Net Revenue Retention (NRR)

The NRR is used in SaaS companies as a measurement to indicate the amount of revenue from current clients that have been retained for a given time period. This key metric takes into account expired contracts, cancellations, upgrades, downgrades, and customer churn as indicators of the possibility of business development from the existing clients.

What is net revenue retention?

One of the most sustainable ways to support revenue growth as a standard SaaS company is to retain customers. In fact, maintaining a healthy customer retention rate is just as important, if not more important, than customer acquisition as happy customers will continue to support your annual revenue year over year. Put simply, achieving sustainable growth through high customer satisfaction is a lot easier than trying to sell to new prospects.

As a key growth metric, a positive NRR allows business owners to know if they should try to gain additional revenue through upselling, cross-selling, and customer upgrades or if they should restrategize their customer success approach to improve their dollar retention. By using NRR, businesses can gain better insight into how their current customers feel about their product or service and use this information to improve their market strategies moving forward.

Why is NRR important?

This customer success metric helps paint a realistic picture of a company's revenue growth. Recurring revenue can only happen through sustainable growth. In order to reduce churn rates, achieve revenue stability, and prepare for high growth, companies must focus on retaining their current customer base while expanding these accounts.

The consequence of not focusing on retaining customers can lead to a high churn rate. Typically revenue churn occurs when there are issues regarding pricing, value proposition, poor customer experience, or other issues within the business model.

How to calculate net revenue retention?

To calculate this growth metric, start by adding together your starting monthly recurring revenue with your expansion MRR and subtracting that number from the total of your contraction MRR minus churn MRR. Then divide that number by your starting MRR and multiply the sum by 100. The formula below illustrates the net revenue retention rate.

NRR = ((Starting MRR + Expansion MRR - Contraction MRR - Churn MRR) / Starting MRR) x 100

What is a good net retention rate?

Customer success teams look for a score of 100% or above when analyzing a company's NRR. However, any score between 90-100 for small to medium-sized businesses is also considered healthy and sustainable. When a business has a high NRR score, it means that its customer upsells, cross-sells, and other attempts at achieving an increase in profit are working and supporting revenue generation.

How to improve NRR

In order to improve NRR, you need to understand what is causing your churn rate. From there, you can then work on improving your customer experience and reducing churn. Make sure that you're providing enough resources to your customers. Self-service options include things like FAQs, knowledge bases, and tutorials, which will help your customers learn how to use your software without needing to contact support. If you don't provide enough resources to your customers, they won't be able to perform their tasks effectively. As a result, they'll leave your platform and move on to another one.

Another way to improve NRR is to make sure that you have a strong customer onboarding process. A well-designed customer onboarding process will help your customers get familiar with your products and services quickly. It will also allow them to become productive faster, which will have a direct impact on their product usage and comprehensiveness.