Understanding the health of your business starts with customer focus: Are you providing breakthrough value to your customers? Is it value that’s so far above and beyond other solutions that it’s worth a prospective customer’s time and effort to switch to you? Is it value that’s so clearly and increasingly a step ahead that they won’t consider other solutions?
That’s what matters most and what drives long-term growth.
Now, how do you measure that success and growth? You need to go beyond surface-level figures: You need to know the metrics that tell you what’s happening in every aspect of your business — the ones deeper than just your averages. Averages lie and can be dangerously misleading.
Consider a scenario: If Jeff Bezos walks into a bar with 100 people, suddenly, on average, the net worth of each individual in that bar is over a billion dollars. Is that useful? Would that lead you to take the right actions? No — averages hide true insights.
It’s convenient to focus only on your overall metrics and averages, like revenue and growth, especially when they look great, and even getting a little more sophisticated — looking at revenue and revenue growth by product, customer segment or geography — still paints an incomplete picture.
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We experienced this at Intercom, where segmented metrics looked good, yet there were hidden insights that would have held us back if we hadn’t found them and made deliberate changes.
Time for a checkup: Diagnosing your revenue health
So what deeper insights do you need to look for, and how do you find them? One of the most useful metrics you can look at for deeper insights is your revenue health by segment.
Every business tracks and reports on total revenue, but you also need to understand the health of your revenue. Revenue health is one way to look at the ongoing value that you are delivering to your customers, in addition to metrics like Net Promoter Scores.
Hidden insights … would have held us back if we hadn’t found them and made deliberate changes. Karen Peacock
If you’re a SaaS business, you track and report on your annual recurring revenue, and the best ways to measure your revenue health are gross revenue retention (GRR) and net revenue retention (NRR).
Gross revenue retention is your ability to retain customers and revenue from those customers. You calculate GRR by taking your total revenue at the start of the period, minus revenue churn during the period, and minus revenue contractions during the period (customers who stay with you, but pay you less) — then divide that all by total revenue at the start of the period.
Net revenue retention is your ability to retain and expand customers. You calculate NRR by taking your total revenue at the start of the period, plus expansion, minus revenue churn and minus revenue contractions during the period — then divide that all by total revenue at the start of the period.
I like to think of GRR and NRR as North Star metrics that show whether you’re increasingly providing value to your customers. If GRR and NRR are healthy, you’re expanding customer relationships and doing right by them.
If you aren’t a SaaS business, the concepts here still apply. You should look at how often customers are coming back to you and buying more.
Finding the leak in your bucket with segmentation
Together, GRR and NRR also give you the insight you need into the health of your revenue and how leaky or strong your revenue bucket is. When these metrics are strong, you have a beautiful business, where each month’s revenue builds upon the past. When these metrics are weak, you have a leaky bucket, and your business starts to collapse as a result.
Where you’ll start to see true insights come is from segmenting GRR and NRR. We do this at Intercom, and in the past, it’s given us helpful insights and enabled us to change course where needed and accelerate elsewhere.
You need to break down your business into key parts or segments, which you can do in many ways — by product, by type of customer (size, buyers, geography), acquisition channel, sales motion, or any other key differences in your customer or business motion. For each, find your ARR, your ARR growth, your GRR and your NRR.
Use these metrics to double down on your products and segments with strong revenue health. For the parts of the business that aren’t as strong, figure out why and how to fix that, or at least don’t let them grow as a percentage of your revenue.
If you have a product or customer segment that is growing quickly, but with lower GRR/NRR, you are building a leakier bucket and diluting the value of your whole business. You’re trading more short-term revenue for more medium- and long-term weakness. This is a bad surprise waiting to show up in your top-line revenue numbers next year.
Our aha moment came when we saw our GRR and NRR by product and by customer segment. When we did this, we saw most of our segments and products were strong, though a small but growing problem had been invisible to us — one of our products for one of our customer segments was growing well, but it was less healthy than the rest of the business. When we realized the issue, we worked in a focused way with that group of customers, on that product, to figure out how to drive more and more value and get all of our core areas strong.
Segmenting revenue health is not only how you stay strong as a business, but how you continue to get stronger and accelerate. If you want to provide breakthrough value to your customers and really know your business, you have to get to the true insights.
You’re not going to find them in your top-level average numbers, because averages hide the insights. Break your business down, segment your revenue health, and you’ll grow fast and help your customers be wildly successful.