Net Renewal Rate with Renewals that have annual increases

Ronald Krisak
Ronald Krisak Member Posts: 48 Expert
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edited July 2020 in Metrics & Analytics

How do folks deal with calculating Net Renewal Rates when a multi-year renewal has an annual step/increase function?  For example, if you have a renewal contract that stays flat in Year 1, but increases by 5% in Year 2, do you wait until you hit that annual anniversary before comprehending the increase into your NRR calculation?

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  • Will Pagden
    Will Pagden Member Posts: 99 Expert
    edited July 2020

    Do you charge customers monthly or annually? 

    I have it set in a way that we target our CSMs on their net revenue retention for their book of business. So if we apply a 5% increase in year 2, we may say they are targeted on a 15% NRR. We work out the % increase we expect by book of business rather than customer, if that makes sense?

  • Ronald Krisak
    Ronald Krisak Member Posts: 48 Expert
    First Anniversary
    edited July 2020

    Thanks @Will Pagden   We charge annually for most customers.  Appreciate the thoughts.

  • Matt Myszkowski
    Matt Myszkowski Member Posts: 143 Expert
    First Comment Photogenic First Anniversary
    edited July 2020

    Decent question @Ronald Krisak  - a hard one to answer via a comment here. I am at the early stage of introducing this at SAP (CSMs this year are not measured on NRR - just customer #, but my leadership team are) and we have a annual 105% target measured annually. You start the year with a base of X and you must get to X+5% by the end of that year. That will be made up of renewals, upsells & net new customers.

    Any step increase is calculated at the start of each new financial year - but we use ACV (Annualised Contract Value) which gives me a greater, and longer term stable number to work with. 

    Does this help/make sense? Happy to have a 121 chat if easier to throw ideas around.

  • Ronald Krisak
    Ronald Krisak Member Posts: 48 Expert
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    edited July 2020

    @Matt Myszkowski  I think I am following, but I'll take you up on your offer to chat.  I'll reach out to you on LI.  Thanks.

  • Marco Innocenti
    Marco Innocenti Member Posts: 18 Thought Leader
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    edited July 2020

    @Matt Myszkowski  - does adding in Net New Customers throw off the formulas?  I have seen that calculation before but the % increase was based off of their baseline going into the year versus layering in the new customers as that alone could more than cover the expected gain.  Plus they would not be renewable in that period, assuming annual agreements.

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