8 Steps To Improve Your NRR TodayJun 08, 2022
Net Revenue Retention (NRR) is a critical health metric in SaaS startups, so much so that a founder’s ability to raise capital is inextricably linked to the NRR percentage of the firm.
I have worked with over 25 founders in the last 12 months, making assessments of their sales maturity and the strength of their underlying GTM sub-structure to ensure they are ready to grow or scale.
All are building fast-growth B2B SaaS startups, and have either taken venture funding or intend to, so how they deploy that capital is important to them and their investors.
Venture capital is rocket fuel, and the only way a SaaS startup can truly take off is if net revenue retention is significantly above 100%.
Net revenue retention is the key to efficient growth, as the cost-to-grow-a-customer (CGC - just made that up!), is significantly less than the cost-to-acquire-a-customer (CAC)
However, if a founder finds their retention is hovering below 100% this spells major trouble and they know it.
As a result, founders scramble to improve NRR to the magic 120%+ range, often causing havoc across the whole organisation which often has the opposite effect, and NRR drops further!
I have seen this movie many times before over the last 20+ years in SaaS and me and my teams have successfully arrested churn and then turned it around in almost every case.
If churn is a challenge for you, or you just wish to improve NRR, here are 8 steps to improve NRR that I’ve picked up over the years, that continue to hold water today:
8 steps to improve Net Revenue Retention today
1. Introduce a data-driven sales culture - invest in RevOps
Unless you are measuring data that impacts your key metrics on a high frequency and making them part of your standard operating procedures it’s going to be difficult to intelligently determine what your next move should be.
The first step in doing this is having someone on your team be your go-to-person for all things funnel data, pre and post sale. I’ve gone on record many times highlighting how I like to hire a RevOps resource early
Net revenue retention is such a key metric that I will be looking for them to not only measure what our NRR is, but to offer insights into why it’s at where it’s at and how to improve it. Having a partner here who can see NRR through cold eyes will be a revelation if you don’t already have this resouece in place.
2. Be prepared to take some hits
Long term sustainable revenue might come at the cost of some short term unsustainable revenue and that might be a bitter pill to swallow - especially if that short term dip in revenue offers an existential threat.
More often than not though, the challenge for founders is one of courage. After multiple quarters of growth, reporting a quarter or two where growth slows is often too much of a challenge for them to face up to.
The slight trough in revenue will be replaced by explosive growth, and you just need to be confident that’s the reality, and share that convincingly with your team and your board - and they will understand.
3. Measure NRR in cohorts versus a blend
If you’re lucky enough to have grown to a size where you have 50+ customers, a cohort analysis of your NRR by client or product type is often very revealing.
Uncovering why some customers have a higher average sale price (ASP) and higher NRR than others can lead to some pivotal remedial actions.
In deeper analysis I have often seen a business whose blended NRR looks bad, but when broken into 3 cohorts, you realise they actually have 1 very bad line of business, 1 not so good, and 1 amazing line of business, for example:
Cohort A: NRR = 40%
Cohort B: NRR = 80%
Cohort C: NRR = 140%
There are always deeper issues at play that need investigating, however, assuming the underlying SaaS metrics and TAM of cohort C look solid, then cohort C has to be an area of renewed focus.
4. Re-define your ICP
Assuming you’ve had the courage to do a quantitative break down of your client cohorts or if you have less customers, just taking an honest view of your early customer feedback, you should be in a position to re-define your ideal customer profile.
Creating focus around who you say “yes” to, and who you say “no” to is a superpower, that a well defined ICP will gift you.
The best salespeople often don’t have this problem, they always want to be ultra focused, however the lack of focus problem is often bestowed on them by founders who either get greedy, or suffer from shiny object syndrome, and ultimately encourage otherwise focused team members to lose focus!
5. Re-assign resources
When you re-focus this almost certainly means you have to re-assign resources, and this may mean some people are surplus to requirements.
One mistake I see founders make is attempting to re-assign people to new roles they are not ready for. For example, a move to a more strategic sell from a more transactional sell is an arduous move for those used to frequent big dopamine hits in SMB, and it rarely works out without a heavy commitment to training.
You need to make the challenging but important move to re-factor your team.
6. Be honest with your investors
This goes for any situation, but especially when you’re executing what could be seen as a mini pivot that will result in a short term dip in revenue. The best investors will understand, respect and support your move, and trust your judgement.
There’s nothing worse for an investor than having to second guess a founder or discover major strategy shifts in retrospect from a third party. This immediately breaks down trust in what is supposed to be a partnership.
If you think you can adjust course and maintain the original forecast you’re almost certainly cutting a corner here that will come back and bite you on the ass.
With any re-focus, you will materially impact the way in which $ARR flows into the system and this will need to be reflected in your forecasts all the way down to an individual contributor level.
Be sure to do this openly and transparently with your team in order to build the deepest respect.
8. Be honest with your team
Building on #7 there’s nothing worse than pretending a pivot is not going to impact revenue in some way shape or form in the near term.
For example, the introduction of a product-led growth strategy for the first time, will almost certainly cannibalise top-line revenue in the short term, and make both renewals and upsells more challenging, whilst reducing the $ARR value of the net new opportunity pool.
It’s futile to try and convince the team otherwise, but many founders try - this is a mistake.
The founders that command the deepest respect are honest with their team about such an impact on their ability to hit original targets and adjust quotas accordingly.
To wrap up
Focus is harder than you think for a founder. As startups grow, so does the pressure and so does the complexity, and for many founders it gets hard to see the wood for the trees.
But if NRR is broken, fixing it has to be top priority as it’s often the catalyst for exponential growth. However, it might take a step or two backwards first to get the long term growth they ultimately want - something that scares the heck out of many founders.
Come up with a plan that you believe, get great people by your side that you trust to help you figure it then… …execute, execute, execute, and let nothing or no-one stand in your way!