Communication & Narratives Case Study - New Relic
The company is pulling off an ambitious change in the public markets now
One of the most fascinating real time case studies in transforming a business from end-to-end is happening in the public markets right now with New Relic (another one that is mid transition is Zillow but this is an enterprise software focused newsletter :) . The company is transitioning from a proprietary, top down sold APM product to an open source, bottoms up adopted observability product.
The recent New Relic investor letter is a masterclass in communication, aligning strategy amongst stakeholders, and owning the narrative. Only by getting everyone to believe, can a company buy the time and ability to execute on a change of this size.
Below is the playbook New Relic is executing on:
Outline the Overall Vision
“The transformation to a consumption model is the latest step in the software industry’s three decade journey to put customers’ best interests at the center of the software business. The move from Client Server / Perpetual Licenses to SaaS / Subscriptions alleviated the customer’s burden of managing software and high up-front costs, but in a subscription model, there is still a disconnect between purchase price and value…
At New Relic, we believe the reason that a consumption model is the way forward for software is because it changes the fundamental nature of the relationship between the vendor and the customer; the vendor understands that if they don’t build great products that customers enjoy using, they won’t get paid. Consumption isn’t just a revenue model; it is the explicit understanding that if we aren’t focusing every function in the company around making our customers successful, we aren’t living up to our commitments or our ability.”
Talk Through the Steps Needed to Achieve the Vision
Product - “When customers aren’t contractually obligated and financially committed to use a product, it is incumbent on the vendor to ensure that users derive value from, and enjoy using, the product. The biggest change from a product perspective in a consumption model is the mandate to make the product user friendly not only from a user experience and design perspective, but also taking into consideration things like third party integrations and extendable platforms.”
Sales - “The most important outcomes in a consumption model are to (1) spend as little time as possible negotiating a deal, and (2) spend as much time as possible working with customers to drive usage among current users, broaden product utilization, and find incremental use cases…Sales compensation plans will more fully reflect our conversion to a customer-centric, consumption-oriented business in FY22 by essentially eliminating sales incentives to sell up-front commitments.”
Customer Success - “One of the primary drivers of churn is users not perceiving value in the product, and we believe that is almost always because they are unfamiliar with how to use the product to its true potential.” New Relic is solving this through improved onboarding, training, and continuous knowledge transfer/best practices sharing.
Lay Out the Metrics to Show Success
De-emphasize the previous North Star Metric (ARR): “ARR, as a metric, is declining in significance as we accelerate our transition to a consumption model, and we will stop providing ARR in FY22, as our focus will have shifted away from legacy subscription model contracts to new consumption model contracts.”
Introduce a new North Star Metric (Users, both Free & Paid): “Last quarter we shared with you that since the launch of Product-Led Growth and our free tier, equivalent sign ups were up 10x. While the sign up rate hasn’t changed materially, growth in the number of customers converting from the free tier to a paid tier is accelerating.”
Augment an existing metric to provide continuity (Net Revenue Retention): “In place of ARR and ARR derived metrics, we will provide metrics that we believe give better insight into our business…The primary metric will be NRR, which is the quotient obtained by dividing the revenue generated from a cohort of active customers in the measurement period by the revenue generated from that same cohort in the prior comparison period.”
Whether or not New Relic pulls off this change successfully is something else entirely. But what the company and founder, Lew Cirne, did exceptionally well was outlining the clear vision, steps along the path, and metrics to evaluate progress so that all stakeholders are aligned. This helps bring about cultural change, realign incentives, and find true believers for the journey.
Excited to see how New Relic progresses on this vision in the future!