NRR is tanking. The “North Star” is falling!
Time to panic? Yes.
Unless you understand what’s really going on.
NRR Defined
Net Revenue Retention – NRR – is the percentage of revenue retained from existing customers in a defined time period, including Expansion, Contraction, and Churn. Also called Net Dollar Retention or NDR.
When NRR is going up, it’s a great metric that everyone wants to talk about.
When it’s going down, it’s a lagging indicator that’s useles
Shifting Sentiment toward NRR
There’s been a significant shift in sentiment toward NRR in the last few quarters.
3Q22: (and for years before): “NRR is your North Star!”
4Q22: “NRR is a lagging indicator”
1Q23: “NRR doesn’t matter!” “NRR is a Vanity Metric”
2Q23: “NRR is tanking” “I’m SO over NRR”
NRR is a Lagging Indicator
Some people are derisively calling NRR a lagging indicator. As if they were shocked by this news and are now angry at this KPI.
I suppose if you looked at NRR as anything other than what it is and always has been – a lagging indicator that reports on what’s happened in the past – then you would be shocked and angry when it all-of-the-sudden drops and you had no idea that was going to happen.
NRR has Always been a Lagging Indicator
NRR has always been a lagging indicator (as most composite, high-level KPIs are).
Even the underlying metrics of Churn (customer leaves and takes all of their revenue with them), Contraction (customer stays but pays less), and Expansion (customer increases spend), are lagging indicators.
Focus on Leading Indicators
To affect change, you need to get clear on the leading indicators that influence Retention/Churn, Contraction, and Expansion.
Here are a few things off the top of my head that you might want to start paying attention to.
Leading indicators of Churn:
When I say “churn” here, I’m talking about customer (logo) churn, where the customer leaves (or doesn’t renew) and takes 100% of their revenue with them.
- Slowed or No Milestone Achievement
- General platform disengagement
- Ghosting Renewal specialist
- Meeting No-shows/cancellations
- Dramatic drop in support tickets
- Downgrade inconsistent with their stated goals
- Integrations are turned off
- Record creation slows
- Customer downloads their data
- Customer announces restructuring plan/acquisition
Leading indicators of Contraction:
BTW, in this current economic state, contraction seems to be the primary driver of falling NRR, not full churn.
When a CS org is focused primarily on customer retention (vs. revenue retention), contraction either goes unnoticed or – upper case OR – that drive for customer retention leads to contraction (discounts, downsells, etc. to “save” the customer).
Okay, so leading indicators of contraction are the same for churn, plus…
- Unassigned Licenses never got assigned
- Assigned licenses have been unassigned
- Excessive unresolved support issues
- Active users stop being active
- Features of current plan/tier were never used
- Premium features have stopped being used
- Consumption drops significantly
- Customer announces layoffs
Leading indicators of Reduced Expansion:
While you may have churn and contraction in some customer segments, it’s totally possible to still have expansion in others.
It’s a bad idea to assume since things are “bad out there” that all of your customers are hunkered down in survival mode.
Some are thriving and are ready to buy more from you.
But, some that might have been ready to buy more from you, that have a logical reason to do so, may have changed their minds.
So, some leading indicators that customers may not expand (at least for now) include any of the indicators of churn or contraction, plus:
- Their goals have shifted
- Avoiding new long-term commitments
- Personnel changes
- Low C-Sat
- Stated lack of confidence
- Slowed growth on their end (headcount, revenue, market share, etc.)
- Legitimate funding/budgetary constraints
Prioritize and Engage
Not all of those are going to apply to your unique situation, and there are many others in addition to those.
But that’s a good list to get you started with.
Identify which of those you have control/influence over and which are beyond your control and prioritize your engagement around the former.
If you need help with any of this, reach out… this is what I do.
NRR is a KPI. It’s not Bad or Good.
NRR is a composite KPI that is by its very nature a lagging indicator. This isn’t good or bad. It just is.
The metrics that roll-up to NRR – Retention / Churn, Contraction, and Expansion – though more actionable than the composite NRR, are also lagging indicators.
If you want to positively affect those metrics, and ultimately NRR, you need to pay attention to the things that directly influence them.
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