The Complete Guide to NRR for SaaS businesses

Net revenue retention (NRR) evaluates the recurring revenue produced over a predetermined period by existing customers. Upgrades, downgrades, and customer revenue churn are accounted for by Net Revenue Retention (which is also referred to as Net dollar retention ~NDR) to indicate the potential for business growth from the existing customer base.

Net Revenue Retention (NRR) is one of the most important metrics in SaaS and ultimately determines whether a company's revenue will shrink or grow if it stops acquiring new customers.  Net revenue retention rate is one of SaaS companies' key customer success metrics. It is an important metric that indicates the profitability of a SaaS business generated solely from existing and same customers.

In a nutshell, it analyses the effect on income generation from existing clients and helps businesses understand how their churn rate impacts overall revenue. Sustainable growth in business relies on retaining and growing with your existing customer base. For this, reporting your monthly recurring revenue (MRR) doesn’t quite cut it.

Want to know more about NRR? Then keep reading to get an in-depth understanding of the Net Revenue Retention formula and how it can help you track your customer success. Here’s why net revenue retention (NRR) is the new benchmark metric for SaaS.

 What is Net Revenue Retention (NRR)?

The phrase "Net Income Retention" (NRR), which is sometimes referred to as "Net Dollar Retention" (NDR) in certain instances, is used to represent the amount of recurring income that has been kept from current customers. The most common testing intervals for this are once per month, once every three months, or once per year. With this technology, SaaS companies can look at both positive and negative changes in customer retention, as well as the money made from upsells, cross-sells, downgrades, and cancellations.

In addition, it helps SaaS organizations see the impact that their churn rate has on overall revenue, which is a significant advantage.

If a firm has a good net revenue retention ratio, it shows that it is able to keep existing customers and attract new ones by providing solid value propositions and effectively renewing existing contracts with existing clients. Tracking your Net Revenue Recurrence (NRR) can provide you with insight as to whether or not the revenue model that your organization is using is successful. If your net revenue retention ratio is greater than 100%, it indicates that your revenue is increasing at a pure and healthy rate.

By keeping a careful eye on what is occurring with your customers' journeys and analyzing the Net Revenue Retention rate (NRR), you will be able to more accurately evaluate the success of your customers and guarantee that they are satisfied across your whole organization. You will have a better understanding of the length of time that clients use your product, the items that they upgrade to, and the frequency with which they cancel their subscriptions to your service. You also know how to measure annual revenue loss and growth.

How to calculate Net Revenue Retention (NRR)?

‍We can calculate the Net revenue retention (NRR) or Net Dollar retention (NDR) that a SaaS service attracts.

You begin by combining the Monthly Recurring Revenue (MRR) and Expansion Revenue together to determine your company's Net Retention Rate (NRR). This sum represents the entire month's revenue. The revenue lost that month as a result of downgrades and client cancellations is then subtracted. After that, divide by the MRR initial value. If your company is growing steadily, this figure should be greater than 100%.

The Net Revenue Retention (NRR) formula is thus as follows:

(MRR from upgrades + MRR from renewals - MRR lost due to churn - MRR lost due to downgrades) / MRR at the start of the month * 100

OR;

(Contraction MRR – (Churn MRR + Expansion MRR)) / Starting MRR

When multiplied by 100, it will give NRR as a percentage (NRR percentage)  - also known as Net Revenue Retention Rate. 

Factors Used to Calculate NRR

• Starting MRR: This is the estimated monthly revenue that a business can expect to generate. It is the amount of recurring revenue from your customer base that you generated in the previous month. Expansion MRR:This represents the added revenue that upgrades and cross-sells add with time. It represents the amount of additional money brought in this month via upsells and cross-sells to existing clients. Contraction MRR or Revenue Reduction:This represents how much revenue  is lost because of downgrades from existing customers.

Churn MRR or Net Revenue Churn: This represents the revenue that was lost as a result of client cancellations. It also covers the amount of recurring revenue lost as a result of customer churn.For instance, let’s say last month’s MRR is $75,000 and your expansion for the month was $10,000. Reduction and Churn were low at $2,000 each. That equation would be:

(75,000 + 10,000 – 2,000 – 2,000) / 75,000 = 108%

This shows that although the company experienced reductions in sales and churn in the month, its growth rate increased for all new customers added.

Why NRR is important? 

Firstly, NRR is important because it has links to SaaS businesses recovering their subscriber Return on Investment (ROI). It tells us how well a company can renew existing customers and also get more revenue from those customers following the first sale - helping to cover the costs of acquiring the customer in the first place. 

A high Net Revenue Retention rate demonstrates the company's ability to provide value, retain consumers, and interact with them. If NRR SaaS is greater than 100%, the company is in excellent form and will continue to grow even in the absence of any new customers. NRR is a valuable North Star since it shows how sticky your product is and improves customer retention rate. You are aware of how committed customers are to your product.

High churn rates or account contraction can indicate issues with your product value proposition, pricing strategy, customer experience, etc. 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 growth rate the better your company’s prospects with investors.

Profitability is also impacted by the Net Revenue Retention Rate. According to a Harvard Business Review report acquiring a new customer can be significantly more expensive than retaining current customers– 5 to 25 times more expensive. If a business can expand existing customers while also decreasing Customer Acquisition Cost (CAC), there will be a positive impact on profitability.

What is a good NRR? 

A Net Revenue Retention Rate of more than 100% indicates predictable and scalable business growth. That’s because companies that achieve an NRR of more than 100% don’t need to onboard another customer to grow.

Realistically, the higher the Net Revenue Retention rate, the Better, as it indicates you keep your customers happy and they get value from the relationship — and that they can be a driving force for growth. The most successful companies have been those with Net Revenue Retention rates well above 120%. Anything less than 100%, you should begin investigating why your customers are churning or contracting at the rate they are (especially in small and medium businesses). 

For a new SaaS company 90% to 100% NRR is acceptable. Whereas, for established SaaS enterprises, you’d expect to see an NRR above 100%.  If you look at 200 private VC-funded SaaS companies in the Bessemer Venture Partners portfolio you’ll see the middle 50% of companies have an NRR between 105% to 145%. So if you are working toward a raise in the near future, this is important to pay attention to. 

What Is Gross Revenue Retention (GRR)?

Gross Revenue Retention (GRR) measures how much of your monthly recurring revenue (MRR) you retain each month after you’ve subtracted the effects of churn or downgrades to lower-priced products, but not the effects of upgrades. Depending on your selling strategy and average subscription tier, Gross Revenue Retention might be calculated on a monthly, quarterly, or yearly basis. It can be mathematically expressed as a formula (for monthly);

 GRR = [(MRR from renewals – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month] * 100

To apply this formula, take your monthly recurring revenue from customers who renewed at the end of the month, subtract any revenue lost because of customers who stopped buying from you, switched to a lower-priced product, or in general are purchasing less from you, and divide the result by your Monthly Recurring Revenue (MRR) at the beginning of the month. Multiply by 100 to convert the result to a percentage.

Gross Revenue Retention is never greater than 100% since even if all accounts were kept renewed without any churn or downgrades, your Monthly Revenue Retention at the end of the month would be the same as it was at the beginning. Gross Revenue Retention can only decrease from 100% and never increase. This is one way that the net retention rate differs from gross retention as the latter might exceed 100%.

Difference Between Net Revenue Retention (NRR) and Gross Revenue Retention (GRR)

Net revenue retention rates (also net dollar retention) and gross revenue retention are very similar metrics. The difference is that gross revenue retention does not factor upsells and upgrades into account. This gives a different perspective and a more precise view of calculating Customer Churn. This method of measuring churn helps to see exactly how your company is being affected by customers leaving your business (net negative churn rate). Both of these metrics are important for measuring revenue gained and the overall health of your company.

They are two different ways of measuring customer retention. A net revenue retention rate is the percentage of revenue generated at a retail level that a company retains from its overall customer base. A gross revenue retention rate measures only revenue gained from those who can pay for goods and services. Customer retention is the key to expanding your business. It’s important to set aside a budget for customer acquisition and marketing so that you can keep them once they’re on board on a monthly basis.

The key difference between Net Revenue Retention (NRR) and Gross Revenue Retention (GRR) in expansion revenue is that NRR measures the incremental amount of net income retained by a company as a result of a new acquisition while GRR measures the incremental cash from generating additional revenue (New Sales).

How to improve your Net Revenue Retention (NRR)

1.   Reducing churn: The most effective churn reduction strategies are focused on the actual causes of unsatisfied customers. 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. Sometimes churn is unintentional as a customer may only have occasional use for your product, or require features you’re not yet supporting. To reduce churn, analyze why churn occurs, engage with customers, educate customers, offer incentives and find the target audience.

2.   Improve upselling and cross-selling: Focusing on the value metrics that are most important to your client segments is one of the greatest methods to increase income from your current customer base and improve net revenue retention. You may design your price and packaging in a way that encourages clients to gradually increase their spending after you have a clear understanding of the value of the solution your product provides. Testing and reviewing this are necessary as the market changes and as you enter new markets or sectors and this leads to a profitable business. Customer retention is the key to expanding revenue in business.

3.   Limiting downgrades: Downgrades can be utilized as a churn avoidance strategy since they are preferable to churn. Customers who have initiated a cancellation process or contacted you to discontinue their membership might, for example, be given the choice to stop their subscription or lower their subscription tier. Many of the strategies you use to lower attrition will also likely lower downgrades. Downgrades, however, can also be the result of upgrading at the wrong time or upfront purchase of the incorrect subscription or product. Similar to churn research, you should analyze customer downgrade reasons to identify any underlying patterns you can address and raise customer retention rates. 

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