Item 8.01 Other Events.
In connection with the Avalara, Inc. (“Avalara”) 2021 virtual analyst day, on May 27, 2021, we disclosed changes to the methodologies by which we calculate Core Customers and Net Revenue Retention rate. Additional information regarding the virtual analyst day, including a link to the webcast and the full slide deck, are available on Avalara’s investor relations website.
Core Customers
We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. We use core customers as a metric to focus our customer count reporting on our primary target market segment.
We define a core customer as:
| | • | | a unique account identifier in our primary U.S. billing systems (multiple companies or divisions within a single consolidated enterprise that each have a separate unique account identifier are each treated as separate customers); |
| | • | | that is active as of the measurement date; and |
| | • | | for which we have recognized, as of the measurement date, greater than $3,000 in total revenue during the previous twelve months. |
Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries and certain legacy and acquired billing systems that have not yet been integrated into our primary U.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.
Prior to May 2021, revenue from our Streamlined Sales Tax solution (SST) was not included in our calculation of total revenue during the previous twelve months. This meant customers that would have otherwise met the definition of a core customer, with inclusion of attributable SST revenue, were excluded from our core customer count as well as our disclosures on the percentage of total revenue attributable to core customers. In May 2021, we revised the methodology for core customers to include revenue from SST.
We believe these changes improve the usefulness of this key business metric, which is to measure both the growth of existing customers into core customers and the acquisition of new customers of a certain size.
We also have a substantial number of customers of various sizes that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have numerous enterprise-level customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers.
| | | | | | | | | | | | | | | | | | | | |
| | | Mar 31,
2021 | | | Dec 31,
2020 | | | Sep 30,
2020 | | | Jun 30,
2020 | | | Mar 31,
2020 | |
Core Customers (as reported) | | | 15,580 | | | | 14,890 | | | | 14,180 | | | | 13,560 | | | | 12,940 | |
Core Customers (revised) | | | 15,730 | | | | 15,020 | | | | 14,300 | | | | 13,640 | | | | 13,000 | |
Net Revenue Retention Rate
We believe that our net revenue retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total revenue in such corresponding quarter from those same billing accounts. This calculation includes changes during the period for such billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one-year period.
