Why Net Recurring Revenue (NRR) is a fundamental product KPI

One of the important usage of data is about product diagnostic.

When data people talk about data, they often talk about data monetization, and get all excited about the many ways that can be used to transform data, and extract value from them. Usually it is about significant quantity of data (either in size, or velocity), and how they can be transformed to deliver insights or support processes, amongst the many things you could do.

Less exciting to data people, but not less important, is a lower frequency type of data, which are product-related financial metrics. They help assessing product health along different dimensions.

I am often puzzled by how many brilliant data people focus on building products that extract value from data, missing the usage of data to assess the very same product health.

A measure that helps understanding a product health is Net Recurring Revenues — NRR.

NRR formula is simple:

NRR = (start RR + US/CS RR — Churn — Down RR) / start RR

Start RR is the recurring revenues ad the beginning of the month

US/CS RR is the amount of upsells and cross-sells on existing customers during the month (or quarter, or year)

Down RR is the amount of revenues lost to products downgrades during the month

Put it simply, is a snapshot of how well the product is performing at retaining and upselling customers, without giving any consideration to new customers acquisition.

NRR greater than 100% constitute a more solid base upon which to add new customers. The reason is simple: you make more from existing customers at the end of the month that you did at the beginning, hence retained customers more than compensate any churn you might have.

On the flip side, NRR smaller than 100% can be a problem in the medium to long term. And the farther away from 100, the bigger the problem. This is because a share of new customers will go to compensate for the revenues lost from existing customer during the month. If you have an NRR of 90%, and revenues from new clients growing at 15%, you are for all intent and purposes ‘wasting’ 2/3 of your acquisition to compensate for revenues loss from the existing customers.

This problem grows as the customer base grows. As many might have experienced, it’s easier to grow new customer fast when the customer base is relatively small (and the corresponding loss on existing customers small for NRR<100), while it becomes more difficult when the customer base is significant (and the loss on existing customer significantly bigger for NRR<100).

NRR > 100 can be considered the ‘tailwinds’ of growth. Even with limited new customer acquisition, the product till grows. To the contrary, NRR<100 are the ‘headwinds’ of growth, as a share of new customers simply plugs a gap coming from existing ones.

If you have NRR<100 you clearly have some work to do on a number of fronts, but you would usually start from the product. Is product value aligned to customer expectations? How ‘good’ is the product on several dimensions? What is the customer feedback? What are the driving reasons for customer loss or downgrade?

You could also look at pricing, and check if you need different product tears to mitigate customer loss.

And of course, you should try to understand why some customers have downgraded. Downgrades are less concerning than churn, nevertheless need to be understood properly to make sure they are not early sign of churn. A cohort analysis might help here.