Don’t trust averages: How to assess and strengthen the health of your business
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. quote 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.