How are you doing keeping and expanding your existing customers?
Given the news about BigCommerce and the focus on their S-1 I wanted to dive-in more and look at Net Revenue Retention. Net Revenue Retention is a measure of how much revenue a cohort of customers pays you over time from an initial subscription and typically measured by looking at a group of customers that were all acquired in the same time frame (July 2020 for example). Let’s say you acquire 100 customers this month and they each are paying you $100/month for your product or service. They represent $10,000 in MRR, now we fast forward to July 2021, 90 of those customers are still here paying the same $100, 7 have since cancelled (or churned) and 3 have added 3 extra licenses and are now paying your $400/month, we will show the math below:
July 2020: 100 Customers x $100/Month = $10,000 Monthly Recurring Revenue
July 2021: (90 Customers x $100/Month) + (3 Customers x $400/Month) = $10,200 Monthly Recurring Revenue
As you can see above Net Revenue Retention includes the “expansion” revenue or those 3 extra licenses bought by those 3 customers, so despite 7 customers churning (costing the businesses $700 in MRR) it sold an extra $900 in MRR to the 3 customers who upgraded and a year later this cohort or group of customers is yielding your business 102% of the revenue they started with ($10,000 vs $10,200) which is and 102% Net Revenue Retention (or NRR). NRR is an important metric for most SaaS/Subscription businesses because is tracks how effectively you are at both retaining your customers and also how effective you are at growing revenue from within your existing customer pool (expansion, x-sell, etc.). Most successful SaaS/Subscription companies have NRR above 100% which indicates that you are growing revenue before your sales team even acquires new customers. Next week we will cover Gross Revenue Retention, how it is different than Net Revenue Retention and why it is important to analyze both to truly understand the underlying health of a SaaS/Subscription business.