NRR is a rubbish metric

And I will die on this hill. 

So you’re a CS Leader and you want a seat at the table? In my experience, you need a revenue number to make anyone take you seriously. If you don’t have accountability or responsibility for expansion (upsell and cross-sell) because Sales still have it, then it’s likely you just have a churn number.

In my opinion, a business which only holds CS accountable for churn is missing the point of what CS is for.

If this is you, you’re likely going to default to the old SaaS favourite NRR, or Net Retained Revenue to demonstrate your usefulness, or at least prove you’re more than a negative number

So we’re all clear,  NRR is the total amount of revenue you’ve kept in a given period, once both growth of existing customers and any churn or downgrade has been taken into account. It completely excludes new logo business, so it only focuses on whether your customer ARR total is growing, or shrinking. 

📈 If you churn more than you expand, negative NRR.

📉 If you expand more than you churn, positive NRR. 

Most SaaS companies like to have an NRR of 110%, showing your customer base is growing 10% quarter over quarter in spite of any churn or downgrade you might have. 

It sounds logical, right? But it’s not. NRR is a confusing metric. It misses the point of a key performance indicator in that it conflates too many interesting data points into something which provides a general trend. A general trend which tells you nothing about your business, your customer longevity or overall health. 

It’s my least favourite sort of metric, a vanity one. Most companies who favour NRR have a churn problem, which they can hide with expansion, and because they seem to be growing, no one asks any questions. 

So what’s the problem? 

If you’re a COO, CFO or a Rev Ops person, there really isn’t one. Your goal is to manage a monitor the overall health of the business. To be fair, if your churn is really high but so is your growth, then depending on the stage of your business evolution you might not actually give a shit, but here’s why you should. 

You can’t get NRR into positive figures without growth. This is just maths. If your renewable base is £100k this quarter and you churn nothing and no one grows, you’ll renew £100k. That’s 100% NRR. Most companies want over 100%, so at this point, you might dig a little deeper, although 100% NRR is probably good enough for you to stick with for a bit.

What’s wrong with retaining all of your customers? On the face of it, nothing. If you’re a CS leader, you should absolutely take that win, because there aren’t too many which come along in customer success. However, from a business growth perspective, this is very bad news.

There is such a thing as healthy churn, customers you don’t want anymore. The customers you brought in on day 1 may no longer suit your ICP, work within your product market fit or have the same problems to solve as your newer customers through the door. Some customers are just plain difficult and are a distraction with all their feature requests. Some customers you should never have sold to, some were missold and now they’ve had enough of you, and some were sold too much. 

You should always expect some churn in your business. To be blunt, if you can retain customers for multiple years using exactly the same products as they bought when they first transacted with you, your product hasn’t grown sufficiently enough to expand their business. You’ve not been bold enough with your strategy or you haven’t engaged them on why they should care. Suddenly, all that retention doesn’t seem so sweet, does it? 

Retention also means you’ve preserved the status quo. You haven’t challenged anything, you haven’t provided any value beyond your initial pitch, and you haven’t developed anything of interest for this particular customer to solve any of their relevant business problems. Don’t get me wrong, I love retention, but I’d go so far as to say that if you’re an early-stage start-up and you’re retaining most of your customers, you’re not disrupting anything… so what are you adding to the marketplace?

And here’s where it gets confusing.

So, 100% retention should not be your goal, because you want to be expanding your customers, not just holding onto them. However, you don’t really want your churn rate to go beyond 20% in a given quarter. More than 20% is a leaky bucket, and you can’t grow on top of that. Can you?

You sure can, but it might not align with your company strategy and it probably won’t be affecting your NRR, more your net new revenue as a whole. You might be “selling at all costs” to anyone who will talk to you. Naturally, if you’re doing this, you’ve accepted a churn problem in 12 months or so… right?

And all of this noise is why you can’t sum up your overall customer health in a single metric.

If your sales strategy is more “spray and pray” than “targetted and solution focussed”, then you’ll unlikely have a positive NRR. The customers that you’ve brought in probably won’t be hanging around if you can’t live up to the value you sold them initially and they are much less likely to be giving you any more money. In short, if you want to demonstrate that successful customers grow, you have to first sell your products to customers whom you know you can make successful, not just anyone who will give you the time of day. 

And here’s my real problem with NRR. Say my company has a pretty well-identified ICP and the sales team is aligned on how to identify and nurture these target customers to bring them through the door. However, times are rough right now and we’ve started straying a little bit left and right of our ICP because we have bills to pay.

In terms of how this impacts your CS team, they’re all fired up for your ICP customers. They know how to talk to, onboard and co-create with ICP customers. They speak the right language, identify the right problems and can demonstrate value easily. These non-ICP customers are a distraction, their problems are vague and undefined (even if you use MEDDICC), their use case isn’t quite what your product does and the CSM just doesn’t really get what they’re up to…

Without getting into the details of why you should have a robust ICP and stick with it, you’re now splitting attention between chasing after these non-ICP customers to try and get them to a place of value and actually successfully managing growing customers who are part of your ICP. Naturally, when the chips are down and if you as a CS Leader only have churn on your head, you’re going to start clutching at straws to retain as many customers and as much money as you can. 

And again, without getting distracted, you will be sacrificing growth for retention here… which is not a good move. But the problem with NRR in this instance is that it doesn’t reward you for either unless both are positive. 

If you have £1m in renewable base and you churn £200k, but one of your top customers expands by 100% (from 100k to 200k), your NRR is going to be 90%. 

That 100k of extra revenue was hard fought. Your team built that relationship, delivered that value (more than once) and supported that customer to understand how to deploy your software to solve their problems, and how there were more problems to be solved. But you still didn’t hit 100% NRR.

Let’s say you expand 2 customers at 100k, your NRR is still only 100%. You’re in the same growth bracket as that boring old company with 100% retention, how’s that fair? 

If you’re paying out quarterly bonuses on NRR, do you really think the CSMs who delivered a 100% expansion in the size of those two strategic accounts will think it’s fair that they should be rewarded for starting and ending the quarter on exactly the same number? 

Equally, let’s say the 200k you churned was a mix of 50k worth of non-ICP customers and 150k worth of customers who have just had enough of your rubbish product. Now, on top of the two big expands, you have 10 other customers who each expanded by 10%, which totalled up makes another 100k. Now your NRR is 110% ((1m - 200k) +300k = 1.1m), yay you’ve hit the mark!!

However, you’re hiding the non-ICP churn, and the customers who think your product is garbage and to be honest, the fact that your churn rate is 20% (which isn’t good) all because you have some successful growing customers. 

NRR conflates too many data points for it to be useful. It’s a vanity metric you can hide behind and it’s not a fair metric for reward because retention and expansion are two different skills with different levels of effort. By all means, use it as a benchmark, because that’s what it’s for.

The problems come when you ignore gross retention and gross expansion data, stopping at the superficial level of analysis because it serves your story.

Ultimately, you need to fill in the blanks and flesh out what your NRR metric is telling you, to give the numbers context and colour. If you’re not using gross retention to challenge your CS team and hold your sales team accountable for adherence to ICP, your NRR will never reflect your CS strategy anyway. 

Always favour metrics of focus, that’s my advice.