Ross Tennenbaum is CFO of Avalara. Views are the author's own.
Net retention rate (NRR) is an important metric for any recurring revenue company but making changes to improve its performance requires going deeper into the workings of the business to adjust what I like to call micro metrics — the much more detailed performance measures that influence a top line, or macro, metric like NRR.
Any macro metric, whether it’s annual recurring revenue, net promoter score or lifetime customer value, can be most effectively improved when you identify the metrics that influence it and make changes at that micro level. It’s what I think of as the macro to micro continuum, and it provides a roadmap for making micro changes that improve macro metrics.
For CFOs, setting, working toward, and achieving metrics are essential to the health and success of the business. From bookings to NRR, many key metrics are monitored and reported in hindsight. While top, or macro-level metrics, are critical, CFOs should be looking across the continuum down to the micro-level metrics that drive macro-level results.
The concept of the macro-micro continuum is simple. It’s about decomposing the results delivered at corporate board meetings or reported on public earnings calls into the specific activities that teams across the company can operationalize to consistently drive better results.
By breaking down key metrics into what drives them, CFOs can work with other business leaders to address areas of concern and opportunity on an ongoing basis – all with the intent of helping the company operate in the most effective, efficient way to achieve maximum results.
Think of a business like a human being. At the macro level, we can measure key metrics for humans like body mass or speed. But as you go from the macro view down to the micro level, you traverse through complex systems and organs before ultimately reaching the cellular layer.
The ultimate level of output the human body can achieve is dependent upon how these units perform their specific job and engage with one another.
So, how can CFOs apply the macro-micro continuum to their metrics and organizations? Net retention provides a good example.
For most SaaS companies, NRR is an important metric for understanding the health and growth of business coming from existing customer accounts. At its highest level, NRR shows the positive or negative growth of existing customer accounts, but there are several drivers that contribute to the final figure. On the upward side of NRR, existing customer account growth can be driven by the customer growing themselves or adding on new solutions. On the downward side, things like downgrades, concessions, and churn all have an impact on NRR.
Applying the concept of the macro-micro continuum to drive higher NRR begins with setting targets for these specific drivers and then identifying the teams that can best operationalize results around each one.
For example, if a CFO determines customer downgrades are heavily impacting NRR, they can work with their customer-focused team and product management to identify the use cases where customers most often downgrade service. From there, clear ownership of what areas need to be focused on can be outlined by each respective team.
While this process seems simple, conceptually, there are a few potential pitfalls CFOs should keep in mind when implementing the continuum in their companies:
- Address data limitations early on.
Before decomposing metrics and outlining areas of focus for the business, you must be certain that you have all the data needed to work off. This requires solid data hygiene and management, or you’ll risk having teams working off incomplete or inaccurate data.
Beyond the foundational layer of data needed, you must also enable teams to regularly review data to track progress.
- Start small and simple.
It’s more effective to focus and align teams on a few metrics than trying to address every one that is reported. Starting with high-priority metrics will allow teams to address the issues with the greatest impact.
- Be consistent.
It’s easy for teams to be discouraged or complacent if processes aren’t working. To drive success, the responsibility is on the CFO to consistently drive the projects forward and reinforce the overarching impact each employee’s efforts are making.
At the end of the day, the results reported by the CFO are driven by the work being done across the company. By adopting the macro-micro continuum, CFOs can help business leaders drive and improve results, and use finance metrics as a tool to drive alignment and buy-in across the company.