By Evan Rich
I have a tendency to repeat the same three words over and over: satisfaction, retention and growth. While some team members give me a hard time about this annoying little habit, mostly in jest (I think), it has become a north star for me: when contemplating whether I’m prioritizing my time properly, I’ll often ask myself whether the task is in service of one of these goals. Kristen wrote last week about measuring customer satisfaction and some of the intriguing options for supplementing NPS. Once we understand what makes our customers happy, it’s important to be able to leverage that into retaining and ultimately growing the base. This week, I’m going to focus on the growth side of things with a closer look at expansion. Early in our business, it was a challenge just to measure expansion consistently and accurately, so we’ll start this conversation at the very basics of talking about how to calculate net retention. Once a consistent methodology is in place, we can dive into some of the leading indicators that provide context for this metric and discuss strategies for driving further growth.
First, let's define the term to ensure we’re all on the same page. Expansion, or net retention, refers to a company’s ability to grow its existing book of business when accounting for churn. This should not be confused with gross retention, which measures the company’s ability to renew its existing customer base (the inverse of churn). Typically we look at net retention on a rolling 12-month basis. For example, at the end of September, which marks the end of Q3 in our business, we’ll be reporting net retention on the revenue that was in the business at this time last year. It is critical that we consider the same cohort of customers (i.e. anyone who was a paying customer as of September 30, 2020) when adding any upsell and cross-sell and subtracting churn.
Here is our standard equation for measuring expansion:
(Existing Business Revenues + Upsell and Cross-sell Revenue - Churn)
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Existing Business Revenues
Let’s say we have $10m in existing business annual recurring revenues as of September 30, 2020. In the 12 months after, we gain $1m in additional spend commitments and lose $500k in churn and downgrades from those same customers. On September 30, 2021, our net retention rate is: ($10m + $1m - $500k) / $10m = 105%. We’re growing the existing business at a 10% clip less 5% lost due to customer churn (i.e. 95% gross retention or renewal rate).
Upsell
Now that we’re aligned on how to calculate customer expansion rate, let’s discuss some strategies for driving this all-important metric through the roof. If your business is built around a single product, then achieving revenue growth from the existing customer base will likely hinge on your ability to maximize adoption through selling additional licenses and/or creating value through supplemental paid features. Fortunately, you have a wealth of data on how your customers are using the product to help inform your upsell strategy.
Daily (or monthly) active users is one such metric commonly used by SaaS companies to measure product stickiness, and it can also be applied here to identify accounts with the greatest potential for growth. In our business, where pricing on our flagship product is usage-based, we have observed frequency of login and API request volume to be key indicators of revenue upside. Moreover, we’ve identified a subset of advanced features unique to our product highly correlated with a customer’s propensity to spend.
Once you’ve identified the leading indicators unique to your product, the focus can shift to surfacing these data points for CSMs so they can quickly take action on them. There are several tools out there that can accomplish this task, so rather than endorsing one in particular, I would just say that any solution you choose should be tightly integrated with the environment where your CSMs live (CRM, CS platform, messenger etc). For example, our CSMs primarily live in Slack, so we chose to invest in automation that notifies CSMs when their customer is seeing large spikes in a key metric. This has proven particularly helpful for metrics tied to billing usage. Rather than the customer being caught by surprise when they receive an end of month invoice, the CSM can now engage proactively and identify the root cause of the uptick in usage. This often leads to an upsell opportunity, which can be worked by the CSM in coordination with a sales peer, depending on how your organization is structured.
Cross-sell
Possessing other complementary products in your portfolio can help unlock even more robust growth via cross-selling. One way to start analyzing this opportunity is by performing a white space analysis. The point of this exercise is to identify customers with room for growth (for example, a customer who has 2 of your 5 products) and determine which of those currently unused products will be a fit for them based on what you know about how they’re currently using your solutions. Again, assuming you view your other products as complementary, the key here is to leverage any existing data about how the customer uses your product to identify potential for expansion. The goal of this exercise is to drive up your penetration rate.
In the example above, the customer has a penetration rate of 40%. Note, this does not mean that all 3 unused products present viable growth opportunities. As advocates for the customer, the CS team bears the responsibility of figuring out which products are well-aligned with the customer’s strategic objectives. Once they’ve identified the white space that they can credibly attack, CSMs will feel empowered to initiate a data-driven conversation with the rest of the account team (CSM, sales, product etc). These discussions should be integrated into the account team’s standard planning process and applied in future business reviews, approaching those conversations from the perspective of educating the customer on complementary capabilities that will enhance their overall experience with your product. Rather than setting an agenda based on your desire to sell a product, you’re instead serving as a valued partner to the customer, educating them on solutions that can address key needs in their business. This will feel distinctly different for the customer and, of course, help you drive satisfaction, retention and growth!
The Success League is a customer success consulting firm that helps leaders build and develop top performing customer success teams. We offer short-term consulting engagements that can kick-start your planning efforts, as well as coaching for leaders who need some weekly advice. Check out TheSuccessLeague.io for details.
Evan Rich - Evan formed the Customer Success team at NS1, an infrastructure technology company that is changing how internet applications are delivered. As VP of Global Services, he is responsible for account management, support and professional services. Evan holds a BS from Cornell University and resides in New York City.