by Inspired by reading a company report about subscription performance and retention rates, here’s an admittedly cynical take on the selective information contained in it, and why it’s useful to think about the implications for performance.
Have you ever seen a report with a minimum spend threshold for reporting on subscription performance? Of course you have. It’s pretty common. But sometimes the threshold just feels too high. And the promise of organic growth is jarring.
Gearing ratios
Before diving into the cynical view, let’s take a step back and share thinking about retention and what Substribe calls the gearing ratios. For Net Revenue Retention (NRR), anything above 100% is growth. And you don’t get growth unless you protect the base, in your Gross Revenue Retention (GRR).
Your retention rate will be different by client tier.
Your gold will perform differently to your bronze…I hope you don’t have to live with this naming convention, but you get the point.
On NRR, maybe your gold is 110%+. Your silver is 105%+. Bronze is 100%.
The segments feed an overall, but each area deserves a careful approach. Beyond the overall retention performance, you get into the nitty gritty of how each tier performs. For instance, your expansion pathways and how this feeds into the overall picture. This is the gearing ratio for your Net Revenue Retention NRR.
Expected performance
Gross Revenue Retention (GRR) strips away the growth numbers and looks at the state of your renewals in isolation. No price increases or additions to fudge the numbers.
You don’t get anywhere fast if the stabilising performance in GRR is low and / or in decline. Sort that first. Then NRR follows. That’s the importance of understanding your segments. Not the overall. And not just ARR, GRR or NRR in isolation.
Let’s liken it to football. Your expected goal potential improves when you are in the box. You’re less likely to score a goal when you hoof it from the back of the pitch. A high GRR gets you closer to the NRR goal. I realise that sounds like a generative AI simile, I promise it isn’t 😉
What lies beneath?
Back to the report. The reported measure is GRR. Now it’s not unusual to remove segments of customers from external reports. But when a segment is removed from the reporting, it’s worth a thought. Setting a minimum spend can help with eliminating noise. Or it can obscure what’s happening.
Poor and declining GRR signals problems with product market fit and a problem with acquiring bad fit customers. In other words, customers are having a bad experience. Markets don’t operate in isolation. And when you’re going into vertical markets, it’s wise to assume the message spreads – this is a double edged sword for growth or the dreaded shrinks.
In this case, even the reported GRR performance is low.
B2B subscription performance grid
Substribe (an expert network of b2b subscription practitioners) say 90% gross revenue retention is a good marker for an established subscription brand with corporate/enterprise subscriptions. The benchmark is 88% for GRR. In the report, the GRR was much lower.
In the Substribe performance grid (see image below) the GRR is set between 80 – 100%. Substribe believe that a <80% GRR is too low to protect the installed base. This is a problem for organic growth. Good enough GRR gives a firm footing, putting you in a good position to go over the 100% NRR needed to grow your installed base.
Why do companies find themselves on the far left hand side of the performance grid?
They aren’t protecting and growing the installed base. The very essence of subscription performance. What’s going on? Look for a mix of acquiring poor fit customers, ineffective account management, and a product or use case that doesn’t work.
The cynical view
If the reported GRR is already low, then just how bad is the story of the segment that doesn’t spend enough to feature in the report?
And why is this important to think about?
Well…the positive spin in the report is more headcount for sales to increase organic growth. But more sales isn’t efficient. Over reliance on acquisitions is going to do a few things to splutter the retention rocket.
- Growth comes at a cost to interconnected elements of the engine.
- Even if all acquisitions are a good fit this puts pressure on the system.
- And aggressive targets will mean more bad fit customers.
- And with a poor product market fit, it’s harder to magnetise new prospects.
- Set this against a backdrop of increases in the cost of acquiring customers.
What to do
So what’s the answer? There should be segments of the installed base above and below the threshold where value is happening.
Start there.
But if there isn’t – then a reboot is needed of ideal customer profile, persona and use case.
Substribe can help with this.
Substribe creates 2 types of performance trackers for b2b subscriptions – revenue retention and customer “must have” sentiment.
Substribe also reboots “must have” with an advisory programme.
We have 1 space left for March/April.
this is a good practice for any subscription business. It allows you to identify your most valuable customers and focus on keeping them happy. It also helps you to identify areas where you can improve your churn rate among lower-spending customers.