How to prevent a Net Revenue Retention downfall in B2B SaaS?

9 Effective strategies for achieving the strongest SaaS NRR.

What’s happening: A downfall of NRR amongst public SaaS companies

In the past week, various messages were posted about what’s going wrong in the B2B SaaS market. Yesterday’s post by Jacco van der Kooij summarized it like this:

  • We now operate at half the growth rate.
  • A 1.5x increase in customer acquisition costs.
  • NRR in freefall.

A wake-up call? For many, yes.

In another post from David Spitz, he shared his prediction on the NRR free fall.

“The median dropped 7% for 113% – and the prediction is it will drop to 105%.”

It is driving more and more startups and scaleups to act under pressure to increase their profitability and Free Cash Flow (FCF) margins.

Reading this all made me wonder: What can you do differently to prevent this?

It inspired me to make this my focus for this essay: How to prevent a Net Revenue Retention downfall in B2B SaaS?

But to start – here are a couple of observations.

A downfall of NRR isn’t caused by one thing that’s off.

  • It can be a positioning issue
  • It can be a segmentation issue.
  • It can be a go-to-market fit issue.
  • It can be a product-market fit issue.
  • It can even be a metric-reading issue.

And very often, it’s a combination of all of the above.

There’s a lot to take in: churn, down-sell, reduced upsell, reduced expansions, and beyond that, timing, segments, and so on.

Some ingredients are more worrying than others – but one thing remains:

It requires you to be brutally honest to find the root cause of issues and address those instead of the symptoms.


Question for you to reflect upon:

What’s the NRR trend you see in your SaaS company? What do you believe is the root cause?


Preventing Net Revenue Retention (NRR) downfall

Below, I’ve outlined 9 steps to not only stop your NRR from dropping but to grow it to benchmark levels (and keep it there).

Step 1: Pay sharp attention to your Go To Market Spend ratio.

David Spitz published a post on Linkedin with this eye opening title:

Never before have SaaS companies spent SO MUCH for SO LITTLE!

In this post, he points out how the Go-to-Market (GTM) for many SaaS businesses is broken – including the charts that back it up.

His focus is the GTM Spend Ratio, i.e., SALES & MARKETING divided by NET NEW ARR (or what you’re spending as a % of what you’re getting).

You might think: ”What has this got to do with NRR downfall, Ton?” but an increasing GTM Spend Ratio is one of those early signs that indicate NRR problems down the road.

Let me explain.

As David points out, the trendline median for public SaaS companies over the past eight quarters has grown steeply: 150%, 167%, 179%, 206%, 224%, 249%, 249%, 264%.

What this means:

For every $ an average SaaS company spends on Sales and Marketing, they get $0,37 in net ARR, whereas just eight quarters ago (Q3 2021), this was $0,67 – so nearly double.

And this means: It’s taken way longer (years, not months) to get each customer profitable, even if you are successfully upselling.

Now, you can look at this two ways:

  1. The cost of acquisition is increasing for everyone – so what’s the point? or
  2. What does this tell about our actual fit?

It’s the latter where the NRR problems hide.

Remember –

Don’t fix problem symptoms.

Fix the root cause of your problems.

Niching down is your best friend.

 


Question for you to reflect upon:

What’s the GTM Spend Ratio for your SaaS company? For how long can you bear that?


 

So then the question arises: Where to start to fix the root cause of the problem. That brings me to following step.

Step 2: Tighten up your Niche.

NRR problems often start at the start of the sales cycle. Why? Because the definition of your Ideal Customer Profile (ICP) is too loose.

Beyond the problem of increased GTM Spend ratio, what happens is this:

You’re allowing accounts in that are less than ideal.

And when times get tough, these accounts are the first to churn.

So how to solve this:

  1. Mindset: Acknowledge that you cannot please everyone. (Read chapter #1 in my book The Remarkable Effect)
  2. Be brutally honest about what your IDEAL customer profile is all about beyond the typical firmographics and demographics. I refer to this as your Favorite Segmentation Cocktail.

Sharpening this not only has a downstream effect on fighting degrading NRR rates but at the same time helps you:

  • Improve sales productivity: Speed up sales cycles, increase win rates, and increase average deal size.
  • Fuel a word-of-mouth machine: The customers you attract have the highest chance to become ambassadors, i.e., your best sales force.
  • Improved resourcefulness: It will make everything beyond sales more straightforward and focused: Implementation, Customer Success, Support, and even R&D.

Don’t underestimate that.

Focus on the customers that have the highest chance to become your fans

They’ll bring you more fans. Fans that stay.

 


Question for you to reflect upon:

Does the definition of your Ideal Customer Profile positively or negatively impact NRR?


Step 3: Sharpen your positioning.

Beyond sharpening your segmentation, the next high-potential lever to prevent NRR downfall is: Positioning.

You may have your segmentation 100% in order, but with the wrong positioning, it all falls flat.

Here’s why:

  1. Positioning clarifies what it’s for (and not for).
  2. It clarifies the value to expect (and not to expect).
  3. It helps customers recognize and appreciate the unique benefits they can’t get anywhere else.

Clarity from three different angles.

And that’s foundational to creating the strongest possible NRR.

Clear positioning influences NRR in the following ways:

  • Increased loyalty (and hence, reduced likelihood of churn.)
  • It contributes to a positive brand perception.
  • It increases openness to upselling or cross-selling.
  • It lowers price sensitivity, even if prices increase over time.

Beyond that, a nice side effect of effective positioning is that it involves profoundly understanding customer needs and preferences.

So, being serious about positioning fuels a valuable feedback loop that enables you to continuously align your product, delivery, and communication around evolving customer needs and expectations.

That is all instrumental to improving NRR.

In a nutshell –

Done right, positioning not only helps you sell more.

It also helps you keep more customers.

Note: here’s an essay that will help you get going to sharpen the positioning of your SaaS

 


Question for you to reflect upon:

On a scale of 1-10 – how much does the way you position your SaaS solution contribute to having the strongest possible NRR?


Step 4: Tune your qualification mechanism.

Perfect segmentation won’t help if you still allow the wrong customers to enter the business. And bringing the wrong customers in hurts NRR sooner rather than later.

That’s where qualication comes in.

I’ve spent 30+ years learning how to avoid making costly mistakes in qualifying B2B SaaS deals, so you don’t have to.

Here are the 7 most common mistakes to avoid:

  • Mistake #1: Not defining your perfect fit customer.
    Get specific and rule by it: Describe clearly who you are for & who you are NOT for.
  • Mistake #2: Ignoring Red Flags in Discovery Calls.
    Instead of looking for reasons why they could fit, be laser focused on the signals why they’re NOT a perfect fit.
  • Mistake #3: Calling someone a “lead” too early.
    Don’t be busy with everyone who shows interest. Prioritize those who are serious about your product.
  • Mistake #4: No guts.
    Saying ‘no’ to a prospect who’s not a perfect fit can only move you forward. Find the guts to say it.
  • Mistake #5: Jumping too eagerly into ‘selling’ mode.
    Just because someone requested a demo doesn’t mean you should just give it to them. Discovery first.
  • Mistake #6: Your Sales Management is too money-stressed.
    Just because customers pay doesn’t make them a good customer. Signing up the wrong customer can be a regret forever.
  • Mistake #7: No urgency.
    Your prospect might have the pain, but without the urgency, you’re pulling a dead horse.

Note: here’s an essay on the art of qualification that will help you turn this into action.

 


Question for you to reflect upon:

Which of the seven mistakes above will give you the biggest bang for the buck if you fix it? What if you’d address that one today?


Step 5: Watch the pulse of customer expectations.

NRR is a crucial metric that reflects customer satisfaction, loyalty, and value customers derive from your product.

If there are issues, NRR will drop – and that will show in several ways:

  • Customers are expanding more slowly,
  • Downgrading their subscription or
  • Churning at a higher rate.

It is by no means just a customer success issue. It’s a customer expectation issue. One way or the other, their norms have shifted. Issues can be numerous, and the aim is to spot the early signals.

From the work I’ve done in business software over the past 30 years, here are some of the signals that I’d watch:

  • Existing customers are holding off on up and cross-selling.
  • Sales cycles start to drag within your installed base.
  • Getting glowing testimonials feels like a battle.
  • Your product is being used less frequently.
  • More negative reviews begin to appear.
  • New functionality is being ignored.

Some can be fixed by improving onboarding or tuning your customer success program, whereas others have deeper-rooted issues (product, segmentation, positioning, etc.).

One thing is sure: The way to solve it is to grow the dialog.

  • Open up for the harsh truth
  • Embrace the feedback and concerns, and
  • Take action to meet the evolving expectations

Or cut your losses and say goodbye to a segment of the market. Either is OK. The market is dynamic – so the fit you have is never set in stone. What’s important is to acknowledge where your fit is the best.

 


Question for you to reflect upon

Do you spot differences in the way you can meet the expectations of certain groups of customers? What does that tell you?


Step 6: Challenge your actual Product Market Fit.

NRR is a complicated beast because it has so many components.

The downfall of NRR can be a result of

  1. Degrading Go-To-Market fit (GTMF)
  2. Degrading Product-Market-Fit (PMF)
  3. A combination of both.

For example, Imagine you’ve just sold a new SaaS deal. You’ve onboarded your new customer successfully, but somehow, the value and stickiness of your product are lower than expected.

The question: Is this due to a loss of GTMF or the lack of PMF?

Often, as said it a compounding sum. But for this post, let’s zoom into product market fit.

In a nutshell, Product market fit focuses on what products and features resonate with customers.

But as with everything, this is a moving target.

  • Your customers’ ambitions change every year (or more often).
  • External pressures change for your customers (economy, regulations, competition, their customers’ expectations)
  • With that, targets and priorities change in every layer of the organization.

And as such – where yesterday your product market fit was perfect, it can be entirely off today.

So, how do you prevent this from happening? Here’s my top 5:

  • Be ultra clear about what business you’re really in. Remember, that’s about an outcome, not a product category.
  • Get AND keep the definition of the problem crystal clear. Remember, the evolving nuances matter.
  • Continuous feedback loops with your ideal customers AND prospects. Remember, prospects can be more honest than your customers.
  • Create resourcefulness to be able to anticipate market shifts early enough. Remember, nothing is so frustrating than not being able to adjust.
  • Balance – Define guardrails to focus your resources for short- & and long-term impact. Remember, short-term stuff is tempting, but don’t ignore to address what your ideal customers expect in 2 years.

There are more factors – like data-driven decision-making, but these five factors give you the framework to act with focus and continuously improve.

In short:

NRR depends on solid product market fit

Not only to bring revenue in but, more importantly, to keep it.

 


Question for you to reflect upon

Critically assessing churn in your company, is it because you sold the right product to the wrong customer, or is product fit degrading with the right customers?


Step 7: Adjust your Pricing and value fit – upwards.

No matter how good your product-market fit – as conditions in the market change, your customers will reassess their options and determine whether the value they get for the subscriptions they pay is still worth it.

And this is where adjusting your pricing strategies comes in sight.

But beware: I am not saying ‘lower your prices.’

It is not about being cheaper but finding the optimal value-for-money fit for the right customer. And making things cheaper often doesn’t mean you’ll attract a better customer, i.e., a customer that will become your biggest fan and, hence, buy more, more often, and stay longer.

That’s what NRR is all about – right?

So this means your prices can go up with the right positioning and value proposition.

Let’s give some examples:

  • In my interview with Melissa Kwan, CEO of eWebinar, she told me she doubled her prices and started attracting better customers, which improved NRR.
  • Mads Wedderkopp, CEO of Dreaminfluence, told me he 5x-ed their pricing and attracted better, more committed customers, resulting in better results (for them), more fans, and higher NRR.
  • Josh Haynam, CEO of Interact, shared how they removed their freemium option to discourage too-early-stage customers and attract a more mature type of customer – resulting in less stress on the support end and improved NRR.

Many stories, each positively impacting NRR.

Consider whether your current pricing model does this:

  1. it’s not the cheapest, but the most valuable for your ideal customers (your value foundation)
  2. it attracts the right customers and detracts from the ones that bring NRR at risk.

Ticking 1 box is great, ticking 2 is remarkable.

 


Question for you to reflect upon:

What could you change to your pricing to positively influence the NRR of your SaaS business?


Step 8: Consider Verticalizing (within your niche).

Another consideration to fight an NRR downfall is to opt for verticalization. You might think, hey Ton, you already talked about niching down earlier, so what’s your point?

Let me explain: Niching down has two motions:

  1. Horizontal: you provide your solution to companies with specific characteristics across different industries.
  2. Vertical: you provide your solution to companies with specific characteristics in one industry.

What is the solution difference?

  • Horizontal: typically ‘Broad & Shallow.’
  • Vertical: typically ”Narrow & Deep.’

I see verticalization as an extra niching layer of hyper-specialization in your arsenal of tools – even if you’re technically offering a horizontal suite.

Why bother?

History shows us that vertical SaaS solutions focusing on specific segments have historically been resilient to NRR downfall trends.

Here’s why: Because you make your solution more and more relevant to your ideal customer ‘in that particular vertical.’

Let me explain:

At Unit4, we offered a horizontal ERP for dynamic service organizations in both the public and private sectors.

We niched down by focusing only on organizations that were and wanted to be highly dynamic. We even gave that nich a name: Businesses Living IN Change (or short: BLINC).

For specific industries, however, we decided to verticalize:

  • Education: by adding Student Management and Research Management.
  • Professional Services: By adding a range of vertical capabilities to aid the planning of consulting projects, resources, etcetera.

It strengthened our relevance in those industries – and with that stickiness of our customers. We became more mission-critical to them.

In short:

Hyperspecialization removes competitive noise.

And increases willingness to pay and stay.

 


Question for you to reflect upon:

For what industries would it pay off to increase your relevance and stickiness by adding vertical capabilities?


Step 9: Prioritize GRR over NRR.

To prevent NRR’s downfall, you shouldn’t fixate on NRR. One metric to add to your toolkit that’s even more important is GRR. Gross Revenue Retention.

Here’s the thing:

NRR is a lagging indicator of how bad the renewal rate really is, and the number is often blurred:

  • NRR shows just the sum of MRR per period for the entire cohort and does not consider the actual renewal event for each customer, i.e., the point where they actually decide to stay or go.
  • Multi-year deals make it worse because they cover up struggling renewal rates at companies.
  • It incorporates additional revenue from existing customers, such as upsells or cross-sells, which can sometimes mask underlying issues with customer retention.

GRR, however, is a much more pure indicator of customer retention:

  1. Focus on Core Revenue: It measures the ability to retain the original revenue from existing customers, irrespective of upsells or expansions.
  2. Customer Satisfaction: GRR directly reflects customer satisfaction and loyalty. A high GRR indicates that the existing customer base is content and continues to contribute to the core revenue of the business.

The GRR formula: GRR = ((Starting MRR − Lost MRR) / Starting MRR) ×100

As you’ll see, GRR can’t be greater than 100% at any point because it excludes upsells and add-ons. And this is a good thing.

What that enables is to focus on the factors that influence Gross Revenue Retention:

  • customer satisfaction,
  • quality of product or service,
  • competitive landscape
  • customer support and care.

GRR gives you brutally honest transparency to address the root issues.

So, should you only focus on GRR? No – the magic is found in the combo. Companies that use one or the other are often creatively hiding the truth:

  • Companies with happy customers and lots of down-sell will focus on their logo retention %. (GRR)
  • Companies with unhappy customers will focus on their net dollar retention numbers (NRR) because they’re much higher than their GRR numbers.

Don’t be any of those companies. Use the combo of NRR and GRR to grow a remarkable SaaS business with staying power.

With that, everyone wins:

  • Your customers get what they hope for.
  • Your business runs better.
  • Your valuation becomes more attractive to others.

 


Question for you to reflect upon:

If you compare NRR and GRR in your SaaS company – what story does it tell you? Two positive stories – or trouble?


In summary: How stop your NRR from dropping?

We started this essay with the question: How can we prevent a Net Revenue Retention downfall in B2B SaaS?

In short, the downfall of NRR isn’t the result of one thing that’s off. 

  • It can be a positioning issue
  • It can be a segmentation issue.
  • It can be a go-to-market fit issue. 
  • It can be a product-market fit issue.
  • It can even be a metric-reading issue.

And very often, it’s a combination of all of the above.

So, how do you not only stop your NRR from dropping but also grow it to benchmark levels (and keep it there)?

Here are nine steps

Step 1: Pay sharp attention to your Go To Market Spend ratio.
Increasing GTM Spend Ratio is an early sign of degrading product or GTM fit.

Step 2: Tighten up your Niche.
Focus on the customers that have the highest chance to become your fans

Step 3: Sharpen your positioning.
Done right, positioning not only helps you sell more, but also keep more customers.

Step 4: Tune your qualification mechanism.
Perfect segmentation won’t help if you still allow the wrong customers to enter the business.

Step 5: Watch the pulse of customer expectations.
The market is dynamic – so the fit you have is never set in stone.

Step 6: Challenge your actual Product Market Fit.
Because where yesterday your product market fit was perfect, it can be entirely off today.

Step 7: Adjust your Pricing and value fit – upwards.
Don’t be the cheapest, but the most valuable. That attracts the best customers.

Step 8: Consider Verticalizing (within your niche).
Hyperspecialization removes competitive noise. And increases willingness to pay and stay.

Step 9: Prioritize GRR over NRR.
Use the combo of NRR and GRR to grow a remarkable SaaS business with staying power.

 

As you’ll see, these steps cover different parts of your business. Hence, aligning across departments is crucial to make this work. 

Almost by definition, individual departments and functions will have limited visibility of the compound (negative or positive) effects their actions have on NRR. And that makes this an area that requires the full attention of the executive team.

As the saying goes: Stop swinging for the fences. Fall in love with the process. Coordinated effort makes the most significant impact.

Good luck!

 

Additional resources to help you create your perfect segmentation cocktail

The easiest way. Book a free call to explore if there’s a fit to do this together.

Otherwise – here are three other options

 

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