Using Net Recurring Revenue to Identify Customer Service Opportunities and Risks

Using Net Recurring Revenue to Identify Customer Service Opportunities and Risks

Net Recurring Revenue is a comprehensive indicator that reveals the extent to which you are retaining, expanding and growing customer relationship value.  Examining the specific underlying elements that contribute to the calculation of Net Recurring Revenue provides the necessary insights to identify the root causes of churn, attrition and contraction.  In addition, examining the reasons for revenue growth presents opportunities to embrace and expand practices that encourage expansion of relationship value.

Net Recurring Revenue

Recurring revenue is, or should be, predictable and expected income earned from ongoing relationships such as subscriptions and service contracts. Measuring Net Recurring Revenue provides an indication of the performance and impact of service offers, products, programs, and customer-focused policies and practices.

Net Recurring Revenue measures the impact of additions and losses to recurring revenue over a specified period and the Net Recurring Revenue Rate indicates if the overall value of customer relationships is expanding or contracting. 

Inputs

To calculate the Net Recurring Revenue Rate, you need to know how much recurring revenue is added and lost within a period.  While you can calculate Net Recurring Revenue Rate by knowing the aggregate recurring revenue you add and lose within a period, it is ideal to have as much granularity as possible. 

The type and magnitude of changes to Net Recurring Revenue Rate can provide important insights into the reasons for changes to the value of customer relationships.

Net Recurring Revenue is a time-based measurement.  Choose a period such as a month, quarter or year.  The shorter the period the more likely you are to find variations from period to period due to time-based market factors and customer behaviors.

The Formula

The formula for Net Recurring Revenue is straightforward. Start with your existing recurring at the start of a period, subtract recurring revenue lost during that period and add recurring revenue added.  See the formula below.

The Meaning of Net Recurring Revenue

Measuring Net Recurring Revenue yields obvious findings including a clear indication about the extent to which recurring revenue is growing or declining.  The more important insights from this metric come by examining the reasons for growth or contraction of Recurring Revenue.  Consider the following when examine Net Recurring Revenue:

  • What is the trend in Net Recurring Revenue – growth or contraction?
  • What is the rate of rate of change in growth / contraction?
  • What are the primary reasons for loss of recurring revenue?
  • What are the primary factors that contribute to revenue gains?

Net Recurring Revenue Trends

It is important to understand the trends in in recurring revenue growth or decline.  Of course, revenue growth is preferred, but decline may also occur.  Establish a reasonable representation of recurring revenue performance over a period that is long enough to accurately reflect typical customer buying behaviors and normal sales, adoption, and renewal cycles.

Measurement Period

The first consideration is the examined measurement period.  Short duration measurements (e.g. monthly) may reflect short-term factors that may overtime be normalized.  Measurement over longer periods can provide a more accurate reflection of the actual trajectory of recurring revenue performance.

The Sources of Growth

If Net Recurring Revenue is growing it is important to understand why so that growth can be sustained or accelerated.  Growth will come by establishing new customer relationships or from increased spending by existing customers.  Differentiation and understanding the sources of growth is important.

New Logos

Is growth coming from entirely new customer relationships?  If so, chances are that your product/services are in demand, customers are aware of your products, want access to your capabilities and that your reputation is positive.  This suggest that Sales and Marketing efforts are working.

Consider if growth can be accelerated.  Are your reaching your maximum addressable market or are there even more customers that you can win over.  Ask new customers why they choose your product over other possible alternatives.  Is it your reputation, your capabilities, price, other factors, or a combination of all the above?  You may be able to sharpen market messaging and enhance the overall value proposition to attract new customers.

Acquiring new customers is great, just make certain that you can nurture and sustain new relationships relationship.

Expanding Customer Relationship Value

How much revenue growth is coming from existing customers through increased spending? Perhaps one of the strongest indicators of customer satisfaction is their willingness to expand their relationship with you.  Expansion may be a result of the utility of your product and services and may indicate that your products are easy to use and/or that the success services you have in place effectively help customers successfully adopt and apply products.

Growth attributed to existing customers is something that every company must understand.  Engage your customers that increase their spending with you to understand why.  Determine how you can accelerate expansion of customer relationship value.

Low or No Expansion of Existing Customer Relationship Value

If you determine that very little growth is coming from existing customers, ask yourself why?  Are customers still trying to achieve value with what they already have.  If so, you may need to provide more assistance to help customers with onboarding, adoption training and success planning.  Its is also possible that growth may be inhibited by lack of value-added offers and extensions.  Examine your product and service portfolio.  Do you offer what your customers need?  Are there additional services that your customers are willing to buy from you?  If so, it is time to expand your portfolio of offerings.

Reasons for Loss

All the gains from new customer relationships and revenue expansion within your existing customer base can be quickly erased if you do not retain the customers you have.  Even if you have a positive Net Recurring Revenue Rate, losses are eroding your full revenue growth potential. 

Customer Loss versus Revenue Loss

Recurring revenue loss may occur because existing customers choose to spend less with you from period to period (e.g. downgrade their subscription level or number of licenses).  In these situations, you retain the customer relationship, yet you get less revenue from an existing customer.  Understanding why customers choose to reduce their spend level is important and should be examined so that underlying issues can be mitigated.

Most recurring revenue loses are likely the result of losing a customer relationship.  Customer attrition is inevitable.  Companies go out of business and sometimes legitimately no longer need to use your product.  Many of the reasons for customer churn can be mitigated when identified and understood.  If customers cannot derive value form your products understand why.  Perhaps it is simply a matter of not being able to achieve the outcomes they expect – if so, consider better onboarding, adoption and training programs.  Perhaps the products lack the features a customer needs or product capabilities are limited, or performance is unreliable.  These are issues that need to be raise to the attention of the product development teams. Customer attrition may also result from poor sales, service and renewal practices.

It is imperative to understand how much revenue you are losing and what percent of that can be retained if changes are made to products, programs and customer-facing practices and policies.

Retain, Expand and Grow

Net Recurring Revenue is a comprehensive indicator that reveals the extent to which you are retaining, expanding and growing customer relationship value.  Examining the specific underlying elements that contribute to the calculation of Net Recurring Revenue provides the necessary insights to identify the root causes of churn, attrition and contraction.  In addition, examining the reasons for revenue growth presents opportunities to embrace and expand practices that encourage expansion of relationship value.

Retention and Recurring Revenue Model

This article is based on ServiceXRG’s Retention and Recurring Revenue Model which helps companies examine the financial health of customer relationships to identify the factors that affect recurring revenue retention and growth.  For more information contact Tom at tsweeny@servicexrg.com.

If you don’t have the time to review a lot of data, there is one metric that can provide a great deal of insight into the health or customer relationships and indicate the performance of Services and other customer facing departments. The one indicator that rules them all is Net Recurring Revenue.  When measured on a monthly, quarterly or annual basis you can learn a lot.

Featured: NET RECURRING REVENUE - Using Recurring Revenue to Identify Customer Service Opportunities and Risks

This report provides detailed instructions for defining, measuring and applying NET RECURRING REVENUE to identify customer service opportunities and risks.

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Milestone 1: READINESS ASSESSMENT

The first step in the transformation to Customer Success is to understand what it is and why it may be right for your business.  While we all want our customers to be successful, the implementation of a Customer Success capability can be costly and disruptive.  Before you commit to a customer success strategy it is essential to determine if this is the right approach and the right time.

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Defining a Customer Success strategy and installing staff, tools and processes is just the beginning.  The needs and expectations of customers will continue change and Success strategies and offerings must evolve.  Focus on maximizing Customer Success performance by monitoring KPIs.  Look for opportunities to continually improve the efficiency and effectiveness of Customer Success initiatives. Create a success-focused culture and differentiate your brand by selling results.

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Similarities between customers’ needs, expectations and general business characteristics can be described by using common classifications and attributes.  Develop a system to organize customers by these common characteristics. 

Define a service segmentation model to organize customers by shared characteristics.

  • Shared characteristics may include service needs, usage, product adoption or life cycle stage and business characteristics.
  • You should identify a minimum of 4 distinct service-centric segments to defined to describe unique attributes such as customer needs, expectations, or business characteristics. 

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  • Note that customers may belong to one or more customer segment.

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  • Target sales and marketing strategies and messaging to the unique needs of segments.

Evaluate service-segments each year to align current and prospective customers and to assure segments are up to date and relevant.

  • Customer needs change so make certain that your portfolio keeps pace with changing expectations.

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Deep data analytics will monitor product performance and usage telemetry to identify potential issues and apply corrective actions.

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To make the successful transition from perpetually licensed products to subscription services requires companies to adopt a subscription mindset.

The Subscription Mindset

The subscription mindset is a unique perspective on the measures of business success and the foundations of the company – customer relationship.  Many of the tenets of the subscription mindset are not new to technology vendors, but the methods by which resources are allocated and performance are measured must change.  The principles of the subscription mindset include:

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  • Services emphasize Customer Success to drive use and adoption of products.
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  • The measures of Service success are based on retention and expansion of recurring revenue.

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The subscription mindset requires that companies embrace a new perspective on customer relationships as well as new measures of success and programs to help customers adopt and succeed with products.

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To be successful with subscription licensing programs you must adopt a subscription mindset.  The subscription mindset is a framework that will guide companies to new perspectives on the value of sustaining customer relationships; suggest changes to organizational structures to meet post-engagement customer needs; introduce new methods for measuring business success; and influence the design of new post-sales service programs.  For more information see the featured report below.

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*Membership level determines your access to ServiceXRG research and other member services. Paid memberships include access to research and playbooks. Free memberships include access to some reports and discounts to others. Please visit our membership page for a list of available membership programs.

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