Net Revenue Retention (NRR) sounds like a mouthful but it is a core metric to focus on in any subscription business. Essentially NRR is how you measure and grow the revenue from your existing subscribers and/or assets over a given period of time - say 30 days, six or twelve months. Through other learnings we’ve talked about the importance of optimising your Customer Acquisition Cost (CAC) and acquiring new customers/subscribers effectively but what happens once you’ve acquired them? This is where NRR steps in and becomes an important measurement of your business’ ability to not only keep your subscribers but grow your revenue from each of those hard won subscribers.
How Do You Measure NRR?
When measuring your NRR it’s important to put an appropriate time frame on the measurement taking place. We find that it’s best to measure your NRR using a “cohort” methodology which means treating all subscribers who started a subscription in the same month or quarter as a cohort. You then determine what is an appropriate ending time for your NRR based on the minimum term of your (ideal) plans and also factoring in ideally how long you want your subscribers to retain a vehicle in your subscription business.
Your calculation is then simply a measure of;
From the above image you can see that to gain a positive NRR you want to have your subscribers expand their recurring revenue to your business versus having recurring revenue churn over the calculated time frame.
What Is a Good NRR for a Subscription Business?
Well that depends on your business model and intent on “land” vs “expand” revenue. Some businesses come in with a high starting or “land” revenue and so they don’t see much movement upwards in revenue across the lifetime of a subscription. Others however, focus on a lower land revenue and instead use “expand” tactics to ensure that the revenue from subscribers increases across either the minimum term or lifetime of a subscription.
The tactic that your subscription business utilises will thus have a bearing on your NRR but in general we see a NRR of 110%-130% as being the average across the industry.
What Are Some Tactics To Grow Your NRR?
To grow your NRR you have two choices - expand your recurring revenue at a greater rate than your churned revenue or reduce your churned revenue at a great rate than your expanded revenue. Tactically there are some options which we explore below.
To expand your revenue you need to focus on;
- Upselling - This refers to moving your subscribers into higher revenue plans and/or assets over their subscription, essentially earning more revenue from a premium offering than what they started on
- Cross-selling - this refers to “selling” your subscribers extra products that can enhance their existing subscription. Examples of this in an automotive subscription include kilometre/mileage booster packs, adding on additional drivers or other ancillary products such as reduce their insurance excess for a premium
- Price increases - simple but effective. Over time your subscription costs will go up through macro and micro economic factors and you need to pass this onto your subscribers. By passing these on your revenue also increases
To reduce your churned revenue you need to focus on;
- Regrettable cancellations - through customer experience and/or subscription offering reduce churn through regrettable cancellations. Note that not all cancellations or churn are regrettable (for example you may need the vehicle back) - but reducing regrettable cancellations will stop revenue leakage which has the effect of reducing your NRR
- Non-renewals - once the minimum term ends, subscribers have the ability to return your vehicle and essentially “non-renew”. If you have enough of this activity in a cohort before the end of your calculated NRR timeframe then you also have revenue leakage and will see this reflected in your NRR
- Product downgrades - this is the removal of add-on products, ancillary services and/or switching down in subscription plans and vehicles to lower cost options.
A focus on metrics is critical to the success of any subscription business and NRR is one of those that needs attention. Through various strategies and tactics you can bring in subscribers effectively but growing those subscribers once they are part of your business is how you can scale revenue in a cost-effective manner. Ignoring NRR can lead to a massive missed opportunity which is why we recommend retaining a focus on your existing subscriber base and ensuring you can both measure and grow their ongoing value.