Maintaining a loyal, satisfied customer base is important for organizations in any industry, but it’s especially vital for SaaS companies. As a software-as-a-service provider, your company relies on the consistent revenue that a satisfied customer base provides.
Customer retention is crucial. Studies indicate that even a small improvement in customer retention rates can significantly impact overall profitability. A 5% increase in customer retention rate can support a 25% to 95% increase in profits!
It’s important to track your company’s customer retention rates and revenue to evaluate your organization’s overall health and growth potential. However, evaluating a SaaS company’s revenue isn’t necessarily as straightforward as it might seem; it requires more than just looking at the bottom line or a bank statement at the end of the month.
What other metrics should you monitor? Net Revenue Retention is an excellent place to start. SaaS providers must understand and track Net Revenue Retention (NRR) to gauge business health. Furthermore, they must continually look for ways to improve that metric.
What Is Net Revenue Retention?
Also known as Net Dollar Retention (NDR), Net Revenue Retention describes the amount of money a company earns from existing customers. In other words, if you had a time period where you brought in no new customers, what would happen to your overall revenue during that time? Would it grow or shrink? The answer makes it very easy to see how healthy your customer base is.
Although it would be possible to figure out NRR for any given time period, most companies measure NRR on a per-month basis. In some cases, however, you may want to calculate NRR for a different period of time, such as during seasonal sales or new marketing campaigns.
Your company’s NRR is based on several different types of monthly recurring revenue (MRR):
- Expansion MRR: Expansion revenue refers to earning more revenue from existing customers (e.g., when clients buy new products, upgrade to higher service tiers, etc.).
- Churn MRR: Churn revenue refers to money lost when clients leave your company.
- Contraction MRR: The opposite of expansion revenue, contraction revenue refers to money lost when existing clients move to a lower tier of service or make other decisions that reduce the amount of revenue your company makes from them.
To calculate NRR, you also need to know the starting MRR for the month you’re looking at. Once you have all these numbers, use this formula:
- NRR = Net Revenue Retention
- StMRR = Starting Monthly Recurring Revenue
- ExMRR = Expansion Monthly Recurring Revenue
- ChMRR = Churn Monthly Recurring Revenue
- CoMRR = Contraction Monthly Recurring Revenue
This formula gives you the NRR as a percentage.
Here’s an example. Let’s say you start the month with $25,000 in monthly recurring revenue. During that month, you earn $8,000 in expansion revenue. But you lose $2,000 from customers downgrading their service and a further $3,000 in customer churn.
Your MRR at the end of the month is $25,000 + $8,000 – $2,000 – $3,000 = $28,000. To calculate your NRR, divide $28,000 by $25,000, and multiply the result by 100. The answer is an NRR of 112%.
That means even if you don’t bring on any new customers that month, you would still end the month making more revenue than you did at the beginning. In other words, your customer base is healthy.
NRR Benchmarks to Aim For
There’s not one single “perfect” NRR value, although you want your NRR to be as high as possible. Here’s a basic overview of NRR tiers for SaaS businesses:
- Below 80% — Churn and contraction numbers are likely high, and the company should focus on improving retention.
- Between 80% and 100% — There’s a fairly good balance between churn and retention, but revenue growth (i.e., expansion) could be improved.
- Over 100% — The company is retaining most of its customers and has strong expansion revenue performance.
For newer SaaS companies that haven’t been established for very long, an NRR between 90% and 100% is a good goal. Larger companies that have been in business longer should aim for higher NRR values that are at least 100%.
Strategies for Improving Net Revenue Retention
Now that you know how to calculate NRR, you can see how your company is performing. But knowing your current NRR number is only the beginning. The next step is to find ways to increase your Net Revenue Retention.
How can you do that? By doing two things: keeping as many current customers as possible and increasing the amount of revenue you get from those customers.
Reduce Customer Churn
It costs more to acquire a new customer than to retain an existing one. So lowering your churn rate is crucial for long-term revenue stability and growth. How can you reduce customer churn? Find ways to improve your customer’s experience, from the sales handoff to go-live and beyond. Reduce delays, mitigate frustrations, and provide better customer service.
Improve Your Onboarding Process
Many companies make the mistake of thinking that churn happens after a customer has been with the company for a while. But 50% of churn happens in the first 60 days, meaning many customers leave before implementation is complete.
If that’s happening, it’s a sign that there are problems with your customer onboarding process. A poorly designed onboarding plan is slow and frustrating, leaving customers wondering whether they will ever get to experience the full functionality of your product. In other words, the time-to-value is too long.
How can you make the onboarding experience better for your customers? Increase transparency and efficiency, improve communication and task management, and quickly address any roadblocks or problems.
Focus on Expansion Revenue
If you can find ways to make existing customers even more profitable, you can increase your expansion revenue. How can you grow expansion revenue? Encourage current customers to buy new products, or upsell them into higher (i.e., pricier) tiers of service. Developing a strategy to increase expansion revenue can be an extremely effective way to improve NRR.
Improve Customer Support
Why do customers leave your company? Is it due to poor customer service? Probably. In fact, 96% of customers say they’d leave a brand because of a bad customer experience. So if you want to reduce churn, take a look at your customer services policies and find ways to improve them.
If you can identify potential problems that are likely to impact your current customers, you can fix them preemptively. Likewise, it’s important to monitor customer satisfaction among your existing clients. Responding quickly to a minor issue (before it becomes a major problem) might encourage the affected customer to stay because they know they can trust your company to handle problems quickly and effectively.
Additionally, actively monitoring your customer satisfaction metrics helps you easily identify customers who are likely to churn. Once you have that information, you can proactively encourage them to stay with a discount, service contract extension, or free trial of a higher service tier.
Switch to Usage-Based Pricing
Does your company follow a usage-based pricing strategy? This approach can be extremely effective for SaaS providers. Essentially, usage-based pricing means charging customers proportionally based on how much they use your software.
This approach can be very attractive to customers, as it’s flexible and allows them to only pay for what they use. While it seems like this model may result in lower revenue, that’s not necessarily true. Usage-based pricing tends to correlate with high customer satisfaction and retention, which are both critical contributors to long-term profitability and a high NRR.
Offer Rewards to Loyal Customers
Another way to improve your customer retention numbers (and thus, your NRR) is to develop a loyalty program. When customers know they’ll be rewarded for staying with your company, they’re more likely to. What sort of rewards should you offer? Consider giving loyal customers discounts, gifts, free upgrades to better products or services, or credits toward future bills.
Add Value Over Time
Finally, look for ways to give your customers more value over time. Customers are likely to stay with a company that’s continually finding ways to serve them better.
If they’re consistently experiencing the benefits of new features and optimizations, they won’t have much motivation to leave. And satisfied clients are more likely to upgrade to higher service tiers (or at least, not drop down to lower levels) when they frequently see improvements or added features that provide more value.
Better Onboarding Reduces Churn & Improves NRR
A high customer churn rate leads to low net revenue retention. And in many cases, especially in the SaaS industry, customer churn can happen quickly, even before the onboarding process is completed.
If you want to improve your company’s NRR, start by evaluating and improving your implementation process. Look for consistent issues that contribute to a poor customer experience, like miscommunication, lack of transparency, and inefficient task management. Addressing all those issues gives new customers a better experience and increases the chance that they’ll stay with your company long-term.
If you’re looking for an onboarding solution that simplifies the process for your team and gives your customers a better experience, GUIDEcx is the answer. Our platform is designed specifically for onboarding, and it mitigates common onboarding challenges via strategic automation, built-in communications, integrated customer satisfaction tools, and effective task management tools.
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