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What is net revenue retention (NRR) and how to calculate it

Sustainable business growth relies on retaining and growing with your existing customer base. For this, reporting your monthly recurring revenue (MRR) doesn’t quite cut it. Here’s why net revenue retention (NRR) is the new benchmark metric for SaaS.

What is net revenue retention (NRR)?

Net revenue retention is the percentage of recurring revenue from existing customers you retained over a given period. Sometimes referred to as net dollar retention (NDR), NRR considers customer upgrades, downgrades, and churn to show how much your business could continue to grow from your current customer base alone is, without acquiring any new ones. NRR does not include new customers.

Why is net revenue retention important? 

NRR is a key metric for subscription companies and SaaS leaders looking to assess how sustainable their business’ revenue growth is. The volatility of the current era sees a shift away from “growth at all costs” to a focus on sustainable growth, particularly among investors. Sustainable growth in SaaS relies on retaining your existing customers and growing their accounts with you. For this, reporting your monthly recurring revenue (MRR) doesn’t quite cut it. 

High rates of churn or account contraction can indicate issues with your product value proposition, pricing strategy, customer experience, and more. But if your yardstick for success is MRR growth, these challenges can be masked by high acquisition rates. A high net revenue retention rate shows predictable and scalable growth. And the higher the rate the better your company’s prospects with investors. Just look at the NRR rates of SaaS companies with some of the most successful IPOs in recent years:

  • Snowflake - 158%
  • Twilio - 155%
  • Elastic - 142%
  • PagerDuty - 139%
  • AppDynamics - 123%

How do you calculate net revenue retention?

To calculate NRR, subtract lost revenue (churn and account contraction) from total revenue (starting recurring revenue plus account expansion) and divide by your starting amount. 

Say you’re calculating your NRR for April 2022. You need to know:

Starting MRR: How much recurring revenue you were receiving from your customer base the previous month.

Expansion MRR: How much new revenue was generated from existing customers this month from upsells and cross-sales.

Contraction MRR: How much revenue was lost from existing customers from downgrades.

Churn MRR: How much recurring revenue was lost from customers churning.

NRR = Starting MRR + Expansion MRR - Contraction MRR - Churn MRR summed and divided by the starting MRR and multiplied by 100

What is a good net revenue retention rate?

You’re looking for over 100% – with industry benchmarks telling us that 109% is what you should be aiming for. Realistically though, the higher the better as it indicates your customers are happy and get value from the relationship – and that they can be a driving force for growth. As we saw above, the most successful companies at IPO have been those with NRR rates well above 120%. Anything less than 100% and you should be investigating why your customers are churning or contracting at the rate they are.  

What’s the difference between NRR and GRR?

Similar to NRR, gross revenue retention (GRR), subtracts churn from total revenue in a given period, but it excludes account expansion and contraction from consideration. It follows the formula: (Total revenue - Churn) / Total revenue. Unlike NRR, your GRR rate can not exceed 100%, as it doesn’t consider the growth of existing customer revenue. While NRR is a measure of sustainable revenue growth, GRR is used by analysts to get a clearer measure of income retention.

How to improve your net revenue retention

There are three areas to focus on to improve your net revenue retention rate: 

1. Reducing churn

There are different ways to analyze churn in a SaaS business, and different types of churn to consider. For many SaaS companies, issues with customer support results in cancellations. Friction in the user experience within the product is also a common driver of churn. A customer may only have occasional use for your product, or require features you’re not yet supporting. And sometimes churn is unintentional.  

The best tactics for improving churn are based on the real reasons why customers are leaving in the first place. So start there. Look for low-hanging fruit, like better signposting to self-serve materials for troubleshooting, for instance. Then invest in the areas that will make the greatest impact, like new features, building out your support or success teams, investing in UX, or revisiting your pricing strategy.

2. Limiting downgrades

Downgrades are preferable to churn and can be used as a churn prevention tactic. You could, for instance, give customers who have started a cancellation flow or reached out to end their subscription the option to instead pause or reduce their subscription tier. You can expect a lot of the tactics you implement to reduce churn to reduce downgrades too. But downgrades are also the result of purchasing the wrong subscription or product upfront or upgrading at the wrong time. Similar to churn analysis, you’ll want to dig into why customers are downgrading to find any underlying trends that you can resolve. 

Depending on what you discover, tactics for limiting downgrades could include:

  • Better enabling customers to choose the right package for their needs.
  • A more flexible pricing strategy
  • Reworking your value proposition
  • Reconfiguring your packages
  • A more considerate timeline for up-selling or cross-selling maneuvers  

3. Improve up-selling and cross-selling

One of the best ways of expanding revenue from your existing customer base is to focus on the value metrics that matter most to your customer segments. Once you understand the value of the solution your product offers, you can design your pricing and packaging in a way that nudges customers to grow their spending over time. This requires testing and revisiting as the market evolves and whenever you expand into new markets or segments. 

You can take steps to remind customers of the value they are getting from your product. Writing improvement tool Grammarly, for instance, use weekly insights emails that summarise a user’s usage statistics, highlighting where the product has helped them the most. You can also remind them what they’re missing out on by not upgrading their access or buying a new product line when they’re logged into their account. Just don’t be too pushy – that’ll likely lead to a faster churn or downgrade.

if you want to learn more about expansion revenue, here’s a useful resource from Profitwell.

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