Net Revenue Retention 💹
What is NRR?
Also known as Net Dollar Retention, NRR is the amount of revenue you had at the beginning of the year that remained with you until the end of the year, including increases.
NRR measures fluctuations within your existing revenue base. It lets you see how much revenue growth or churn you have in a period from existing customers.
How does NRR impact my company?
Everyone loves subscriptions, because you only have to get a customer once. If all goes well, they stay with you.
That saves you time and headache, and it also saves you capital. Consistent, recurring revenue means fewer resources spent on ads and salespeople. This is especially true if existing customers increase their spending with you over their lifetime.
Cohorted Retention 📊
What is Cohorted Retention?
A cohort is a group of customers who share one or more important characteristics. These may include demographics, sign-on date, industry sector, and others.
You can (and should!) measure retention for individual cohorts. The resulting metric is known as cohorted retention. For instance, you may examine retention rates specifically for customers who joined you in December of 2018. Or, you could measure retention behavior for food retailers separately from clothing retailers.
Why measure retention in cohorts?
First of all, it might be that you’re doing a great job keeping one type of customer, but not others. Imagine you complete a retention analysis based on customer location. You find that businesses on the east coast really stick to your product, but your west coast customers churn at a much higher rate.
That information can help you make educated guesses about the source(s) of customer churn. Maybe businesses on the west coast tend to serve a different type of customer than those on the east, meaning their business needs are distinct from one another. Maybe the culture on the west coast makes those users less compatible with your product. It could be any number of factors, but you won’t be able to analyze that unless you know the correlation exists.
Additionally, you might find patterns in customer churn based on time. This is especially true when you measure retention by sign-on date. For example, let’s say you find that customers who joined in January 2020 showed an increased churn rate in January 2021. You investigate further, and find that those who joined in February 2020 were likely to churn in February 2021, and so on.
When you see patterns in your cohorts dwindling after a certain amount of time, it’s wise to ask yourself:
Are they leaving around the same time (and possibly for similar reasons)?
- The scenario above is common in SaaS companies with annual contracts, because the end of the contract is when customers are most likely to churn. In that situation, make a strong effort to push contract renewal.
- Time-based patterns in churn may occur for other reasons as well. For example, maybe your product becomes less useful to businesses as they scale. Perhaps you made unpopular changes to the product that cause customers to drop after a few months. Whatever the reason, you’ll need to complete a cohorted analysis to address it.
Have they received the same excellent treatment across the course of their entire relationship with you?
- Sometimes customer service is top priority with newcomers, but falls to the wayside once customers have been with you for a greater length of time. This prevents the customer from using your product to its fullest potential, and from developing a strong relationship with your business.
- Make sure your customer success team is highly skilled and sufficiently staffed to provide top service at all stages of the customer life cycle.
Have your customers changed in ways that present new needs?
- Perhaps your consumers have gone mobile and now need a mobile-friendly version of your product. Or, they may want to expand the range of services offered to their customers in ways you don’t currently support. How can you adapt?
Is there a component of your product that is disappointing for the user once it reaches a certain threshold?
- Perhaps a customer who once paid a low price for your base product becomes disillusioned once they move up to the premium tier. The customer might expect more features than you provide in exchange for the higher cost, leading to dissatisfaction when they upgrade.
Why measure uncohorted retention? 🤷
If cohorted retention metrics provide so much valuable information, you might be wondering why a business would bother with uncohorted retention. Put simply, cohorted retention provides details of your customers’ retention behavior, but uncohorted retention shows you the big picture.
It’s one thing to know how all the different sectors of your customer base behave in isolation from one another (like you’d see through cohorted analysis). It’s another thing entirely to understand how all the moving parts connect to make a whole.
In other words, it doesn’t matter that your east coast customers are super sticky if the churn from your west coast customers outweighs that. If you don’t measure overall, uncohorted retention, you won’t be able to measure individual cohort’s impact on that figure.
To get the fullest picture of your business’s health, you’ll need a solid understanding of both uncohorted and cohorted retention.
The Goal: An NRR over 100%! 🎉
Growth can result from selling to new customers, but also from existing customers growing their spend. This means your NRR can actually exceed 100%. When your NRR surpasses 100%, your revenue growth from existing customers exceeds churn.
To conceptualize this, imagine that between February 2021 and February 2022, a handful of customers left your service. This amounted to a $25K total loss of revenue. However, in the same period, the customers you retained grew their spending. In fact, they grew it by $50K. Even though you lost customers, your revenue still increased by $25K!
Remember, you also need to look at the cohorted data. This helps you figure out which customers increase their spending, and which tend to stagnate or leave. You can then focus your efforts on obtaining more customers that are likely to grow with you. Not only will your acquisition dollars be better spent, but your business will grow even faster than before.
Understand Your Retention Story 📚
Cohorted and uncohorted net retention each tell their own story, especially over varying lengths of time. Knowing the status of both types of retention will point you down the path to fast growth.
We know: generating these metrics is hard. If you’re overwhelmed, don’t worry! Let Subscript do the hard work for you.👏🤩💪