Fresh Data Shows Customers Are Spending Less
According to Altimeter Capital, a key metric in the software industry, net revenue retention (NRR) continues its quarter-over-quarter decline. The downward decline is on a seven-quarter streak.
What is net revenue retention (NRR)?
NRR reflects how much existing customers spend year over year. A high NRR means customers are happy and buying more. For example, if a company has a 158% NRR, it means the existing customer base from a year earlier has increased its total spend by 58%.
Why is NRR dropping?
There are a few reasons:
- Economic uncertainty: Companies need to be more cautious with their budgets, where capital is less accessible, restricting spending on new products and services.
- Focus on cost-efficiency: Businesses want to cut costs by consolidating their software subscriptions. Even platform plays show a weakening, meaning point solutions are at greater risk.
- Maturity of the market: Some software categories may be reaching saturation, making it harder to upsell existing customers.
Here's a look at how some industry leaders are faring:
- Snowflake, the data analytics software vendor, saw its NRR dip from 158% in 2020 to 131% in early 2024.
- Twilio, the cloud communications software company, reported an NRR of 102% in February 2024, down from 139% in Q4 2020.
- Zoom, the video conferencing giant, has seen its enterprise net retention rate drop to 101% from over 130% three years ago.
- ZoomInfo, which sells access to sales data, reported a dramatic drop in NRR to 87% at the end of 2023 from 116% two years earlier.
- DigitalOcean, a cloud computing competitor to AWS, saw NRR fall below 100% in 2023, dropping from 112% to 96%.
What can we do?
- Prioritize customer service: Proactive communication, excellent customer service, and ensuring our product remains valuable are vital to keeping our existing customers happy and engaged.
- Offer additional value: Provide new features, integrations, or services to justify continued spending. Highlight the return on investment (ROI) our product offers.
- Be mindful of pricing: Consider flexible pricing options or bundling to make our offerings more attractive.
- Host events: Consider dinners and happy hours to engage with our customers, bring them together, and teach them something new.
- See customers: Ask our boss to approve travel to visit customers. Pick markets where we can bundle four or five in-person meetings across two days.
The good news?
Industry leaders like Amazon Web Services (AWS) are seeing signs of stabilization, and some SaaS companies report low churn rates despite lower NRR.
The takeaway:
Stay informed about industry trends and adapt our sales strategy accordingly. By focusing on customer value, building strong relationships, and offering compelling solutions, we can weather any storm.
