SaaS KPIs: What's better, NRR or Logo Churn?

In 2018, YouScan began using the OKR (Objectives & Key Results) method to keep track of our goals and results. Improving customer retention is one of our four key goals this year, and one of the key performance indicators (KPIs) is to keep NRR better than X%.

In this blog post, we'll explain what net revenue retention (NRR) is, and discuss why we chose to pivot from the traditional "churn" (number of customers lost) method of measuring the effectiveness of client retention, and instead focused on the financial metric, NRR. Finally, we'll explain the impact of the switch on our own decision-making process.

Logo Churnn

First, a few definitions. You're probably already familiar with the traditional idea of "logo churn" (the number of customers, or "logos", you've lost). In its simplest form, Logo Churn is the correlation between the number of clients who've unsubscribed or didn't renew their subscription to your service, and the number of paying clients in the previous month. For example, if you had 100 subscribers in the previous month, but only 95 of them remained in the current month (so 5 clients have left), then your monthly logo churn was 5%.

There are many different ways to quantify the loss of customers, so you can choose the one best suited for your business model and customer life cycle.

For example, at YouScan, we followed Lincoln Murphy's recommendation and started measuring the "real" customer loss in addition to customer count loss. To calculate this, we exclude clients that we know for certain only subscribed for a single month (in our case, this is pretty common for agencies that use our services to generate a one-time report), as well as clients on an annual billing cycle who are in the middle of their cycle (since we know we won't lose them in the current month). This metric is a more accurate reflection of the number of lost customers who could've been retained during the given time period.

Some companies also exclude recent subscribers from their Logo Churn calculations, since they consider these customers to be in the middle of their onboarding process and not yet reaching the "loyal customer" status.

It's a good idea to segment Logo Churn by client category (for example, by field, size, location, etc.) Several public companies take very "creative" approaches to their definitions of customer loss metrics to look better in front of their shareholders.

As you can see, there are many different ways to calculate Logo Churn. The important thing is that you understand precisely the reasons behind why and how you're doing it, and that the KPIs accurately reflect your business model, so that you can track your progress and act accordingly.

The pros and cons of Logo Churn

This performance indicator is accessible and serves a good first touchpoint in understanding what goes on with your client base. If the percentage of clients who don't renew their subscriptions stays high or doesn't decrease month-to-month, this indicates that it might be a good time to reconsider your product offering, pricing plans or business model, as well as whether the marketing funnel is reaching your target audience.

However, Logo Churn has one big downside: It doesn't provide any insight into what kind of customers you're losing. Are you losing subscriptions from small agencies or enterprise clients?

Because of this, many SaaS businesses combine Logo Churn with Revenue Churn (or how much revenue is lost every month), or its inverse metric, Revenue Retention.

What is NRR (Net Revenue Retention)?

At YouScan, we measure revenue retention like this:

Where MRR (monthly recurring revenue) - monthly revenue from customers
Upgrades MRR = how much MRR has increased due to customers upgrading their plans
Cancellations MRR = how much MRR has decreased due to customers who didn't renew or cancel their subscriptions
Downgrades MRR = how much MRR has decreased due to customers who've downgraded their plan

Example

Let's say you had 10 customers in January, five of whom paid $500/month, while the other five paid $100/month.
Thus, January's MRR amounted to $500 x 5 + $100 x 5 = $3000/month.

Out of the five customers who paid $100 on a monthly basis, two didn't renew their subscriptions in February (Cancellations MRR = $200/month), one switched to a $500/month plan (Upgrade MRR = $400), and two had kept their $100/month plans.

Out of the five customers in the $500/month plan, one cancelled their plan (Cancellations MRR = $500/month), one has downgraded to the $100/month plan (Downgrade MRR = $400/month), one kept their $500/month plan, and two others upgraded to the $1000/month plan (Upgrades MRR = 2 x $500).

In total, you lost three clients in February (Logo churn = 30%), which can seem like a terrible month at first glance—until NRR reveals that you've actually started making way more money with your remaining customers.

Let's calculate your MRR for February.

With all the customer upgrades, you've increased revenue by 2 x $500/month and $400/month: Upgrades MRR = $1400/month;

You also lost revenue due to cancellations ($200/month and $500/month): Cancellations MRR = $700/month;

And you've had a $400/month loss of revenue from a client who downgraded their plan:
Downgrade MRR = $400/month.

Thus, your net revenue retention from existing clients is calculated:
NRR = $1400 - $700/month - $400/month = $300/month, or 10% of $3000.

So despite the fact that you lost three customers, your existing customers are making you $300 more each month! (+10%)!

Advantages of NRR compared to Logo Churn

Advantage #1: NRR provides insight into the revenue flow from your customer base

NRR tells you the most important thing about your business: Are you increasing revenue with your existing customer base, or not? If your NRR is positive, your SaaS business can grow exclusively through revenue (for some time), without any marketing or sales efforts. Your existing clients are getting a great value add from your product and are ready to pay more for it. This is the best-case scenario.

If your NRR is negative, it means that the losses from customers who unsubscribe or downgrade their plans outweigh your monthly revenue from your other customers' upgrades. In order to grow, you have to offset these costs with new client revenue (New Business MRR).

It's important to note that the bigger your client base, the more difficult it becomes to offset the losses with new business.

For example, if last month's MRR totalled $100,000/month, and this month's NRR was -3% (meaning that you lost 3% of revenue from these customers, or $3000/month), you need to have $4000/month of new sales this month to increase your MRR by at least 1%.

But if your MRR is $10,000/month, to compensate for the NRR of -3% and increase revenue by 1%, you need to sell at least $400,000/month worth of subscriptions. This is doable in a healthy growing market, but it's a challenge for those operating in a niche market, those experiencing high acquisition costs (CAC), or businesses with limited client acquisition channels. If your situation resembles the latter scenario, you're in for some tough competition: You'll likely have to find ways to enter new markets, or even create new products to expand your offering.

Advantage #2: Using NRR, you can find out exactly what kind of customers bring in the most revenue

Compared to Logo Churn, NRR shows whether you're losing small-stakes customers, or clients who bring in large portfolios.

For example, a -1% NRR and a -5% Logo Churn mean that the majority of outgoing customers don't contribute significant revenue, which means their loss doesn't hurt your business too much (assuming you've already offset their CAC). But the reverse scenario (-5% NRR and -1% Logo Churn) means trouble: You're losing high-paying customers, which is a serious problem.

Advantage #2: Using NRR, you can find out exactly what kind of customers bring in the most revenue

Advantage #3: NRR encourages you to consider the bigger picture for your SaaS business

NRR allows you to take a "bird's eye" view of your business, and evaluate your customer acquisition and retention strategies as well as your overall business model.

Once our focus at YouScan has shifted to improving our NRR, it led to a drastic change in our thought process and made us reconsider questions like:

  • Who is our target audience? How effective is our sales funnel at attracting these types of customers?
  • How can we build an effective upgrade strategy to help transition customers to top-tier plans?
  • What kind of complementary products/services can we offer to our customers in order to increase their monthly subscription costs?
  • How can we build the most effective processes to support customers who hold the most potential for increasing our revenue?

These kinds of questions are drastically different from the simple one of "How to keep the number of lost customers to a minimum," which is not very helpful when you're trying to grow your business.

If you haven't yet tried the NRR method, we highly recommend giving it a chance right away. NRR will help you build out better customer acquisition and retention processes, and contribute to new growth strategies for your SaaS business.