SaaS

A High NRR May Not Be a Good Thing for Your SaaS Business

Paul Prebinski | July 14, 2022

Imagine for a second that your SaaS business has attained the holy grail of net revenue retention (NRR) figures: 150%. You’re knocking it out of the park and you can now sit back and relax, right?

Well, not so fast—it’s not always in the best interest of your SaaS business to focus solely on a high NRR figure.

Your 150% NRR can lead to complacency and a false sense of security, especially if you aren’t keeping a close eye on other growth and retention metrics.

For example, unless you also check your business’s other metrics, you might not realize your new customer growth is only 25%. That’s not necessarily a death knell for your SaaS business, but it can present future challenges in terms of growth and the sustainability of your business.

Let’s discuss.

High NRR can mask other issues in your SaaS business model

If you only look at your NRR, you may think your SaaS business is on track with excellent growth and a secure future.

But NRR doesn’t always tell the whole story.

While you may be fantasizing about the compounding business growth that’s surely coming your way thanks to your high NRR, some potentially critical issues could be lurking in the shadows.

Issue #1: Low new customer acquisition

In order to create a self-sustaining engine for future growth, it’s important to earn revenue from both existing customers as well as from new logos. A high NRR figure doesn’t take into account specifically where your revenue growth is coming from, so your SaaS business may be at 150% NRR but only 20% new logo growth.

Those figures mean your sales team is likely putting most of their effort into upselling existing clients with more products or account expansion. These are often easier sales targets than net new customers and should be focused on.

But, too low a rate of new customer acquisition can hinder future growth.

When the sales team focuses too heavily on selling to existing customers, they may effectively ‘over-harvest’ that revenue stream to the point where:

  • there is a lower potential for upselling and cross-selling in the future, or
  • customers no longer feel they’re getting enough value for their money.

This may lead to issue #2…

Issue #2: High customer churn

When customer satisfaction wanes, customers don’t feel like they’re getting their money’s worth, becoming more likely to churn. If enough customers churn, it can cause your SaaS business to become a leaky bucket. This occurs when a high churn rate chokes off the growth rate—existing customers are leaving at the same or higher rate than new customers are being acquired.

Another potential churn-related pitfall is when your SaaS business reaches a growth ceiling, which is where your customer base has grown substantially to the point where your churn, though not necessarily a concerningly high percentage, ultimately cancels out the growth of new customers. This can occur when your new client acquisition rate has not kept up proportionally with the size of your customer base.

Again, since NRR takes into account your expansion revenue as well as your churn revenue, the final figure can be greater than 100%. It’s a good metric of growth, while GRR is a better measure of customer retention. Therefore, it may be difficult to accurately assess your churn and growth rates by looking solely at your SaaS business’s NRR.

How to avoid being blindsided by these masked issues in the SaaS industry

Fortunately, there are a few ways you can avoid falling into a high-NRR-based complacency trap:

Track all metrics holistically

First and foremost, it’s crucial to take a holistic view of all of your SaaS business’s metrics. These should include NRR and gross revenue retention (GRR), as well as monthly recurring revenue (MRR), annual contract value (ACV), customer lifetime value (LTV), and customer acquisition costs (CAC). Be sure to look at customer retention and churn rates as often as you check your NRR.

Especially early on in an effort to scale a SaaS business, it can be tempting to focus only on customer acquisition and attaining a glamorous 100%+ NRR. However, it’s equally important to ensure that your customers stick around and your GRR is high and stable.

The median GRR for SaaS businesses that are less than three years old is around 99%, although it commonly drops to around 90% after about three years. So, if your SaaS business is relatively new, it’s important to ensure your GRR is meeting these benchmarks before you worry too much about NRR.

A high GRR shows you have a subscription product that is useful and valuable to customers over the long term, while a high NRR shows you have strong growth potential. Investors know this, so if you seek funding, plan to have both your GRR and your NRR inspected.

As SaaS expert Dave Kellogg outlines, “I think the thing that most often goes wrong with SaaS metrics is when they’re incoherent with the story. No metric is inherently evil or good, but it has to match the story. If you’re going to tell a big land-and-expand story, and you’ve got multiple products and cross-sell and additions and price increases, I better see a nice NRR. If you have none of those things, well, first I’m going to wonder why you chose that story.”

So, the moral of the story: keep an eye on all your KPIs and metrics holistically—watching them individually as well as noticing how they correlate with each other. And, keep in mind that different metrics can be more impactful depending on where you are in the lifecycle of your business, the type of SaaS products or services you offer, and your business goals.

Balance sources of revenue growth

Next, aim to split your total revenue growth 50/50 between new logo growth and expansion revenue from existing customers. In the SaaS industry, if your overall revenue growth relies too heavily on expansion revenue, you run the risk of encountering a leaky bucket situation or hitting a growth ceiling.

Growth ceilings can be deadly for SaaS businesses, and there are only three ways to break through. You could:

  • reduce churn/increase retention,
  • acquire more new customers, or
  • increase average revenue per user (ARPU).

Ensuring your revenue growth is balanced between new and existing customers from the get-go helps ensure that you won’t have to take emergency measures to save your business later on.

Segment your NRR and other metrics

Finally, segment your NRR and retention rates by ARPU and acquisition date to help reveal trends that may not otherwise be obvious. Doing so can help show whether small, mid-size, or enterprise customers are more likely to churn, as well as when that is most likely to happen. Then you can formulate a plan to increase retention rates for the customers who are most prone to churning.

This type of metric segmenting can also help you identify if there are certain members of your sales and customer service teams who may be underperforming. If so, steps can be taken to improve performance and target specific problem areas.

So, how do you achieve these steps?

A modern, comprehensive subscription management platform can help

A modern subscription management platform is more than just a tool to handle billing—it’s also a valuable data mine that increases the visibility of non-NRR metrics.

This type of full-scale SaaS solution can also:

  • Provide real-time customer data and reports
  • Integrate seamlessly with your existing tech stack
  • Generate accurate forecasts
  • Virtually eliminate manual billing errors
  • Reduce recurring revenue leaks
  • Assist with revenue recognition compliance

Having all of this information readily available allows you to keep your finger on the pulse of your software as a service business and make data-driven decisions. In turn, this can help you scale effectively, meet your GRR and NRR goals, and win over investors.

Tags:

Written by:

Paul Prebinski
Paul Prebinski
Director of Sales, Stax Bill

Paul is the former Director of Sales at Stax Bill. He is an accomplished customer focused leader with a strong background in FinTech, SaaS, and cloud services. Paul and his team work closely with customers and partners to help improve and optimize recurring billing processes.