You’ve Won a New Cloud/SaaS Customer! Now What?
At Ingram Micro Cloud, we have a lot of data. We reach 90% of the world’s technology users and our cloud platform serves over 30 million users and hundreds of thousands of customers around the world. When we dig into what factors contribute to the growth and success of a managed service provider (MSP), customer retention is key. Market leaders build the lifetime value of a customer into their customer acquisition strategy and know that customer retention is equally important.
Customer retention and customer loyalty go hand in hand – customers who have a great experience with a particular business tend to purchase more and remain loyal to that brand. In a single order, transaction-oriented business, new customers must be continually acquired in order for the business to grow. However, in a recurring revenue business model, the customer’s positive experience extends the recurring revenue and presents opportunities to grow the existing customer base, increasing customer lifetime value. Reducing churn becomes even more important in a subscription-based business, and retaining existing customers becomes the focus.
What is the best way to measure the value of retaining customers to the business? One of the best ways is to compare gross revenue retention (GRR) and net revenue retention (NRR). Let’s unpack the difference between these metrics and discuss what impacts each of them.
Gross Revenue Retention (GRR)
Gross revenue retention (GRR) is one of the major metrics that measure stability and health of a business. GRR is the percentage of recurring revenue from existing customers, including downgrades and cancellations. It is calculated by subtracting the value of renewed contracts or subscriptions at the end of a period from the total value of contracts or subscriptions due for renewal at the beginning of the period. Low GRR translates to an inability to retain customers over the long term, indicating the business is not viable over the long-term.
Net Revenue Retention (NRR)
NRR is a metric similar to GRR that comprises all revenue generated from existing customers, including upgrade and cross sell activity. NRR is impacted when a customer:
- Churns or leaves the business
- Downgrades to a lower subscription plan
- Buys a new product from the business
- Upgrades to a higher subscription plan
When NRR is above 100%, the business is healthy and is growing even without acquiring new customers. By reviewing these use cases, the business also gains a better understanding of which changes, such as upgrades and cross-sells versus downgrades or churn, are impacting the revenues generated from existing customers. Even if a business loses revenue through downgrades and churn, there is still an opportunity for revenue growth through more upgrades and cross-selling to existing customers. The key is net negative churn. Businesses that achieve net negative churn subsequently continue to grow even without new customer acquisition.
Negative churn is the pinnacle of customer retention. By delivering added value to your existing customer base, you receive value in return in the form of customer retention, which is key to maintaining strong NRR. The only difference between GRR and NRR is that GRR does not include revenue growth through upgrades and cross-sells. GRR will never be more than 100% and will be equal to or less than NRR. However, when NRR exceeds 100% consistently, the compounding effect over time accumulates exponentially.
“If you compare companies with NRRs of 100% to companies with NRRs greater than 110%, over 5 years, the 110-plus group grows 45% faster,” says Victor Baez, our Senior Vice President of Cloud Channel Sales.
The numbers prove that retaining recurring revenue and expanding business with existing customers is crucial for business growth. For SaaS-based businesses, the goal is simple: prevent revenue churn.
How Can We Help You?
Churn is a reality for all businesses, especially those in the B2B SaaS economy. By adopting customer centricity, you can minimize this churn rate and enhance your net revenue retention. From simplifying the onboarding process for your customers, to comprehensive success teams around the globe to boost your efficiency and enhance your customer support, Ingram Micro Cloud is the partner to help you automate and scale your business. Together, we can leverage the power of data, resources, and our proven Cloud Marketplace platform to increase the lifetime value of your customers.
Category Growth & Best Practices
Written by John Dusett
Published on September 13, 2022
John Dusett, Executive Director of Sales, Ingram Micro Cloud
A 25-year veteran of the B2B Technology industry, John leads all go-to-market functions that enable the transformation of Ingram Micro’s traditional software business to a high-growth cloud services business. His team of technology experts, marketing gurus and sales professionals are focused on helping MSPs and IT Resellers transform their business to capture growth in cloud services.