Customer Growth and Renewal

Measuring Success in Customer Growth and Renewal

Discovering the New “North Star” KPIs for Customer Growth

Understanding the key drivers for building a healthy revenue growth engine will help both top line revenue growth and operational excellence.

In recent years we have experienced a shift in charter of the classic renewals team from “defend the base” to “defend and grow the base.” During the same period, we have seen the emergence of customer success organizations, and these organizations are being built for adoption, expansion, and renewals. Recent TSIA benchmark data indicates that 48% of all customer success organizations have renewal goals, and we expect this trend to easily crest 50% this year.

These shifts in charters require inspection of key performance indicators and the implications for how we measure success in the growth objectives. Let’s have a deeper look at the two “north stars” of customer growth.

North Star # 1:  Net Revenue Retention

Why You Should Shift Your Focus from Gross Renewal Rate

As teams move from the “defend the base” charter to the “grow the base” charter, a new measure of success is required.

Classic gross renewal rate (GRR), a traditional north star for renewals, is a defensive measure that indicates the ability to renew the install-base revenue. It answers the question, “of the available annual recurring revenue (ARR) opportunities due to expire, what did we actually renew?” Furthermore, it is an indicator of the overall health of a renewal team’s business capability.  

There are dozens of variables that can be applied in this calculation, but ultimately it is a measure of yield from the existing opportunity without inclusion of upsell or cross sell. It fails to measure the net growth side of the equation; and in the new world, growth is very important. Because of this, I see Net Revenue Retention (NRR) emerging as the KPI of choice.

At our TSW Conference this past October, Michael Maday, director of customer success at Gainsight, presented a breakout session around this topic. He gave an inspired argument for the importance of NRR in today’s SaaS companies, and its importance to customer success organizations in particular.

For companies that are following a SaaS-based ARR or consumption model, NRR has become a key indicator for company valuation. Achieving a 120% NRR places a company in an elite group of growth performances, much like those companies that are able to successfully achieve the Rule of 40 performance.

NRR is a strong indicator for overall company financial health, and a great driver of revenue growth. At the operational level for customer success and renewals organizations, it must be used with clear eyes and proper expectations. Why? In part it’s about raw math and in part about behavior.

Let’s look at best practices for implementing an NRR approach.

Build Realistic Goals That Include the Whole Team

If a customer success or renewals team in a SaaS company has an available ARR opportunity to renew $10M, they will typically achieve a 90 - 91% GRR based on TSIA benchmark data. To hit a NRR rate of 120% on the original $10M, they would have to achieve a $12M contribution result. That means they must contribute $3M in incremental ARR above and beyond their renewal work and in the headwinds of the renewal performance. That’s effectively a 133% new growth on the $9M won in renewal.

Clearly, the customer success team can contribute to the growth goal. TSIA sees 96 -98% NRR as common, with pacesetter performance above 106%. However, placing high goals singularly held by just customer success and renewals puts undue responsibility on them while ignoring other selling teams with the capability to contribute.  

When corporate plans place the total number on the customer success or renewals team, they may not appreciate the role that sales or other functions are contributing to the performance. A best practice is to benchmark and measure the growth (expansion) contributions from each organization and build a realistic goal for each. Placing too high a target on the renewal effort can cause serious unintended consequences.

Create Incentives Around Renewal Goals

Leaders must understand the behavior dynamics when introducing NRR. We typically see a customer success manager or renewals specialist with a base vs. variable compensation plan of 70/30 on the aggressive side and 80/20 or 85/15 on the more conservative side. Of the variable component, we typically see a mix of renewal goals and growth goals, with renewals the first priority and growth the second priority.

What happens at the end of a quarter when the pressure is on, and you must hit the number? Which number? Conflict can arise for the customer success manager or renewal specialist and they will most likely move to the deal that benefits them the most, not the company.

Too often, I hear about teams hunting big deals while they are not tending to the core renewal responsibilities, leaving portions of the ARR opportunity unattended and ultimately lost. While I support the NRR growth approach, there is an art to calibrating the focus on growth or teams may suffer poor performance on the renewal side.

 In essence: use NRR, but use it wisely.

North Star # 2: Resolution Rate

Building a Sustainable Long Term Renewal Engine

The counterbalance to revenue growth is execution excellence. Is the “engine” built to a scale that can handle the opportunity at risk, and is it tuned to maximum sustained performance? GRR sort of gets at this measure, but there is even a purer view of operations excellence: Resolution / Execution Rate. Resolution rate measures the ability to resolve the book of business on time or in quarter, either as a won deal or a lost deal.

This approach is the way of life for Whitney Daily, global head of the Renewal Center at SAP and her teams. It is exemplified in their  tagline,  “#quest4ZERO. ZERO Churn. ZERO Loss. ZERO Slips.”

With this motto, SAP has baked in an exemplary discipline into their renewals process and it has become company culture. Everyday, each person on the team thinks about how to get the deals over the line on time and in quarter. Every aspect of the renewal engine is inspected for optimization. Sweeping a deal under the rug and writing it off is not OK. Renewing at a huge discount just to get it done is not OK. People, processes, and technology work together to achieve the ultimate goal of resolution.

By implementing a zero-tolerance policy, SAP is building a sustained operational approach that naturally leads to excellent GRR execution and even NRR performance.

Renewal opportunities have a very prescribed segmented path. When a deal behaves differently than the system was built to handle (i.e. a small deal gets very big or complicated), prebuilt processes take over to move the work to the optimized path. The renewal center mission is equally focused on customer interaction and sentiment.

As such, creating a superb renewal experience is central, and their laser focus on the renewal outcome is a key contributor to that mission. Real-time expectation management and expert communication is what drives their execution rate.

The results are fantastic. 99.7 resolution / execution rate with 38% of renewals converted to multi-year.  All pacesetter performance standards.

Create outstanding revenue performance by thinking about Growth and Execution at the same time. Each holds the other in creative balance to build a sustainable revenue engine. It’s an engine that is built to renew business but also to grow revenue when deployed in balance.

Top Takeaways to Align with the KPI North Stars

• Build Alignment from the C-suite to customer success manager on the strategy and purpose of each revenue producing function.
• Measure renewal + upsell + cross sell both independently and together to understand the potential in each and from where the potential resides (sales, customer success, renewals, etc.).
• Commit to building the Culture and the Engine, which are both business capabilities required to be outstanding in a SaaS world. Old models of defending transactions are not enough.

  December 2, 2021