In the ever-changing world of SaaS, both technological capabilities and customer expectations continue to evolve. How can companies keep up?
To set expectations from the beginning, clearly defined contracts are critical in Software as a Service companies. Especially in subscription models, contract redlining is like mapping out what’s ahead (and, importantly, what’s not).
Once clients are on board, many SaaS businesses utilize Net Revenue Retention as a compass to stay on track toward success. Leveraged effectively, NRR provides valuable insights on how to grow the business.
So, how’s your NRR?
What is Net Revenue Retention (NRR)?
Net Revenue Retention measures the change (positive or negative) in recurring revenue generated from existing customers over a specific period. It considers various factors like upsells, cross-sells, downgrades, and churn. This indicates whether you’re growing revenue within your existing customer base or losing revenue due to customer attrition or downgrades.
A high NRR demonstrates a growing revenue from existing customers even without new customer acquisition.
So, what is the formula to calculate Net Revenue Retention?
Let’s understand this formula in detail with an example:
Consider a SaaS company that starts a fiscal year with $1,000,000 in annual recurring revenue (ARR) from existing customers.
During the year, the company might experience the following:
- Upsells and cross-sells: Additional revenue from existing customers who have upgraded or bought additional services worth $200,000.
- Downgrades: Reduction in revenue from existing customers who have moved to a lower tier, worth $50,000.
- Churn: Loss of revenue from customers who have canceled their subscriptions, worth $100,000.
An NRR of 105% shows that the company has retained its existing revenue and expanded it within its existing customer base. This figure suggests customer satisfaction, robust product offerings, and effective customer success strategies.
Still doesn’t feel enough? Next, let’s check out some of the best ways to improve this NRR.
How can you improve your NRR?
In order to improve your Net Revenue Retention, you need to first begin by identifying your current NRR. So, use the above-mentioned formula to get started, and begin assessing your current weaknesses.
How? Here’s what you need to do:
1. Break down your NRR
Start with the basics, and break down your NRR to its core elements. By doing so, you will discover the details for each of the following aspects of your business:
- Customer churn (loss of customers)
- Upsells (existing customers purchasing more expensive plans)
- Cross-sells (selling related products)
- Downgrades (moving to less expensive plans).
Having this data is the first step to precisely identifying where changes are happening. This granular view helps understand which areas are performing well and which aren’t.
2. Identify trends or patterns that may be affecting retention
Next, you’d analyze the data to uncover underlying trends or recurring patterns. For instance, a consistent increase in churn during specific months (around Christmas breaks or New Year) might indicate seasonal issues. Alternatively, a sudden decrease in upsells might be correlated with a recent product change.
Therefore, analyzing NRR components can help you understand underlying factors that impact customer behavior and satisfaction, enabling the business to take targeted action.
3. Pinpoint areas of weaknesses (e.g., high churn rate, low upsells)
Based on the detailed analysis in the previous steps, this stage is about identifying specific weaknesses that need to be addressed. A high churn rate indicates customer dissatisfaction with the product or service, whereas low upsells indicate a failure to communicate the value of higher-tier packages (or perhaps even the lack of appeal and a need to reevaluate these offerings).
Therefore, try pinpointing these areas of weakness, allowing businesses to focus strategically on the root causes rather than just the symptoms.
4. Create holistic customer success strategies
You need to look beyond the usual marketing strategies to boost revenue through customer retention. All campaigns, including the sales and marketing alignment efforts, should be planned to directly impact revenue generation.
SaaS companies should implement holistic strategies that ensure that every team involved with customer satisfaction – from marketing and sales to account management and client success – are on the same page. This creates a consistent and cohesive experience for the customers throughout their journey with your business, increasing satisfaction, and as a consequence, building customer loyalty.
5. Implement or improve a customer success program
Design a customer success management program to ensure customers achieve their desired outcomes using the product or service. Implementing or improving this program means putting measures in place that systematically identify customer needs and actively work towards fulfilling them.
Some tasks include creating customer personas, defining success plans, and assigning customer success managers to monitor and guide customers’ journeys.
6. Consistently reach out to customers to ensure product utilization
Set up regular communication with customers to understand how they use the product and whether they derive value from it. You can connect with them via periodic check-ins, surveys, or follow-up emails after certain milestones (for example, after 50 hours of usage, three months to purchase, etc.) This will help you detect issues early on and proactively help your customers to ensure they don’t face bottlenecks in product usage.
By proactively seeking feedback and addressing concerns, you will enhance the value your business provides. You will also better understand your customers’ evolving needs, empowering you to offer solutions that resonate. Not only will this reduce churn, but it can also give you a competitive edge!
7. Provide personalized onboarding experiences and continuous support
The onboarding experience, especially when it comes to SaaS products, sets the tone for the entire relationship. Therefore, one way to boost your NRR is to offer a personalized onboarding experience and making sure your customers expectations are aligned with the product offerings.
Introducing continuous support post-onboarding ensures that customers can access assistance as they progress through dedicated support teams, self-service portals, or community forums.
8. Cultivate customer loyalty
Cultivating customer loyalty goes beyond catering to the generic needs of end-users. It involves creating lasting customer relationships and communities around your product or service. Loyal customers can become brand advocates, providing positive word-of-mouth marketing.
The easiest way to have this? Personalized experiences! As mentioned earlier, you need to personalize onboarding while also aligning all teams to ensure customer satisfaction.
You can also personalize customer support, offer relevant rewards, and nurture interactive communities and forums around your product, making sure your customers feel like they are a part of your business, and not just another number. Aim for building a strong foundation that encourages customers to stay and grow with the brand through loyalty-driven activities that help reduce churn and thereby increase your NRR.
An ideal loyalty program should incentivize customers to remain with your product or service in the following manner:
- Rewards and incentives: Offer exclusive rewards, discounts, or features to customers who stay with your service for extended periods. This might include free upgrades, additional support, or exclusive content.
- Recognition: Recognize and celebrate customer milestones or anniversaries with your service.
- Measure and improve: Regularly measure the program’s effectiveness and make changes as needed to ensure it remains engaging and valuable to your customers
Recognizing and rewarding loyalty increases the likelihood that customers be more loyal. Also, offering exclusive features or discounts may promote upgrades, further contributing to revenue growth through revenue marketing within the existing customer base.
What is a good NRR rate?
A good Net Revenue Retention (NRR) rate is typically around 100% or higher. Think of it like this: if your NRR is 100%, it means you’re not losing any revenue from your existing customers.
Now, if your NRR goes above 100%, that’s even better. It means your existing customers are not only sticking around but are also spending more with you, which is like icing on the cake.
On the flip side, if your NRR is below 100%, it suggests that you’re losing some revenue from your existing customers. That could be due to churn or perhaps even downgrading.
So, in a nutshell, aim for an NRR of 100% or higher to ensure your existing customers are not only staying but also contributing to your revenue growth. It’s a good indicator of a healthy and growing business.
Improving the NRR in SaaS businesses is an ongoing process that requires a thorough understanding of the current situation, strategic planning, and persistent efforts throughout the organization. SaaS businesses can build stronger relationships with existing customers and foster long-term growth and profitability by systematically addressing the critical areas that affect NRR, from customer success to pricing strategies.
The aforementioned tactics are a good starting point for a SaaS business looking to improve their NRR. Overall, adopting a blend of such techniques requires creating a customer-centric culture where customer service feedback is not just welcomed but actively sought. This and other customer-focused activities like customer experience management can reduce churn and increase upsell opportunities by engaging customers, understanding their needs, and aligning products to business needs.