How to Measure Net Recurring Revenue

How to Measure Net Recurring Revenue

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How to Measure Net Recurring Revenue

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 necessary insights to identify the root causes of churn, attrition, and contraction.

Net Recurring Revenue Defined

Net Recurring Revenue measures the additions and losses to recurring revenue over a specified period. Net Recurring Revenue Rate indicates if the overall value of customer relationships is expanding or contracting. Knowing how to measure Net Recurring Revenue, you can obtain a clear indication of the performance and impact of service offers, products, programs, and customer-focused policies and practices.

How to Measure Net Recurring Revenue

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.

Recurring Revenue Measurement Period

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 see variations from period to period due to time-based market factors and customer behaviors.  Measurement over longer periods will provide a more accurate reflection of the actual trajectory of recurring revenue performance.

Existing Recurring Revenue

Start with your Existing Recurring Revenue (Existing RR) at the start of a period.  This includes any sources of revenue that are renewable at the end of a term including product and service subscriptions.  This does not include one-time purchases and license fees.

Recurring Revenue Lost

Subtract Recurring Revenue Lost (RR Lost) during that period.  This includes subscriptions that are canceled or non-renewed (lost) and subscriptions that are reduced in total value (contraction).

Recurring Revenue Added

Add Recurring Revenue Added (RR Added).   This will include any new sources of recurring (additions) or expansion of the value of existing recurring revenue relationships.

See the formula below.

The Meaning of Net Recurring Revenue

Measuring Net Recurring Revenue provides 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 examining 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 – loss of customers or contraction or exiting of relationships?
  • What are the primary factors that contribute to revenue gains – new relationships or expansion of existing relationships?

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.  Use these insights to develop strategies to stem customer churn and reduction of contract value. Build upon practices and circumstances that lead to new customer engagement and growth of existing relationships.

Net Recurring Revenue

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How to Measure Net Recurring Revenue

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.

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Moving Beyond Industry Average Renewal Performance

Moving Beyond Industry Average Renewal Performance

Over time, the implication of achieving only industry-average renewal rates will result in significant customer attrition and lost revenue.  Industry-average renewal rates show that nearly one-fifth of customers are lost at renewal time.  As these losses compound over time, the effects are dramatic.

Industry Average Renewal Performance

A steady erosion of the customer base over a five-year period is typical for companies that only achieve industry average support and maintenance contract renewal rates.  The impact of consistently the industry average contract renewal rate (82.4%) illustrates the erosion of the customer base.  This example shows that at the end of a five-year period, the percent of customers under contract erodes to 46% of the original relationships.

This example does not take in to account new contracts added or other growth activities.  It is intended to highlight the impact of achieving only industry average performance.  Increasing support and maintenance contract renewal rates by 5% to 10% can have a dramatic impact on the percent of customers retained and on net revenues.

The Impact of Industry Average Performance

Moving Beyond Industry Average Performance

Industry average performance is not good enough.  To maximize support and maintenance contract revenue you need a clear picture of your current situation or a plan to understand and mitigate attrition. ServiceXRG offers the following recommendations to assess and improve your customer retention capabilities:

  1. Establish an up-to-date and actuate measure of your current support and maintenance contract renewal performance.
  2. Benchmark your current renewal performance – are you at, below or above industry average performance?
  3. Identify the top reasons for contract non-renewal (hint: ask your customers). See also Why Your Customers Don’t Renew Service Contracts and What You Can Do About It.
  4. Develop a mitigation plan to stem contract attrition.
  5. Forecast the impact of increasing contract renewal performance by 5%, 10% or more.
  6. Use the forecasted benefits from increased contract renewal performance to make the case for funding corrective actions (new or better tools, more staff, or changes to business processes).
  7. Continue to refine processes, tools and performance indicators to maximize retention and revenue from the current customer base.

Assessment: How effective are your service contract renewal practices?

Are you leaving money on the table? Do you know why customers cancel service contracts? Use ServiceXRG’s Renewal Assessment tool reveal your Service Contract Renewal Health Score.
You will receive immediate feedback with recommendations to maximize service renewal performance, a copy of the Service Renewal Best Practices playbook and a complimentary coaching session.

Begin Assessment

Playbook: Service Renewal Best Practices

The Service Renewal Best Practices playbook introduces the metrics, practices, and activities necessary to optimize service contract renewal performance and grow customer relationship value.

Would you like a free copy of the Service Renewal Best Practices playbook?

Use ServiceXRG’s Renewal Assessment tool and receive your copy.

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Recurring Revenue Rate

Recurring Revenue Rate

The amount of recurring revenue a company receives may increase, stay the same, or decline for a given period. Recurring Revenue Rate indicates the percent change in the amount of recurring revenue at the end of a specified period compared to the recurring revenue at the beginning of the same period.

Recurring Revenue Rate

Recurring Revenue Rate provides an indication of how much recurring relationship value has been retained, grown or been lost.

Recurring Revenue Rate can be applied to a specific timeframe (e.g. quarterly, annually, etc.) or applied to tracking Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR).  This is critical for tracking the financial health of recurring revenue relationships such as service contracts and subscriptions.

Unlike Contract Renewal Rate, where 100% is the maximum performance level, Recurring Revenue Rate can exceed 100% indicating that the value of an existing relationship, or the net value of all recurring relationships, has increase from the previous period.

Example:

For Period = Q1

Recurring Revenue Rate = Recurring Revenue at End of Term / Recurring Revenue at Beginning of Term

Recurring Revenue Beginning Q1 = $100

+ Recurring Revenue Added in Q1 = $50

$45 from new customers

$5 from expansion of existing relationships

Recurring Revenue Lost in Q1 = $30

$25 due to customer churn

$5 due to downgrade of existing relationships

= Recurring Revenue End Q1 = $120

Recurring Revenue Rate = 120% (20% growth)

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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.

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The Bottom Line

Retention of both relationships and revenue are critical indicators of business health.  Understand retention levels and underlying factors that influence them. Retention is paramount – make it a strategic priority!

 

Assessment: Customer Success Management

How effectively do you engage new customers? Do have a formal onboarding process? Do you help customers plan for success with your products? Do you monitor customer health? Take this assessment to see where your practices stand and learn how to maximize customer success management.

Check out ServiceXRG’s Customer Success Management Assessment.  You will get immediate feedback with recommendations.

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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.

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Retention is Paramount – Make it a Strategic Priority!

Retention is Paramount – Make it a Strategic Priority!

If there is one service performance indicator to steer by it is RETENTION. You can have plenty of satisfied customers but still not grow, but you can’t grow unless you retain the customers you have.

Less NPS / More High-Touch Understanding

We have become too dependent on electronic surveys and NPS/CSat scores to tell us that our customers are okay. These are fine indicators but do not always tell us why we lose customers. Frankly many of the customers we lose may never have shared feedback through voice of the customer campaigns.

To mitigate churn, we need to dig deeper to understand why a customer stops (or never starts) using a product or why they do not perceive value from the services they pay for.

The best way to do this – pick up the phone or visit your customers and listen to their concerns! Don’t wait for customers to cancel before engaging them.

How We Keep Customers

Not every relationship can (or should) be retained, but if you listen carefully enough you will find that you can address many top churn factors.  Onboarding, adoption, success planning and account management are all powerful tools to mitigate risk factors.

Principles and practices of customer success are taking us in the right direction with an emphasis on retaining existing relationships. We need to make certain that we avoid the temptations to rely too much on tech-touch and keep personal channels of communication open with customers – especially the ones we do not hear from on a regular basis.

The Bottom Line

Retention of both relationships and revenue are critical indicators of business health.  Understand retention levels and underlying factors that influence them. Retention is paramount – make it a strategic priority!

 

Assessment: How Effective Are Your Service Renewal Practices?

Check out ServiceXRG’s Renewal Assessment tool to reveal your Service Renewal Health Score.  You will get immediate feedback with recommendations to maximize service renewal performance.

Related Articles

How to Measure Net Recurring Revenue

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.

read more

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Support and maintenance portfolios have been the foundation of many post-sales service offers, yet Support offers alone are no longer adequate to sustain and growth customer relationship value. Modernization of support portfolios and the evolution to customer success-focused programs and offers is the future of post-sales service portfolios. This article will help you to determine what type of post sales service portfolio you need.

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Why Your Customers Don’t Renew Service Contracts and What You Can Do About It

Why Your Customers Don’t Renew Service Contracts and What You Can Do About It

Why Your Customers Don’t Renew

Renewal Begins Day 1

From the day you sell a service contract you need to begin working on the retention of that customer relationship.  The worst thing you can do is wait until 90 days prior to the service contract expiration to send a renewal notice.  Each of the reasons for nonrenewal can be mitigated – or at least minimized – through well defined renewal practices that begin on day 1 of the service relationship.

Keep the customers you have and find ways to prevent customers from canceling services in the first place.  Retention is paramount – make it a strategic priority!

Reasons for Non-Renewal

What You Can Do About It

Addressing Perceived Lack of Value

The most common reason for service contract cancelation is that customers do not perceive that the benefits outweigh the cost of continuing the service. Or, they do not feel that the risk is too great to cancel – this is a common perception by customers that use mature products.

Active / Cancelled

For customers that actively use your product, but have canceled services, there is still hope for a win back.  Re-engage active product users and attempt to convince them of the benefits of your service.

Electronic mail and automated campaigns will not be enough.  Call them and listen to their concerns.

You will learn a lot about why customers canceled in the first place (price, lack of use, product issues, etc.).  Consider making modifications to the service to make it more appealing (better entitlements and/or lower price).

Active / At Risk

Within your active customer base chances are good that you have customers that would like to cancel but are not willing to accept the risks associated with lack of service or out of date software.

There is still time to protect these relationships. Work with customers potentially at risk to help them use and realize the value of service. Consider the following:

  • Interact with customers throughout the relationship and don’t just wait for them to call you. Interaction can occur through a support case, a proactive call to the customer, an informative e-mail newsletter, and publication of useful self-help resources (blog, wiki, knowledge base).
  • Report progress relative to success plans, support plans, and journey maps.
  • Make sure that customers are taking advantage of the services offered through the service relationship.
  • Meet service-level commitments and make sure that customers are aware of your performance.
  • Conduct periodic health checks and account reviews (e.g. Quarterly Business Reviews or more frequent) with both technical and business unit stakeholders.
  • Leverage each customer interaction as an opportunity to reinforce the value and necessity of the service relationship.
  • Establish a service usage “statement” that highlights the type and frequency of services used. Provide customers with evidence about the benefits they receive.

What to Do About Customers that No Longer User Your Product

The second most common reason for service cancelations occurs when customers stop using your products or have difficulty using it in the first place.

Once this occurs – for whatever reason – there is little to do to win the customer back.

Onboard, Adopt, Success

The best strategies to minimize cancelations due to lack of use is to develop good onboarding, adoption, and success practices to make sure customers can use and apply your products effectively. Consider the following:

  • Develop customers’ product skills by offering easy to access and affordable (preferably free) training programs.
  • Help customers define and achieve success through success planning.
  • Define journey maps, provide coaching and guidance to help customers attain specific outcomes.
  • Do not wait for customers to call with problems, engage customers proactively through automated and personal methods.
  • Offer or extend proof of concept, architecture, and design guidance.
  • Define and monitor customer adoption (extent and frequency of use) and success (impact of use) metrics.
  • Assign success managers or teams to monitor and drive customer adoption and success rates.
  • Monitor product performance and service use.
  • Conduct periodic health checks and account reviews.
  • Offer a portfolio of value-added outcome services.

Optimize Renewal Practices

The actions you take to secure the service renewal are fundamental to success.  Great programs and great relationships can be undermined by simple breakdowns in renewal procedures.  The costliest process breakdowns include not asking for the renewal or asking the wrong person.  Consider the following:

  • Maintain a relationship with the person(s) responsible for renewing the service contract.
  • Target multiple points of contact for renewal notification.
  • If the primary person leaves find out who will assume responsibility for the relationship.
  • Set clear expectations with the customers about budgeting for contract renewals including any uplifts or add-on fees.
  • Notify customers at least two months prior to renewal expiration.
  • Analyze the reasons customers do not renew.

Service Renewal Benchmarks

Assessment: How effective are your service contract renewal practices?

Are you leaving money on the table? Do you know why customers cancel service contracts? Use ServiceXRG’s Renewal Assessment tool reveal your Service Contract Renewal Health Score.
You will receive immediate feedback with recommendations to maximize service renewal performance, a copy of the Service Renewal Best Practices playbook and a complimentary coaching session.

Begin Assessment

Playbook: Service Renewal Best Practices

The Service Renewal Best Practices playbook introduces the metrics, practices, and activities necessary to optimize service contract renewal performance and grow customer relationship value.

Would you like a free copy of the Service Renewal Best Practices playbook?

Use ServiceXRG’s Renewal Assessment tool and receive your copy.

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How to Measure Net Recurring Revenue

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.

read more

Support or Success – What Type of Post Sales Service Portfolio Do You Need?

Support and maintenance portfolios have been the foundation of many post-sales service offers, yet Support offers alone are no longer adequate to sustain and growth customer relationship value. Modernization of support portfolios and the evolution to customer success-focused programs and offers is the future of post-sales service portfolios. This article will help you to determine what type of post sales service portfolio you need.

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