR from 95% to 105% may not sound like much, but over five years the business has an extra $10 million in annual revenue!
See how NRR can improve your own revenue growth using this Google Sheet.
Improve your retention rates
Your target number will vary significantly based on your business and industry. Many businesses can have a low NRR below 50% and still be successful. For example, a construction company probably doesn’t expect the same customer to order a new parking garage every year! On the other hand, software services (like QuickBooks) want to keep you each month and upgrade your service over time. For similar software companies, NRR should exceed 100% if they’re successful.
Whatever your target NRR might be, every CEO should track it. And if you want to increase your NRR, here are some steps you might take:
- Compare customers you retained and grew to ones you lost and look for patterns in the when/how they were acquired, the products they bought, their interactions with customer support, etc.
- Consider what makes your current products and services “sticky”. Or look for opportunities to expand your product portfolio to grow a recurring line of business.
- Review pricing levels and strategies, find opportunities to increase volumes and/or cross-sell other products.
- Think about how you can shift spending between acquiring new customers and servicing existing customers.
- Gain a single view of each of your customers, with acquisition details, lifetime value, purchase and payment histories, etc.
In summary, customer and revenue retention rates are not just financial metrics. The metrics and the customer data required to compute and track them drive important business decisions and strategy everywhere from sales to product to customer service.
