These metrics have been utilized by VC and PE-backed companies for multiple years, but they are now gaining traction across the broader XaaS ecosystem. Measured correctly, and supported by other productivity metrics, NRR and CAC to LTV are powerful mechanisms to evaluate marketing and sales effectiveness.
NRR stands for Net Recurring Revenue.
It measures the cumulative impact of additions and losses to recurring revenue within the customer base over a specified period of time; typically a month, quarter or year. It is a relatively simple metric that is consistently reviewed on executive dashboards because it summarizes three critical sales motions into a single number. The three sales motions include:
The following illustration should help:
Does 116% NRR growth indicate healthy performance? General XaaS industry practice of 107% – 112% suggests the company is performing well. Context is critical, however, as NRR performance is dependent on many factors including growth stage. Early stage, high growth companies should aim higher, while later stage companies should view 116% as acceptable.
NRR is a valuable metric for CROs and sales leaders to measure on a consistent basis. However, it does have a major drawback.
Granularity: Remember that NRR encompasses three sales motions, so it is incapable of showing specifically where growth challenges reside. Revenue leaders must break apart the number to pinpoint issues and take corrective action. The example above is a good case study:
It is particularly important to analyze each NRR element during times of uncertainty. COVID is forcing companies to reevaluate pipeline and adjust forecast as budgets tighten and purchase decisions push into the future. While growth (up-sell and cross-sell) is typically a revenue leader’s priority, one can argue that churn mitigation is the most critical factor to optimize in the short-term given pending financial difficulties from thousands of businesses. Click here for practical Customer Success suggestions to manage the install base or register for our upcoming NRR Virtual Roundtable.
LTV:CAC stands for Lifetime Value over Customer Acquisition Cost.
LTV:CAC is one of the most important metrics for XaaS businesses at it represents the efficiency of a company’s business model in terms of acquiring new customers and profiting from them over time. CAC represents the total marketing and sales dollars required to acquire a customer. LTV represents the total revenue or gross profit obtained over the lifetime of the relationship. Combining the two metrics creates incremental value because it quickly tells if a business is making more money per customer than it is spending to acquire that customer.
What should companies strive for in terms of performance? LTV:CAC must exceed 1x otherwise the company loses money in perpetuity as acquisition costs exceed customer revenue in today’s dollars. Benchmarks vary in the marketplace but ideally LTV:CAC exceeds 3x for most segments or customer cohorts. Alexander Group recommends the following actions to drive up LTV:CAC:
Technology is a fast moving industry. Business models are evolving. Metrics and KPIs will adjust as a result. Alexander Group will continue to share perspectives and benchmarks with you and other revenue leaders to ensure our community stays abreast of contemporary trends.
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