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

It Is Time to Move Beyond Support Portfolios

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 success-focused programs and offers is the future of post-sales service portfolios.

Support Versus Success

If you are creating or modernizing a post-sales portfolio that offers customers more than reactive problem resolution assistance you are likely building a success portfolio.

Success portfolios differ from support portfolios because they offer services typically beyond the scope of technical support and often include services and resources from departments such as Training, Professional Services and Technical Support.

The focus and intent of post sales services programs help to define the type of portfolio you are building and suggests what entitlements to package and offer to customers.  Use the table below to consider what the focus and intent of your post service offers should be.

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Success

  • Services focus on responding to, diagnosing and resolving issues.
  • Services are designed to increase supportability by helping customers use and administer products more effectively. 
  • Tools and services monitor issues and provide recommendations or corrective actions to mitigate problems.
  • Speed, effectiveness of response and customer satisfaction are key indicators of success.

 

  • Services focus on helping customers use the full functionality of a product. 
  • Consultation and guidance through high-touch and tech-touch.
  • Onboarding, adoption and success planning services offered.
  • Services focus on helping customers to achieve tangible business outcomes.
  • Product use, customer success, retention and growth of recurring revenue are key indicators of success.

 

Note: Success Portfolios often include support services, but Support portfolios do not include services beyond traditional issue resolution entitlements.

Characteristics of Leading Post Sales Service Portfolios

Well-defined post-sales service portfolios with up-to-date and customer-driven service entitlements can significantly increase your ability to help customers use and apply products.

Market leading service portfolios are well structured to offer differentiated service rights, entitlements, and resources to deliver maximum customer benefit.  World-class service portfolios offer:

  • Access to skills, resources and expertise from across all service departments including Support, Professional Services, Education and Success.
  • Flexible program structure and purchase options provide access to the services customers need when they need it even as their needs evolve.
  • Expert assistance to drive tangible outcomes and achieve quantifiable benefits for the price paid.

Take Your Services to the Next Level

Is it time to update your Support portfolio or add Customer Success programs extensions and add-ons? Give us a call. We can help you define, price, and launch successful new service offers.

Contact us today.

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Moving Beyond Industry Average Renewal Performance

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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Less NPS and 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.

Less NPS / More High-Touch Understanding

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: 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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read more

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Service Renewal Metrics: Definitions and Benchmarks

Service Renewal Metrics: Definitions and Benchmarks

Service renewal metrics indicate the level of performance for retaining the number of service contracts and the rate that recurring revenue is retained and grown.

Service Renewal Metrics

Tracking service contract renewal performance and recurring revenue retention is essential to help identify the factors that lead to customer and revenue retention and attrition. Measuring both the number of contracts and revenue retained is an important indicator of customer relationship health.

Two important service renewal metrics are Contract Renewal Rate and Recurring Revenue Rate both are defined and described below.

Contract Renewal Rate

Contract Renewal Rate indicates the percent of contracts due to expire in a specified period that are successfully renewed.

Contract Renewal Rate provides a good indication about the number of relationships your able to sustain and can help identify attrition and retention trends and underlying causes.  When possible, examine Contract Renewal Rates by key customer segments to identify relationship trends by customer type, geography, product family, length of relationship, etc.

Example:

For Period = Q1

Contract Renewal Rate = Contracts Successfully Renewed / Contracts Due to Renew

Contracts Due to Renew Q1 = 100

Contracts Successfully Renewed Q1 = 90

Contract Renewal Rate = 90%

Recurring Revenue Rate

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

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 has increase from the previous period.

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.

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)

Best Practices

  • Establish both contract renewal and recurring revenue metrics.
  • Monitor contract renewal rates to identify trends in relationship retention or attrition.
  • Examine contract renewal rates by key customer segments to determine variations in retention or attrition performance by customer type.
  • Compare contract and recurring revenue rates to indicate changes in buying behaviors.
  • Measure the rate of growth or reduction in revenue month-to-month or year-to-year.
  • Investigate the root cause for loss of contracts and revenue.

 

Featured: Service Renewal Best Practices

Service renewal performance is fundamental to overall corporate financial health.  Existing service relationships represent a predictable recurring revenue stream and provide the foundation from which to grow revenue.  Before you can grow relationship value however, you must be able to retain what you have.

Login or register to get a copy.

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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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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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