Measuring success is tricky. Broadly, everyone keeps an eye on the bottom line, but each department prioritizes its specific performance metrics. The different priorities help day-to-day execution, but what about the big picture? Is measuring revenue enough to build momentum year after year?
The short answer? No. It’s not.
To create momentum for your company, scale your efforts, and achieve your valuation goals, you need to use Net Retention Revenue (NRR) as your North Star. NRR is not only the result of cross-departmental efforts, but it is also a more nuanced measurement of your annual revenue.
The NRR Formula
The reason companies focus on NRR is because it’s much more meaningful than other revenue-based metrics. Gross Revenue Retention (GRR), for example, only measures the customers who renewed their existing purchase. If you renew all of your current customers, your GRR at the end of the year is 100%. Anything less tells you that your business is contracting.
GRR is undoubtedly an essential measurement. However, it doesn’t give you the full picture that NRR does. It does not tell you about adoption or expansion. It won’t give you a sense of your momentum. That’s where NRR helps. NRR is a measurement with GRR as its base. It calculates churn, retention, as well adoption, and expansion. It gives you the ultimate insight into your install base.
The standard formula for calculating NRR is:
- (Ending Annual Recurring Revenue, plus all renewals, cross-sells, price increases) – (down sells, churns, and other revenue contractions) ÷ (Starting ARR) during a consistent measurement period from ONLY your EXISTING customers.
You want this number to be over 100%.
Anything over 100% gives you a sense of momentum, which gives you a sense of your business’s growth, scalability, and valuation of your business. In terms of where your company is going and how quickly, NRR makes perfect sense as a North Star for companies.
Reaching World-Class NRR Metrics
World-class NRR is 125%, and as you might expect, it’s impossible to achieve that level without a comprehensive strategy across departments. Teams must understand exactly how their individual efforts impact NRR, plus how they can support each other. The good news is that factors like upsells, cross-sells, upgrades, and churn affect NRR. These performance indicators tend to motivate team members and foster collaboration.
We’ve identified three simple steps to help you transition your organization’s focus from GRR to NRR. Each will help build a solid foundation you can build upon to reach the goal of 125% NRR.
1. Operationalize Your Customer Success Efforts
No single action will impact your NRR more than operationalizing your Customer Success team. If your Sales, Marketing, and Product efforts remained the same, and all you did was invest in operationalizing your CS team, you would still see improvements to your NRR.
Lane Holt, our Director of Customer Success, explained it best when she said the most critical question to ask yourself is, “What can we do to make it easier for Customer Success Managers (CSMs) to be CSMs?” Someone needs to be in charge of the big picture, strategic decisions that make it easier for your CSMs to do the work of fostering adoption and expansion in your customers.
Consider introducing digital success strategies. What engagements can you transfer to in-app notifications that would free up time for CSMs to focus on more personalized engagements? What moments in the customer journey can you make more valuable for your customers, big and small?
More mature CS organizations might consider the entire customer journey. What additional moments of value can you provide for customers? Where might you be able to tie actions to their verified outcomes?
All these micro-moments add up to more monthly users, faster Time to Value (TTV), and, ultimately, better NRR.
2. Create a Single Source of Truth
With new operations in place, the next step is to identify a single source of truth. The new strategies created from your CS Ops leadership will need to be tested. You want to make sure that you’re communicating to the right user at the right time with the right message. While you may already be inclined to know how to do that, monitoring performance over time will help you iterate and improve.
Reporting in a single tool, like Gainsight, ensures everyone is working from the same accurate information within CS. More importantly, however, it provides visibility for other departments. Your Sales team, for example, can use the data in your reporting tool to make a plan for upsells or cross-sells. Your Product Marketing team can leverage usage data in their materials. Product can use direct feedback from customers to inform new features. All these separate initiatives work best when they are born from the same information and executed in conjunction with each other.
The result of your combined efforts includes a more enthusiastic customer base, which drives NRR. Plus, you’ll be able to release more meaningful product features and produce better customer stories that reach new customers. More customers create more potential for a world-class NRR rate.
3. Implement Scalable Systems
Finally, to create a world-class NRR, your team must focus on systems that will scale. As we’ve mentioned, NRR indicates the momentum your company has, which informs your valuation. The only way to build on that momentum year after year is to focus on processes that will scale as you grow.
The best process we’ve seen is to prioritize what your biggest challenges are in terms of scale. Typically, the pain points fall into one of six categories:
- Visibility
- Adoption
- Retention
- Experience
- Efficiency
- Expansion
Identify three categories that your organization struggles with most frequently when trying to scale. Then make a roadmap for how you will reimagine your systems to be able to scale. For example, if you have a problem with scaling retention efforts, how can you create a systematic renewal process? What are some early warning signs you can flag that will tell your CSMs that a customer needs early intervention? What opportunities can you take advantage of to get customers to recommit to their verified outcomes? When can you celebrate the progress they’ve made towards those outcomes?
Each of those strategies can be a digital-first engagement that can scale no matter the size of your customers. The point is not to automate all your systems. Rather, you want to automate the ones that make sense so that the processes that require CSMs are as thoughtful and impactful as possible so that you can drive growth and improve NRR.
Learn More about Net Revenue Retention
Learn more about Net Revenue Retention and why it’s essential in our newest ebook, “NRR: Your Most Important Growth Metric.” Inside, we outline growth strategies for each of the six major pain points. Plus, we tell you how to get buy-in from other departments so everyone shares the responsibility (and rewards) of growing your NRR. Download your free copy today!
