A metric you should be tracking: Net Revenue Retention (NRR)
Most agencies and consultancies don’t track Net Revenue Retention. But it’s an important metric to understand how efficient your firm is at retaining and growing your book of business. Once you start using it, decisions about account management, pricing, and forecasting have a lot more focus.
What NRR measures
NRR shows how much revenue you keep and expand from the clients you already had at the start of a period. It ignores new-logo sales. You’re looking only at the firm’s revenue from the existing client portfolio (don’t include pass-throughs).
Expansion: upsells, cross-sells, price increases
Contraction: scope reductions, discounts
Church: clients that that go to $0
If your existing client portfolio ends bigger than it started, NRR > 100%. If it ends smaller, NRR < 100%.
The NRR formula
Pick a period (month, quarter, year)
NRR = (Starting Revenue + Expansion - Contraction - Churn) ÷ Starting Revenue
Here’s an example calculation of NRR:
You begin the quarter with $250,000 in monthly fees across the same clients.
Expansion: +$15,000
Contraction: -$7,000
Churn: -$10,000
NRR = (250,000 + 15,000 - 7,000 - 10,000) ÷ 250,000 = 99%
This means that revenue from your existing client base shrank slightly (1 percentage point).
Another example:
You begin the quarter with $150,000 in monthly fees across the same clients. You expanded relationships with two clients, one client had a budget cut, but you retained all clients.
Expansion: +$40,000
Contraction: -$15,000
Churn: $0
NRR = (150,000 + 40,000 - 15,000 - 0) ÷ 150,000 = 117%.
This means you had a healthy expansion in the quarter. A healthy NRR is typically 103% or greater.
How to use NRR
1) Determine the health of the base business:
>120%: World-class NRR
100-120%: Good NRR
90-100%: Fair NRR
<90%: Bad NRR
When your NRR is 100%+, any new business you bring in is additive. When you’re below NRR, any new business you bring in is replacing revenue.
2) Forecast smarter
Treat NRR as your base-plan growth from existing clients.
Example:
Your trailing twelve month fees are $5.2M.
Calculate your NRR for the same period and adjust for any known changes. Let’s say you align on a 104% NRR.
$5.2M * 1.04 = $5.408M
So you could forecast $5.408M in revenue from your existing client base for the next 12 months. Additional growth would come from net new logo business.
3) Use it as an incentive metric
Tie Client Success/Account Leads to portfolio NRR, but require a gross margin floor so revenue isn’t being gained at the expense of profit.
Incentive plans should reward:
Hitting NRR targets
Multi-year renewals
Mix-quality improvements (higher-margin services)
Things you can do to positively impact NRR
De-risk key accounts. This step is often skipped when thinking about client expansion. Identify the risks that could result in loss of revenue for your firm. Then, evaluate the impact, likelihood, mitigation plans, who owns the mitigation plan, and set deadlines.
Client Quarterly Business Reviews (QBRs). Set quarterly review meetings with your clients to review outcomes, roadmaps, and any challenges with the relationship. Do not use this as a status meeting.
Multi-thread relationships. We advocate always being at least three people deep on each account. Exec sponsor + economic buyer + daily champion. Deeper relationships improve your long-term success with the client. Work to understand the entire business and ask for introductions to other players as appropriate.
Outcome-based reporting. Document wins (and losses) that tie to the agreed-upon KPIs. Discuss these reports regularly. At a minimum, at your QBR.
Renewal Discipline: Start early when you have an approaching contract expiration. Don’t assume that it will just continue, even if you have an auto-renew clause in your contract. Start having internal discussions 120 days before renewal to address any potential issues that the team is experiencing. Start talking with the client at least 90 days prior to renewal. Proactively address any challenges in the relationship.
Offer ladders & packaging. Create things like tiered retainers, managed services and add-on modules. One thing to consider, if you don’t have it already, is a small retainer for account management/ad hoc consulting. When a client has a last minute need, a strategic challenge, or just a question that falls outside of the scope of your engagement, a retainer encourages both parties to expand their conversations beyond current projects and tactical implementation. Often, this retainer leads to additional opportunities.
Value Pricing. Time and materials pricing will always be subject to the value that someone puts on an hour. As AI becomes more prevalent in workflows, the time and people needed to complete projects will decrease, leading to decreasing revenue for your firm. While it may not be possible to move all of your clients from a hourly billing model to value pricing, it’s critical to start exploring and testing a value based pricing model. Blair Enns has some great material on value pricing and is widely recognized as an expert on value based pricing. It’s a great place to start.
Case studies from other clients. Don’t just save your case studies for prospects. Share them with your current clients. Your clients are often looking for ideas that may not come up in the regular course of conversation. When you share a case study, apply it to their business and show how sharing is relevant to them. Don’t just send over a PDF.
Special notes for project-heavy firms
If your revenue comes from many one-off SOWs, calculating NRR can get a bit challenging. Here are two options:
1) Use “same-client revenue retention” on a trailing twelve month basis. Compare clients from clients present in both the current trailing twelve months and the prior trailing twelve months. Make sure your timeframes are the same for all of your clients when you’re calculating NRR across the firm.
2) Track NRR on your recurring/managed-services book only.
Either way, exclude pass-through revenue and keep the definition consistent period to period.
Bottom line
NRR shows whether your current book of business is compounding or eroding.
When you hit 100%+ NRR consistently, you turn business development from constantly replacing revenue to being a growth accelerator.
We’ll walk you through calculating your NRR and provide customized recommendations on how to improve metric. Contact us.