In a recurring revenue business, one of the most important metrics is Net Revenue Retention (NRR) — a measure of preserving and growing revenue from the customer base. Every company expects some level of churn (customers that do not renew their relationship), and some amount of down-sell (customers that reduce the amount of money they spend). These two measures are both negative. If we start with 100% of our revenue up for renewal, churn and down-sell are reductions in revenue.
On the positive side is upsell, when a customer spends more this year than last year. There are a number of sources of upsell, including price increases, increased usage, add-on capabilities or modules, and new projects. These sources and others increase the revenue from the customer base. Net Retention is the net of the negatives and the positives. The minimum goal is to have upsell offset churn and down-sell so that the revenue we start with is at least preserved in the next year. That would be 100% Net Retention. However, a good outcome is to have Net Retention above 100%, so that the base of revenue coming from existing customers grows year over year and contributes to overall growth. A really good metric is Net Retention of 115% or more.
If Net Retention is less than 100%, then we have a leaky bucket - revenue is dripping out of the bucket. We need to sell new customers just to maintain our revenue level and fill the bucket back up. To grow total revenue we need to preserve what we have (NRR) and add new revenue on top, but if a portion of new sales is just refilling the bucket, then even if we succeed in selling new, our growth is constrained by the rate at which revenue is leaking out of the bucket.
We could just double our efforts and sell more new to outrun the leak. It is certainly a good idea to sell more, but to maximize growth we really need to plug the leak. I have read estimates that it costs five times as much to sell a new account as it costs to preserve an existing account. In other words, it is more cost efficient to plug the leak than it is to try to outrun it.
Companies often see churn and down-sell as inevitable and just accept it, but that is simply not good enough. The first step to improving the situation is to do a deep dive into the reasons for churn and down-sell. We often hear vague generalities and ‘guesses’ about why clients are leaving or scaling back. But, fixing the problem will take real analysis.
Death and marriage (bankruptcy and mergers) account for some of the leak, as will changes in management or strategy, but we need to go deeper. We have to recognize that churn and down-sell are not just the purview of the customer success team. It is a companywide challenge. The product team needs to see how the product and their decisions are impacting churn. The sales team needs to recognize where they may have closed a deal for the wrong reasons. The implementation team has to acknowledge how they contributed to the problem, and even the marketing team needs to evaluate if the leads were actually a good fit for the solution being offered.
Once we have a clear, multi-faceted understanding of the causes, we can collaborate on strategies to turn things around. I believe that one of the biggest drivers is lack of customer engagement. We focus on selling and implementing, but too often we do not pay enough attention to ongoing engagement. If we follow the trends for some simple metrics, we can usually see if engagement is growing or shrinking, and engagement is the leading indicator of churn and down-sell:
Is the number of users growing?
Is the frequency of use growing?
Is the time spent on the site, or the number of features being used growing?
What is the frequency and tenor of support calls?
Is there ongoing training and certification or did it stop when the system was first launched?
How many contacts do we have in the customer organization and how many levels of management do we have relationships with?
How often are we interacting with the customer contacts?
Think about engaging customers like we think about engaging employees. We should provide continuous updates and encouragement. We should deliver performance reviews and strategy sessions about the customers vision and aspirations for our platform. We should communicate frequently and listen for feedback. Too often we know when the relationship is not going well, but we are afraid to confront the situation. Our teams need to recognize that while churn is bad for us, it is also bad for the customer. It is embarrassing to admit they made the wrong choice, or they failed to get value after spending money on our solution. They want it to work just like we do, so help them. Establish a customer advisory board. Hold frequent open forums with customers to share updates and get feedback. Launch an active customer marketing program. Engage customers in new feature designs and decisions. Start a meaningful newsletter. We need to guide customers to do the “right” things and follow best practices to drive their program success. Make them feel like part of the family.
Improving engagement will drive up retention, and it costs way less to preserve revenue than it does to find new revenue. Stop the leak so that all of the new revenue goes to actual company growth. The bottom line is that we have every opportunity to up our game on Net Retention and focus on mining the base for upsell, just like we focus on growing new-name revenue.