Churn can kill a subscription business quickly. High gross revenue retention rates (GRR) are necessary for the financial health of a business. But low net revenue retention rates (revenue growth from your existing customer base, aka NRR) can also kill a company, just a bit more slowly.
For B2B subscription companies, NRR (aka net dollar retention, aka NDR) is the holy grail of growth. Even increasing NRR just a little bit can increase revenue growth significantly.
When we talk about revenue growth, we tend to focus a lot on new business acquisition - bringing in new logos. And we talk about retention - keeping the customers we have. But customer expansion is a trickier topic to tackle.
In theory, every customer success and account management team wants revenue growth. They’re excited when a customer upgrades, and they celebrate NRR increases. But the reality is that CSMs and AMs spend most of their time on retention and very little on expansion.
(Quick editor’s note: We’re using both “customer success” and “account management” to refer generally to the teams responsible for the support and growth of current customers. We’ll dive more into the distinction between the two shortly.)
Even at the highest performing and most mature companies, expansion revenue accounts for only 20-25% of their overall revenue. Why is this?
Retention is table stakes
First and fundamentally, you can’t have expansion without retention - you can't have NRR without GRR. If you don’t keep a customer, then you have no chance of growing that customer. It’s also a lot more expensive to keep a customer than to get a new one.
Most of the effort on a customer success team goes towards keeping accounts, not growing them. CSM and AM comp plans typically reward retention more than expansion. Loss aversion plays a role, as well; there’s a common and very rational fear of “don’t do anything to upset the customer, because our competitors are waiting to snatch them up” running through most CS teams. And generally, happy customers are more likely to stick around than those that aren’t happy.
Many CSMs want to be perceived as a trusted advisor to the customer, making sure their customers are finding value in the product. They will do anything they can to make a customer happy, thinking that if they prove themselves indispensable, the customer is more likely to stay on as a customer - and hopefully maybe eventually upgrade.
We’ve got this belief in the idea that the happier a customer is with a company and a product, the more likely they are to upgrade. If we can just show them how committed we are to their account, they’ll buy more from us, right? Right?!
It turns out that’s simply not true. Studies have found that NPS doesn’t correlate to retention rates. And other studies have shown that there is no correlation between customer service and expansion revenue. As Gartner writes, “There’s no upper bound to exceeding customer expectations.” CSMs can bend over backwards, sending emails at 2am, answering the phone on Thanksgiving, spending hours on QBRs. But beyond a certain point, above-and-beyond customer service doesn’t have any impact on the renewal and expansion potential of an account.
A lot of customer success work is wasted above and beyond what’s necessary to sustain GRR and grow NRR.
If more effort doesn’t lead to expansion, then what does?
Expansion requires more than effort
For most companies, cross sells and upgrades just don’t work. Even if you have new products that are a great fit for your existing customer base, it’s damn hard to get those customers to buy anything new. Only 28% of sales leaders meet their cross-selling and account growth numbers. What can you do to improve your rates?
You likely need multiple assignment processes for your customer accounts. For example, you might need farmers and hunters.
Farmers are the caretakers. They help the customer be successful with the product, fix any problems that come up, and focus on satisfied customers who actually use the product and renew their contract every year. This can lead to account growth, but it’s not the main objective, just a byproduct. These are CSMs.
Hunters are the seekers. They look for opportunities to grow a customer account, to find hidden value in existing accounts. They don’t want to upset the ecosystem, but their goal isn’t satisfaction; it’s growth. These are AMs.
You may also need to assign accounts based on different criteria. Companies tend to segment customer accounts based on criteria that's convenient for them - like what’s easily visible (geography, industry, company size) or what fits their internal organization (product line, current spend) - and less on what actually matters to maximizing value (customer potential or needs).
Those convenient segmentation methods are the easiest to define and implement, and simple to communicate to customer success teams. But they leave revenue on the table, because they fail to identify the segments with the highest potential for growth.
To grow an account, you need something new. You need to sell into a new team, provide a new product, fix a new problem. Retention is all about stability - we’re doing this thing and it works and we’ll just keep doing it. Expansion is about change.
What are the changes you can impact? The goal is not to figure out how a customer can use your product better, but how you can help make their business better. What processes do they need to change to grow? And you need to provide a clear connection to ROI; how will this change tangibly benefit their business?
You already have an advantage - they already use your product. You know their team, you have information about their company your competitors don’t have.
You’re also uniquely positioned as an outsider. You have a fresh set of eyes to put to a customer’s problem; you’re far enough away from the problem to think about it differently. You also have the benefit of knowing what all your other customers are doing, what has worked, what hasn’t. What can you apply to this customer to help them improve?
This is a customer-first focus. It’s also a future-first focus. It’s not about what your product does, or what the customer is doing now. It’s about something they can improve to do better in the future. Even better if more of your product can help them do it.
This can seem vague and hand-wavy, so I’ll illustrate with an example.
A real example
Our last startup Union Metrics made social media analytics and listening software, and was acquired by TrendKite, a growth-stage company that made earned media monitoring and measurement software, what we called “digital PR” - like digital marketing but for communications. It was a cool product in a space with only a few other competitors.
The TrendKite product was missing a comprehensive social component (hence the Union Metrics acquisition). Sure, it’s great to measure all your press coverage, but there’s so much conversation related to that coverage on Twitter and other social media. So without a social media listening component, the product is limited. It seemed so obvious to us at TrendKite - if you’re already measuring media coverage, wouldn’t you also need to know about the social media conversations about that coverage?
The problem we ran into was most of our customers - PR teams - didn’t own the social media program at their companies, and didn’t see why they would need a social tool that seemed so similar to what their marketing team already had. So cross-selling a social media add-on wasn’t attractive to most customers at first, and less than 5% of customers were buying social.
We took a closer look at our approach. We couldn’t just “add on social” - that isn’t a very customer-focused approach. How does that help PR teams? What are we trying to improve for them?
A common problem for a lot of PR teams is they’re not closely connected to strategic decisions at their companies. They’ve been left out of conversations about who owns social media, for example, and we know that social media can have a direct impact on revenue. How could we help PR become more strategic at their company?
We could help our customers change their approach to social media to position it as a core part of the comms team’s work. Okay, so maybe PR isn’t responding to customers on Facebook, but PR needs to be engaged with social media in a lot of other ways. Social listening is great for competitive intel, research on an industry and other trends, identifying potential influencers and advocates. It’s also vital for understanding what people are saying about your company online. How does your audience perceive your company? How can you use that information to shape your communications strategy?
Monitoring what and how an audience discusses a news article is really only a tiny piece of the power of social media for PR. It can and should help drive decisions for a PR team. Once we figured out how to first ask, “How does social media fit into your day to day?," it became less about selling, and more about helping customers grow their PR strategy through social.
Once we reframed (and rolled out a big sales enablement push), social sold like hotcakes. We were generating $1MM in social ARR within 4 months.
Take a customer-first approach to revenue expansion
So, what do you do next?
First, look at how your customer teams are organized. Do you have separate CSMs and AMs? Or is one person responsible for servicing and growing accounts? How do you decide who gets which accounts? Are there different ways you could structure your team?
Second, look at the work your team is doing. How much time do they spend on customer service-type queries? There may be opportunities to adjust the scope of their work or alter comp plans to incentivize certain activities. What are your upsell and cross-sell rates?
Third, evaluate where it seems like cross sells are working. What can you learn about what’s working? Is there a particular sales approach that’s more effective? Are there identifiable criteria about the customers who do upgrade? Figure out what’s working and how you can duplicate that success across your entire customer base.
Overall, don’t let the fear of losing a customer hinder your desire to pursue increased NRR. If your teams are spending more and more time helping customers, but NRR isn’t increasing with that effort, figure out how you can redirect that effort into actions that do correlate with NRR.