Many small businesses are struggling because of the unprecedented effects of the coronavirus pandemic on the economy. As a CPA, your guidance is critical to help small business clients navigate these current challenges and enable successes.
One of the most valuable factors in a business’s long-term vitality is customer retention. For instance, DocuSign’s annual sales grew more than 30%, due in part to their high level of repeat customers.
Small and medium businesses (SMBs) can also benefit from obsessively tracking and learning from customer and revenue retention trends. That makes retention analyses an ideal addition to your advisory services — and you can do it using the same accounting data you’re already managing for SMB clients.
There are multiple ways to measure repeat business success, but customer retention and net revenue retention are the key ones.
Customer retention is the percentage of customers retained from one period to the next. If a client had 500 customers last year and 400 of them bought again this year, then the client retained 80% of its customers.
The 100 customers who didn’t buy again were lost (or churned), which gives you a customer churn rate of 20%.
Net revenue retention
Net revenue retention (NRR) provides a revenue-based view of customer retention to round out the story. The two components of NRR are revenue contraction and expansion. For example, if a churned customer used to buy $1,000 of products or services, then churning the customer results in $1,000 of revenue contraction.
Revenue expansion comes from increases in sales to retained customers. So, if a customer spent $4,000 last year and spent $5,000 this year, then the customer contributed $1,000 in expansion revenue.
NRR = (Prior period revenue + revenue expansion - revenue contraction) / prior period revenue
In other words, NRR answers the question of how top-line revenue would change if your client didn’t gain any new customers. NRR is powerful because the effects are cumulative. It’s either a dividend or a tax that clients pay on every group of customers that they acquire.
In the following example, we assume a small business had $10 million in revenue last year and consistently generates 20% of revenue from new customers. Improving the business’s NRR by 10% adds $10 million in annual revenue by year five.
See how NRR affects revenue growth by adjusting the assumptions in this Google Sheet.
Advise clients by providing the analyses
Each of your clients may need to change different parts of their business to improve their customer and revenue retention rates — but they can’t start until they know where they are and can track progress.
You can export customer sales data from the accounting system or CRM and build your analyses in a spreadsheet. We also provide automated retention analyses in our product at Tally Street.
Whichever approach you choose, your clients will have new, valuable insights to help them make important business and strategic decisions affecting everything from sales to product to customer service. The AICPA® has resources to help you guide small business clients through these uncertain times.
Brian Suthoff is cofounder and CEO of Tally Street. For small businesses that want to grow and get paid, Tally Street provides a virtual analyst that helps convert sales into cash by using data to anticipate problems before they happen. Tally Street is part of the AICPA and CPA.com Startup Accelerator for 2020.