{"id":251735,"date":"2020-12-04T00:00:00","date_gmt":"2020-12-04T05:00:00","guid":{"rendered":"https:\/\/www.servicexrg.com\/blog\/net-rr-intro\/"},"modified":"2022-06-14T14:20:22","modified_gmt":"2022-06-14T18:20:22","slug":"net-rr-intro","status":"publish","type":"post","link":"https:\/\/www.servicexrg.com\/blog\/net-rr-intro\/","title":{"rendered":"Using Net Recurring Revenue to Identify Customer Service Opportunities and Risks"},"content":{"rendered":"
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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.\u00a0 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.\u00a0 In addition, examining the reasons for revenue growth presents opportunities to embrace and expand practices that encourage expansion of relationship value.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

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Net Recurring Revenue<\/h2>\n

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.<\/p>\n

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.<\/p>\n

Inputs<\/h3>\n

To calculate the Net Recurring Revenue Rate, you need to know how much recurring revenue is added and lost within a period.\u00a0 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.<\/p>\n

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.<\/p>\n

Net Recurring Revenue is a time-based measurement.\u00a0 Choose a period such as a month, quarter or year.\u00a0 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.<\/p>\n

The Formula<\/h3>\n

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.<\/p>\n

NET RR = EXISTING RR \u2013 RR LOST<\/strong>\u00a0(Loss + Contraction)<\/em>\u00a0+ RR ADDED<\/strong>\u00a0(Add + Expansion)<\/em><\/h3>\n

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The Meaning of Net Recurring Revenue<\/h2>\n

Measuring Net Recurring Revenue yields obvious findings including a clear indication about the extent to which recurring revenue is growing or declining.\u00a0 The more important insights from this metric come by examining the reasons for growth or contraction of Recurring Revenue.\u00a0 Consider the following when examine Net Recurring Revenue:<\/p>\n

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  • What is the trend in Net Recurring Revenue \u2013 growth or contraction?<\/li>\n
  • What is the rate of rate of change in growth \/ contraction?<\/li>\n
  • What are the primary reasons for loss of recurring revenue?<\/li>\n
  • What are the primary factors that contribute to revenue gains?<\/li>\n<\/ul>\n

    Net Recurring Revenue Trends<\/h3>\n

    It is important to understand the trends in in recurring revenue growth or decline.\u00a0 Of course, revenue growth is preferred, but decline may also occur.\u00a0 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.<\/p>\n

    Measurement Period<\/h4>\n

    The first consideration is the examined measurement period.\u00a0 Short duration measurements (e.g. monthly) may reflect short-term factors that may overtime be normalized.\u00a0 Measurement over longer periods can provide a more accurate reflection of the actual trajectory of recurring revenue performance.<\/p>\n

    The Sources of Growth<\/h3>\n

    If Net Recurring Revenue is growing it is important to understand why so that growth can be sustained or accelerated.\u00a0 Growth will come by establishing new customer relationships or from increased spending by existing customers.\u00a0 Differentiation and understanding the sources of growth is important.<\/p>\n

    New Logos<\/h4>\n

    Is growth coming from entirely new customer relationships?\u00a0 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.\u00a0 This suggest that Sales and Marketing efforts are working.<\/p>\n

    Consider if growth can be accelerated.\u00a0 Are your reaching your maximum addressable market or are there even more customers that you can win over.\u00a0 Ask new customers why they choose your product over other possible alternatives.\u00a0 Is it your reputation, your capabilities, price, other factors, or a combination of all the above?\u00a0 You may be able to sharpen market messaging and enhance the overall value proposition to attract new customers.<\/p>\n

    Acquiring new customers is great, just make certain that you can nurture and sustain new relationships relationship.<\/p>\n

    Expanding Customer Relationship Value<\/h4>\n

    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.\u00a0 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.<\/p>\n

    Growth attributed to existing customers is something that every company must understand.\u00a0 Engage your customers that increase their spending with you to understand why.\u00a0 Determine how you can accelerate expansion of customer relationship value.<\/p>\n

    Low or No Expansion of Existing Customer Relationship Value<\/h4>\n

    If you determine that very little growth is coming from existing customers, ask yourself why?\u00a0 Are customers still trying to achieve value with what they already have.\u00a0 If so, you may need to provide more assistance to help customers with onboarding, adoption training and success planning.\u00a0 Its is also possible that growth may be inhibited by lack of value-added offers and extensions.\u00a0 Examine your product and service portfolio.\u00a0 Do you offer what your customers need?\u00a0 Are there additional services that your customers are willing to buy from you?\u00a0 If so, it is time to expand your portfolio of offerings.<\/p>\n

    Reasons for Loss<\/h3>\n

    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.\u00a0 Even if you have a positive Net Recurring Revenue Rate, losses are eroding your full revenue growth potential.<\/p>\n

    Customer Loss versus Revenue Loss<\/h4>\n

    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).\u00a0 In these situations, you retain the customer relationship, yet you get less revenue from an existing customer.\u00a0 Understanding why customers choose to reduce their spend level is important and should be examined so that underlying issues can be mitigated.<\/p>\n

    Most recurring revenue loses are likely the result of losing a customer relationship.\u00a0 Customer attrition is inevitable.\u00a0 Companies go out of business and sometimes legitimately no longer need to use your product.\u00a0 Many of the reasons for customer churn can be mitigated when identified and understood.\u00a0 If customers cannot derive value form your products understand why.\u00a0 Perhaps it is simply a matter of not being able to achieve the outcomes they expect \u2013 if so, consider better onboarding, adoption and training programs.\u00a0 Perhaps the products lack the features a customer needs or product capabilities are limited, or performance is unreliable.\u00a0 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.<\/p>\n

    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.<\/p>\n

    Retain, Expand and Grow<\/h2>\n

    Net Recurring Revenue is a comprehensive indicator that reveals the extent to which you are retaining, expanding and growing customer relationship value.\u00a0 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.\u00a0 In addition, examining the reasons for revenue growth presents opportunities to embrace and expand practices that encourage expansion of relationship value.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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