We’re sure you know this, but it’s worth the reminder: acquiring new customers isn’t the most cost-effective way to generate more revenue for your business. Yes, customer acquisition is important. But you’ll spend less and make more by retaining and continuing to sell to your current customer base. What does this have to do with Net Revenue Retention (NRR)? A lot!
NRR measures how much recurring revenue you’ve retained and generated from existing customers over a set period of time vs. how much you’ve lost from downgrades and cancellations. When you calculate net revenue retention, you’ll have a better idea if your business is retaining enough customers to survive and prosper in the long term.
In this post, we’ll dig further into why NRR is a key metric for SaaS companies by sharing:
Let’s get started!
Net revenue retention (NRR), is a key metric that SaaS companies use to measure revenue retained from existing customers.
You’ll look at the following four factors when calculating your business’s net revenue retention rate:
If you’re familiar with net negative churn rate or net dollar retention rate, you may think NRR sounds similar–and it is. These three terms can be used interchangeably. But why even care about this metric in the first place?
As a SaaS company, you’ll track NRR as a way to:
To calculate net revenue retention, you first need to determine your recurring revenue for a given period of time. This is the total amount of revenue that you expect to receive on a monthly or annual basis from your recurring customers.
Once you have your recurring revenue figure, you should add any additional revenue coming in from expansion (i.e. upsells or cross-sells). Then, you’ll need to subtract revenue lost from downgrades and customer churn.
For example, let’s say that, this month, you expect your company to generate $300,000 in monthly recurring revenue (MRR). Thanks to upsells and cross-sells, you also generate $30,000 in additional revenue. However, your customer churn rate for this month is 20%, so you’ve lost $60,000 in monthly recurring revenue. In addition to that, you’ve also lost $5,000 of revenue due to some customers downgrading their subscriptions.
How would you calculate the net revenue retention rate for this scenario? Easy. You’ll use this simple net revenue retention formula:
(Starting MRR + Expansion – Churn – Downgrades / Starting MRR) x 100 = NRR
And here’s how you’d plug in the numbers from the example above:
(300,000 + 30,000 – 60,000 – 5,000 / 300,000) x 100 = 88.3
Now, you may be wondering: Is 88.3% a good net revenue retention rate for a SaaS business? Well… not really. And here’s why.
The ideal net revenue retention rate for a SaaS business is 100% or higher. An NRR this high demonstrates your business is showing signs of growth despite losing money to churn and downgrades.
Companies like Snowflake and Twilio have NRR over 150%!
On the other hand, a net revenue retention rate below 100% (like we saw in the example above) means that your business is currently losing money and, consequently, not growing. That being said, a net revenue retention rate around 90% can still be a good sign. With a few tweaks, your business could have a viable path toward growth.
So, how can you achieve a net revenue retention rate of 100% or higher?
Improving the net revenue retention rate of your business is an essential step to ensure your business survives in the long run. You can achieve that goal by:
Let’s look at some example actions you can take for each one.
While pricing and packaging is one of the most powerful mechanisms to capture new customers, it is also the area that requires the most significant change in mindset. To help, we have developed a 3D Pricing and Packaging (P&P) Framework, embedded in real life examples, specific guidance, and benchmarks.
Once you’ve tackled churn, increasing the revenue generated from your existing customer base is another effective way to improve your net revenue retention rate. Here are some ways to increase expansion revenue:
Adding new features to your product is a great way to get customers interested in upgrading. These additional features should reflect the needs of your customers, which can also be found by analyzing customer feedback.
Offering discounts on upgrades or add-ons is a great way to encourage customers to buy more from you. For example, you can offer a discount to existing customers who have recently referred a friend or signed up for annual billing.
Bundling your products and services together is a great way to increase sales. Think about how to market your upsells and cross-sells so they complement each other and offer a discount for buying them together.
A free trial of the next tier of your service can be a great way to increase expansion revenue. By giving potential customers a taste of what they can get by paying a bit more, you can increase the likelihood they’ll upgrade their subscription. You may also think about a Freemium model.
Gross revenue retention (GRR) is another metric SaaS businesses can check to get an idea of how well they’re doing. GRR also measures the recurring revenue that a company retains. But, unlike NRR, it does not include revenue that comes from expansion from upsells and cross-sells. Consequently, your gross revenue retention will always be equal to or lower than the net revenue retention rate, never exceeding 100%.
Because GRR focuses exclusively on recurring revenue, it’s a more conservative metric than NRR to use when making financial projections. This makes it a good number to know when speaking to investors concerned about your business’s financial health.
While both NRR and GRR are important metrics for SaaS businesses, NRR is a more holistic measure of a business’s growth because it encompasses all aspects of the customer lifecycle.
Net revenue retention is a key metric you’ll use to determine if your SaaS company is generating enough revenue from your existing customers to offset revenue lost due to churn and downgrades.
To calculate the net revenue retention rate for a particular month, you’ll use the following formula:
NRR = Starting MRR + Expansion – Churn – Downgrades / Starting MRR
If you’d like to calculate it based on annual revenue, you’ll replace MRR with ARR in that formula.
Ideally, your business will have a net revenue retention rate of 100% or more. But if it’s lower than that, don’t panic just yet. You can improve NRR by using the ideas we shared to reduce churn, increase expansion revenue, and prevent downgrades.
Gross revenue retention (GRR) is another key SaaS metric. But, unlike NRR, GRR does not account for expansion revenue, making it a more conservative metric to evaluate your business’s projected financial growth. That being said, NRR provides a more holistic measurement of that growth because it accounts for all aspects of the customer lifecycle.
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