Why focusing on Net Revenue Retention (NRR) may be more important in today's business environment

Over the past 3-4 years working with two different companies, Net Revenue Retention (NRR), which helps measure the ability of your company to retain and expand revenue from its existing customer base, became a focus of board meetings, C team offsites and day to day revenue operations. At various stages over the years, especially in the early days of the SaaS model, maximizing your customer count was seen as validation of product market fit, ability to penetrate a market and a measure in the race to beat your competition. So why the shift?

Or at minimum, the emergence of NRR as a primary measure of your business’s success and future prospects?

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Focus on the Customer: In the current business landscape, customer success and satisfaction are key. SaaS companies recognize that customer retention and expansion drive sustainable growth. NRR provides insights into how well a company is delivering value to its customers and whether it is successfully upselling or cross-selling additional products or services.  Happy customers are typically growing customers..

Revenue acquisition costs: Let’s face it - acquiring new customers can be expensive.  Heavy marketing and sales investments go hand in hand with longer sales cycles in some cases.  When looking to expand business with existing customers, a number of the lengthy and difficult steps involved in acquiring a new customer can be bypassed or are simply unnecessary: 

• Infosec requirements?  Already passed.  
• Need a customer reference?  Guess what, speak to your peers.  
• Need a business case to justify an investment?  Let’s base it on the work you already do together.
• Concerns about onboarding?  You’ve already done it with the customer, at least once.   

Evolved Assessment of Business Health:  Measuring NRR helps your business understand the lifetime value of a customer, factoring in both customer churn and expansion revenue. Be wary of great NRR rates masking low new customer growth and weak GRR (Gross Revenue Retention).  We experienced this in a situation where we had a strong quarter closing a few large deals, but churned more than normal.  The growth from those existing customers overshadowed the beginnings of a churn trend.  Had we not been paying attention to both, we would have missed a major down trend that would have bitten us a quarter or two later.

Competitive market dynamics: Differentiating your business is a constant challenge.. Evaluating NRR gauges your ongoing ability to provide value to customers, maintain a competitive edge, and prevent churn.  High NRR rates can be a strong indicator of your company's ability to meet customer needs effectively, and stay ahead of your competition.  Weak NRR rates indicate a need to focus more on your customer, the value they derive from your products and as a measure of penetration within a given customer, cohort or vertical, and overall.  Keep in mind, if your aren’t focusing on your customers, someone else is “walking the halls” looking to undermine you and take a chunk of your business.

Investors' perspective: My experience has been that investors are taking a very close look at NRR when gauging where to invest, as it demonstrates customer satisfaction, the stickiness of the product, and the potential for future revenue growth. Higher NRR rates indicate a strong customer base and the potential for increased profitability, which can attract additional investment and support business expansion.