The One-two Punch of NRR & CX

Anyone in leadership in a SaaS or a subscription revenue business understands the impact of Net Revenue Retention on business valuation. But it’s often thought of a bit too esoterically, as if it were some flighty concept for some future state, versus something actionable.

The truth is that NRR matters in any subscription business from day one. And the reason it matters is that the snowball effect of putting good practices into place early can reap massive rewards downstream when you go to raise funds or exit.

In short, NRR drives enterprise valuation, and EV keeps you in the driver’s seat and in control of your company’s future. Therefore, you must act on it, and do so early.

Let’s walk through it using the chart below. Thanks first to m3ter for their excellent article on this topic, which you can find here.

We see two companies, both starting at $1mm in ARR, all else being equal (including net new revenue acquisition) except for their net revenue retention rates. Company Orange has an NRR of 85 percent, whereas Company Green has an NRR of 105 percent.

Fast forward five years, keeping everything the same, and you begin to see the snowball effect of NRR. Company Orange ends up not even cracking $2mm ARR, whereas Company Green gets near $4mm ARR.

It needs to be said: that’s a massive difference. In fact, Company Green now has 230% more ARR than Company Orange. Despite these two companies starting out equal, that 20% NRR difference has made Green 2.3X the size of Orange.

But that’s not all.

That’s just the revenue. What about valuation? What multiple oin revenue can you get with an NRR at 105 percent versus 85? At least another 2x, maybe 3x in terms of valuation? Maybe more?

In the end, we’re not talking 2X bigger but more like 5X bigger. Let that sink in a moment.

By boosting NRR, you can make your company 5X more valuable.

Of course, we’re back to the start of this article and the idea of NRR being a bit mystical. And while NRR does depend heavily on product-market fit, a good sales motion can compensate for some of that as PMF is being tweaked.

But besides PMF, there is only one thing that impacts NRR – and that is your Customer Experience.

Past basic product features and functions, the only reason customers will stay with you and eventually purchase more is because the CX drives that outcome.

So if you want to move NRR up over 100 percent, you must focus on your customer experience. You have to nail time to value, and be prescriptive, and hold customers accountable to success. If you can do that, and drive measurable value for them, you can definitely boost your NRR.

CX boosts NRR, and NRR boosts valuation. And that’s how you win.