There is one metric that determines who gets bonuses and makes clear the growth trajectory of a SaaS business.
It’s called Net Revenue Retention (NRR, for short) and it’s one of the most powerful metrics a SaaS business can understand. But unfortunately it’s also a lagging indicator. By the time you’ve measured it, you can’t do anything to change it. So you need to dig into what comprises NRR and make positive changes now so your NRR is up later.
In a Catalyst panel discussion with Modern Sales Pros, three revenue operations and customer success leaders—Rachael McBrearty, Chief Customer Officer at LeanData; Mark Fershteyn, CEO at Recapped.io; and Will Foley, VP of Revenue Operations at Brazen—shared their insights on how to bolster NRR.
Understanding net revenue retention (NRR)
McBrearty agreed and broke down why it mattered so much. In short, NRR comes from current customer retention plus growth, divided by initial base over a period of time.
Take, for example, a business with $1 million in revenue for the quarter. If 10% of customers churned, that means $900,000 in revenue left from the initial customer base. However, the customer success team also processed $200,000 in upsells, expansions, and cross-sells, bringing total end of quarter revenue to $1.1 million ($1 million - $100,000 (churn) + $200,000 (expansion) = $1.1 million). Divided by the original base of $1 million, the NRR is 1.1, or 110 percent.
“Ultimately, [NRR] is the biggest indicator of your business success and your customer success,” said Fershteyn.
The challenge put to every revenue operations and customer success leader, of course, is to increase NRR by either increasing gross retention (more customers renewing) and/or increasing net retention (new revenue via customer growth).
Improving NRR (6 methods to try)
The panel shared insights about how they’ve all worked to increase NRR and how they approached different tactics.
1. Segment analysis to drive cohort-based action
Segments—whether by offering, customer type, or time-based cohorts—will help you see the big picture.
It can be a nasty wake up call because, as McBrearty said, it’s easy to mask a poorly performing cohort with overall performance. For example, if your business has a self-service offering for freelancers and a full-service offering for enterprises, you may be masking net churn in the freelancer segment because of growth in the enterprise segment.
Foley said it helps a lot with prioritization, namely finding what works in your most successful cohorts and seeing how you can adapt those practices to less successful cohorts.
2. Aim for DIY elements to make high-touch efforts more impactful
Fershteyn shared that Recapped is looking toward both product intuitiveness and DIY resources as a way to increase NRR. His theory is that customers will have more obvious value from the product and be more equipped to solve their own problems, resulting in higher retention and growth.
“My ultimate goal is that we don’t need to provide any success because the product is so intuitive,” said Fershteyn.
While Fershteyn admitted not needing customer success is a dream rather than a possible reality, he also said that adding DIY resources like a knowledge base, articles, and tutorials (both in-product and through support documentation) helps customer success efforts when high-touch service is required.
3. Set up the right sales incentives to avoid gaming the system
McBrearty cautioned that NRR is controversial sometimes because it can be gamed.
For example, if a sales rep is talking to a potential customer who has 40 team members with plans to hire 10 more, that customer may want to purchase 50 licenses up front to be fully ready. However, the rep could tell the customer to only buy 40 up front and a further 10 down the line, thus gaming the NRR metric to look more positive than it might actually be.
The solution, said McBrearty, is to properly incentivize both sales and customer success. This means compensation based on NRR numbers for both teams but also recognition and compensation for sales reps to sell the best possible deal for the customer. This may not mean the biggest, but it can be tracked to the customer’s time to value or other key success metric, intricately connecting sales efforts not just with revenue numbers but quality of revenue.
4. Privilege gross retention first
NRR is made up of gross retention from renewals and net retention from growth. Foley’s advice is to privilege gross retention. At Brazen, for example, gross retention numbers have a multiplier attached for CSM compensation.
“The easiest way to improve net retention is to improve gross retention,” said Foley.
When gross retention is higher—meaning more customers renew—the company is already closer to a higher NRR target and they need less growth to get there. Plus there’s the fact that a retained client is far less expensive than acquiring new clients. But there’s a double benefit as well: when more customers renew it provides more possible upsell, cross sell, and expansion opportunities down the line.
5. Leverage growth playbooks and lifecycle account planning
For McBrearty, playbooks anchor around the four stages of the customer lifecycle—adoption, go-live (called “protection”), growth, and at-risk (called “save”). The team at LeanData puts together playbooks for what customers might need at each stage and how the CS team can look for renewal or growth opportunities.
Foley said that Brazen runs similar playbooks but also looks to three types of growth opportunities—upsell (more of what the customer currently has), cross sell (into different products), and expansion (becoming a standard tool for more teams within one customer organization).
In addition to using playbooks extensively themselves, Catalyst Software offers a powerful playbooks engine for their customers that allows them to easily create and operationalize playbooks to automate alerts, assign tasks, and trigger emails at critical moments—for example, when a new account is assigned, when a healthy customer turns unhealthy, or when a renewal is coming up.
6. Sell at the right pace
Fershteyn said it can be “alluring” to look at a big check size from a new customer. However, that can lead to mismanaged expectations, low adoption, and ultimately churn, something McBrearty agreed with. To incentivize sales to think about the long term, Fershteyn said Recapped compensates sales reps for upsells and growth.
Foley agreed with this sentiment, saying it needs to be up to the customer. While the team will always bring up everything Brazen has to offer if it makes sense, they are more interested in the customer getting exactly what they need and getting value from it. When that happens, growth and retention is much easier.
“It pays off to do the right pace, as much as you love getting those dollars up front,” said McBrearty.
Aligning the company to NRR
NRR is a lagging indicator, so the real alignment is toward the initiatives that will lead to better gross and net retention. And that requires alignment toward NRR as a concept, metric, and compensation indicator.
It may sound like a tall order—and it requires significant executive buy-in, to be sure—but when the whole company aligns to this key metric, it empowers everyone to do their jobs properly. From the CS perspective, a focus on NRR means the team can think about customer pains, marketplace pains, and developing solutions in collaboration with marketing, product, and sales to ensure more growth opportunities for everyone.
“[Aligning to NRR] makes it easier,” said Foley. “And more fun.”
Catalyst ran an entire summit dedicated to bringing Customer Success to the center of the company, which is available for watching on demand here.