Revenue Retention is the secret ingredient to growth
Metric Stack 10: Net Revenue Retention Rate and more!
Net Revenue Retention Rate is the most popular metric on MetricHQ, and with good reason. You can’t achieve much growth with a leaky bucket. Welcome to week 10 of Metric Stack. I’m Priyaanka Arora, your personal metric assistant and Content Researcher & Writer at Klipfolio.
Your existing customers hold the key to sustained growth. But don’t take my word for it: in this edition of Metric Stack, guest contributor Sagar Shukla of Foresight takes us through his experience as a SaaS co-founder, where he found that NRR is one of the most important SaaS metrics out there.
What is Net Revenue Retention?
Net Revenue Retention Rate (NRR) is the percentage of recurring revenue retained from existing customers. This includes expansion revenue, downgrades, and cancels. Here’s the formula:
NRR = [RR beginning of period + expansion RR during period - downgraded RR during period - cancelled RR during period] / (RR beginning of period)
Read on to hear from our guest contributor, Sagar Shukla, as he answers the question:
Why is NRR the top SaaS metric of 2021?
If we were to pick one revenue growth metric every SaaS investor, executive, or functional leader is talking about, it’s Net Revenue Retention rate (NRR). Also known as Net Dollar Retention (NDR), it is replacing churn as the top SaaS metric in 2021.
In our personal experience, two major secular backdrops are powering the current environment: an increasing amount of venture funding for high growth tech companies, and the highest Customer Acquisition Costs in five years. Take a look at this graph showing North American venture dollar volume by stage.
The amount of venture dollars flowing into high growth tech companies has more than doubled from H1 2020 to H1 2021. As this article from Crunchbase states,
“Things are running hot. Really hot. Valuations are up, deal counts are high, and exit multiples are up there too.”
A ton of new money is chasing the same customers, which leads us to the second trend.
Customer Acquisition Cost (CAC), is up by more than 50% over the past 5 years. The cost burden for acquiring new logos is enormous and is driving down dollar efficiency ratios. This is in part driven by the content market ecosystem becoming saturated by new entrants fueled by massive venture capital rounds. The barriers to producing marketing that wins over new buyers have fallen away, which has also resulted in those efforts becoming less effective over time.
Which leads us back to NRR. With all this money flowing in and acquisition costs going up, where does leverage to drive growth exist? Within your existing client base.
This is why everyone is talking about NRR
A 20% increase in NRR can lead to a 50% revenue increase at the end of a 3 year period.
A 1% increase in NRR can increase valuation by 70%.
A new dollar from an existing client is 40-70% cheaper to acquire than from a new client.
The key input of the NRR equation is revenue expansion that comes from reducing discounts, selling new users (cross-sells) and new solutions (up-sells).
Focusing on expanding revenue from existing clients and as a result driving up NRR has had massive results in the market. For example, UiPath turned their $400K of initial customers into $22.7M (81x ARR multiple for top 50 customers) over 5 years because of their 145% NRR. The industry median is ~99%.
As former leaders of client service and account management teams, we saw the importance of this first-hand.
I used to run implementations when I worked for a SaaS company serving the financial services industry. We were able to paint an incredibly rich picture of each client’s business because of how intimate we were with their data and processes. This empowered our team to provide clear and effective recommendations on how else we could enhance their business through our solutions. They listened by opening up their cheque books for more user licenses or adopting additional solutions.
When my co-founder ran account management at the same company, his team ran the same play as ongoing trusted advisors. This resulted in growing accounts 2-3X from the initial sale amount in as quickly as a year. Multiplied across hundreds of clients, this yields highly capital-efficient revenue growth.
Revenue expansion within your accounts comes from having deep and rich customer insights on the value they are receiving from your solution. Once you are able to crack this code, you will be able to drive up-sells, cross-sells, reduce discounts, and realize the true revenue potential of every account. A higher NRR will surely follow.
Metric Stack is inviting guest writers!
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