Net Revenue Retention (NRR): The Most Critical Metric in SaaS
Founders, leaders, and investors alike agree that NRR is now the “gold standard metric” when it comes to rapid and sustainable growth in SaaS.
How does NRR affect growth? Well it’s a lot easier to grow your company when you aren’t losing revenue along the way. It’s even easier to grow your company when the amount your existing customers are paying you increases over time.
That’s the reason why retention matters so much to growth, and why top executives and investors track and pay such close attention to it.
What is Net Revenue Retention?
The Net Revenue Retention (NRR) is the percentage of recurring revenue that’s retained from existing customers over a specific period of time. It measures how good your company is at renewing or sustaining your existing customer base, as well as how good it is at generating additional revenue from those same customers.
Some examples of situations that would impact NRR include:
- A customer churns/leaves you completely
- A customer upgrades their subscription tier
- A customer downgrades their subscription tier
- A customer stops using one of your products (but not all)
- A customer buys additional products from you
- A customer removes users (if paying per user)
- A customer adds users (if paying per user)
Any action (or inaction) taken by current customers that changes how much money is coming into your company should be taken into account when calculating NRR.
NRR versus Recurring Revenue
Recurring revenue is the amount of income your company receives that’s expected to continue into the future. If you have 100 customers, paying $1000 each every year, your Annual Recurring Revenue is $100,000.
Net Revenue Retention Rate (NRR) on the other hand, is a retrospective metric that looks back on how much of your recurring revenue you retained during a specific amount of time. For example, if you had 100 customers at the start of the year paying $1000 each, and then you had 1 customer churn and 2 customers double their contract size, your $100,000 ARR at the start of the year is now $101,000 at the end of the year, which means your NRR would be 101%.
Net Revenue Retention versus Net Dollar Retention (NDR)
Net Revenue Retention (NRR) and Net Dollar Retention (NDR) are very similar when used in a customer success context. In fact, most CS practitioners use these terms interchangeably.
- Net Dollar Retention measures the average percentage change of a single account’s revenue over the first 12 months of that account’s lifetime.
- Net Revenue Retention measures the percentage of revenue gained across all customers. This also covers a rolling 12-months period.
No matter how you slice it, though, Net Dollar Retention is basically the same (in a CS context) as NRR.
However, as CS organizations are increasingly tied to revenue, you may want to shift to using NRR as a more appropriate and accurate term. Let’s face it, “revenue” sounds better than “dollar.”
NRR versus Gross Revenue Retention (GRR)
Where NRR and NDR are practically identical, NRR and Gross Revenue Retention (GRR) are similar, but with one important difference.
Net Revenue Retention encompasses all recurring income in an account or group of accounts. This includes upsells, add-ons, additional users, price increases, and the like.
Gross Revenue Retention covers recurring income from customers, but does not include upsells and other expansion-related income. It measures the annual revenue that is lost from a customer base, which is considered a truer metric to track customer health, since churn is not masked by upsells and expansions to the degree it is with NRR.
NRR versus Customer Retention Rate (CRR)
Net Revenue Rate measures dollar amounts, while Customer Retention Rate (CRR) measures the number of customers or users that a business retains over time.
Some CS leaders consider CRR to be the true indicator of a business’ performance, because it is not affected by factors like upsells, downsells, pricing tiers, add-ons, discounts, or other deals that may skew the retention rate numbers.
Why is Net Revenue Retention important?
NRR greatly impacts growth
Your business needs a stable foundation upon which to grow. An NRR rate above 100% means that your revenue is compounding year over year, which has massively positive implications across the board.
Investors use it to gauge business health
Investors pay very close attention to customer success, especially now. NRR indicates your company’s stability and growth potential, which are critically important factors for valuations, acquisitions, IPOs, etc..
“It’s no surprise CS is all over the boardroom today,” says Vas Natarajan, Partner at venture capital firm Accel Partners. “I took a quick measure of all of our board agendas for any of the board meetings I've done in the last six months. And if I actually went through and looked at the amount of air time that was given to customer success across those board agendas, it's about 30 to 35%.”
It leads to a higher company valuation
Because NRR is such a strong indicator of a company’s customer success practices, investors use this metric to help determine how much the business is worth.
“Net Revenue Retention is the most critical factor in assigning company valuations,” Vas emphasized. “The best performing companies that have the highest valuations have excellent customer retention numbers.”
It takes some pressure off new business growth
If your NRR is below 100%, it means that your company is relying on net new sales to make up for that churn and grow the company’s bottom line. If your NRR is above 100%, then your revenue is compounding, your valuation is growing, and while obviously net new sales are critical, there is less pressure on sales teams, which generally leads to a stronger funnel and customer base.
The effects of high NRR compound over time
As you can see from the graph above, NRR has an exponential effect on company growth year-over-year. Even a 20% difference in NRR could mean the long-term difference between staying at the front of the pack or playing catch-up.
How do you calculate Net Revenue Retention Rate?
Net Revenue Retention Rate Factors
NRR can be calculated using the following factors:
- Monthly/Annual Recurring Revenue (MRR/ARR) - this value should encompass all recurring revenue from the period you’re measuring (monthly or annual). Note that some organizations choose to exclude net new deals from this figure, while others choose to include it. At Catalyst, we do not include net new deals during this period.
- Expansion Revenue (ER) - include all expansion revenue such as cross-sells and upsells from the period being measured.
- Contraction Revenue (CR) - this includes all revenue shrinkage for an account, such as license reductions, downgrades, etc.
- Revenue lost through churn - this is the dollar value of accounts that have churned for the period being measured.
Once you’ve got all of your data, you can go ahead and apply it to the NRR formula.
Net Retention Rate (NRR) Formula
The formula for calculating Net Revenue Retention is:
(($Value of MRR + $ Value of ER) - ($ Value of CR + $ Value of Churned Accounts) / $ Value of MRR ) x 100%
Remember to substitute MRR for ARR if you are calculating Annual Net Retention Rate instead of monthly.
Examples of NRR
Let’s review a couple of examples of NRR - one negative, and one positive.
In our first example, Company A has the following attributes:
- ARR = $150,000
- Expansion Revenue = $15,000
- Contraction Revenue = $7,500
- Churn = $50,000
If you plug those numbers into the formula, you get an NRR rate of 71.67%. Note that this example is not taking net new sales into account.
Now let’s look at our second example, Company B.
- ARR = $100,000
- Expansion Revenue = $15,000
- Contraction Revenue = $1,000
- Churn = $5,000
The Net Retention Rate for Company B would be 109%. Again, not including net new sales.
If this current trend continues and the NRR remains steady, then in 3 years, Company A will have an ARR of only $55,220 (excluding net new sales), while Company B will have an ARR of almost $130,000 (excluding net new sales). And remember, this is despite Company B starting with a much lower ARR than Company A.
Now, it’s possible that Company A might still be seen as a success, even with such a low NRR, because their sales team is pulling in such huge numbers of new deals that it masks the problem.
Company B, on the other hand, will see accelerated growth since their MRR will build up every month even more as new sales come in.
What is a good Net Revenue Retention rate?
Since Net Revenue Rate represents the growth potential of your company, the goal should be to get to 100% or higher. But what baseline NRR rate can you reference?
Klipfolio suggests that 90% is a good rate for companies selling to small-to-medium businesses, while Enterprise SaaS companies would be better off targeting a higher number.
“Top-tier companies can see NRR rates of 130% or up,” says Vas Natarajan. “Companies that achieve these numbers are global-level organizations with loads of investment potential.”
Net Revenue Retention and Customer Success
Customer success plays a crucial role in your company’s Net Revenue Retention numbers. After all, retention and renewals are two of the customer success department’s primary responsibilities. Every customer that CS saves, every extra seat they sell, and every additional service they provide increases your NRR.
"Net Revenue Retention and Customer Success are intrinsically linked," says Sydney Strader, VP of CS for Catalyst. "Businesses cannot afford to sideline or ignore Customer Success anymore. CS is the central function that houses all critical customer insights used to prescribe businesses strategy in order to optimize both retention and growth. To improve retention is to improve your growth potential."
In the past, customer success was viewed as an above-and-beyond service—something that companies would only provide to their largest and most important customers as an added benefit. Now, that is far from the case.
“Customer success is not a cost-center. It’s a profit-center,” says Leona Leong, VP, Customer Experience at Coconut Software.
“This is proven by the fact that NRR is such an important consideration for investors and the C-suite. Future-forward businesses are investing deeply into their CS and CS Ops functions now, for a huge payoff down the road.”
Now that we’ve confirmed how vital Net Revenue Retention is to a company, let’s see what we can do to improve it.
How to Improve Net Revenue Retention
If you look at the formula, there are basically two ways you can improve your Net Revenue Retention:
- Increase your expansion revenue
- Decrease your churn
Of course, breaking it down into a couple of bullets is oversimplifying by a lot, so let’s double-click into each.
Increasing expansion revenue
Some examples of how your SaaS business can increase your expansion revenue would include the following:
Upselling. Your CSMs and Account Managers play an important role in helping customers see the need for additional seats or features. They can make their case in an EBR, laying out all the reasons why expansion would be the right move, and then assist the customer in getting the most value from their investment.
Modals. Modals are basically pop-up overlays that are used to highlight a call-to-action (CTA). You can use them in-app to encourage the user to upgrade whenever they try to access a feature not available to their tier (or to sign up if they are a trial user).
In-app messaging. Remember Clippy, the animated paperclip from Microsoft Word? Picture that, except without the endearingly obnoxious character. In-app contextual message prompts can appear at specific pages or when the user performs a specific action and prompts them to upgrade.
It’s important to remember though, that above all else, the aim of the business should be to focus on expansion through value-creation. Provide customers with so much value that it’s a no-brainer for them to add more seats, purchase another module, invest in an integration, etc. because they’re confident that they will see a strong return on their additional investment.
Increasing retention and decreasing churn is the more reliable of the two methods, simply because expansion revenue is limited —not every account will be willing or able to expand. That means that keeping as many customers happy (and paying) for as long as possible, needs to be a critical part of any NRR strategy.
Here are some highly actionable and effective ways you can do that:
Optimize your onboarding process. Onboarding is the earliest and best opportunity to show value to the customer. It’s where you show them all the ways they will be able to get value out of your product and make a fantastic first impression. The smoother and more streamlined your onboarding process is, and the more you focus on things the customer values, the more likely the customer is to stay with you for the long-term.
Conduct regular EBRs. An Executive Business Review (a.k.a. EBR or QBR) is your opportunity to get feedback straight from the customer. Yes, you can and should absolutely show the customer all of the wins that you’ve accumulated over the past several months, but you should also give them an opportunity to voice potential concerns. It’s your chance to course-correct and avoid any impending icebergs that will sink the account. Catalyst VP Customer Success Sydney Strader has an excellent trick for this.
Capture insights with a Customer Success Platform. Customer Success Platforms like Catalyst excel at tracking customer behavior and account data and turning them into useful insights to help guide your account strategy. You can leverage weighted health scores and set up early-warning systems for at-risk accounts, so that you can reach out to customers before things escalate (or set up automations to do that for you).
Reevaluate your ICP. Are your customers not sticking around? It may be because they’re not your ideal customers in the first place. A low NRR may be a sign that you need to redefine your ICP and refocus your marketing/sales efforts.
Net Revenue Retention deserves to be more than simply “one more metric.”
It’s a game-changer; a key indicator of company performance and growth potential. NRR needs to be elevated above your standard KPIs (yes, even NPS…especially NPS) and used to help determine the direction and priorities for every person and team at your company.
Want to talk more about NRR? We do, too!