From ChartMogul SaaS Retention Report, Jamie Davidson, CEO of Vitally says:
“Net revenue retention (NRR) is the heartbeat of the most successful SaaS companies. See the NRR for companies like Snowflake, Cloudflare, ZoomInfo, Slack, and Datadog. You can’t succeed today with a lax or static retention strategy.”
Unfortunately, some subscription businesses unknowingly sabotage their growth by overlooking this crucial compound metric: net revenue retention.
So, let’s have a deeper look into why NRR is so important for businesses like yours. Let’s learn how to calculate it, understand why it matters more to revenue metrics than gross revenue, and most importantly, discuss how to improve it.
What is net revenue retention (NRR) and what does it say about your business?
Net revenue retention (or NRR) is a key metric that takes into account customers increasing their spending and those cutting back or leaving to determine a business’s customer success, growth potential, and financial health.
In the simplest terms, it’s a measure of how much revenue you’re keeping from both expansion and contraction. In the context of NRR, expansion is a collective term for upsells and cross-sells while contraction is about downgrades and churn.
Typical good benchmarks for NRR are considered to be 100% or above. But what does this metric really say about your business?
Say you have a high net retention rate. It means you’re growing even with fewer newly acquired customers. Your customer acquisition efforts can rest easy because your existing customers are spending more anyway. That’s a great sign of a healthy business!
But on the flip side, if your NRR is low, you might need to hustle for new hot leads just to stay even. It could be that your customers are dissatisfied, your offerings aren’t a good fit for them, or your tactics aren’t sticky at all.
So, how do you calculate net revenue retention?
To compute your net revenue retention, you need the following information first:
- Monthly recurring revenue (MRR) at the beginning of a specified period
- Expansion revenue from existing customers
- Churn or the lost revenue due to cancellations
- Lost revenue due to plan downgrades
If you already have the data needed for the net retention rate calculation, the computation is simply plug and play to the following net revenue retention formula:
NRR = (Starting MRR + Expansion MRR – Churned MRR – Downgraded MRR) / Starting MRR
Example: Imagine you’re running a SaaS company. At the start of the quarter, your numbers look like this:
- Starting MRR: $100,000
- Expansion MRR: $15,000 (some customers upgraded their plans)
- Churned MRR: $5,000 (a few customers left)
- Downgraded MRR: $2,000 (some customers switched to cheaper plans)
Now, let’s proceed to calculating net revenue retention. Let’s plug these numbers into our net revenue retention formula:
NRR = ($100,000 + $15,000 – $5,000 – $2,000) / $100,000
= $108,000 / $100,000
= 1.08. To get the percentage, we multiply by 100: NRR = 1.08 x 100 = 108%
What does this mean?
With a 108%+ NRR rate, you’re actually growing revenue from your existing customer base despite churn and downgrades.
Here’s a caveat though: While NRR seems simple on the surface, it can get complicated in practice. After all, you’re dealing with a lot of moving parts—upgrades, downgrades, churn—and they all happen at different times and different volumes. Tracking these changes accurately across your entire customer base can be challenging.
Why do subscription businesses need to track and calculate net revenue retention rate?
Because unlike traditional businesses (centered around one-time sales), subscription models thrive on customer relationships. Net revenue retention rate or net recurring revenue captures this essence of subscription companies and tells you if your customers are sticking around, upgrading, or leaving.
Let’s talk about the other several crucial reasons:
NRR is a predictor of future revenue growth.
By focusing on NRR, you’re essentially looking at the momentum of your existing business. If that rate of growth is strong, it’s a good bet that your overall recurring revenue will also keep growing—even without factoring in new customer acquisition.
NRR gives you a pulse on customer satisfaction.
By analyzing NRR trends, you can identify which customer segments are thriving and which ones need attention. That way, you can formulate targeted strategies for each segment that needs attention.
NRR is a resource allocation guide.
NRR helps with strategic decision-making. Here’s a usual question from subscription business owners: Should you focus on acquisition or should you focus on growing existing accounts instead? The answer lies in your net revenue retention (NRR) data.
A good NRR attracts investors.
VCs and investors love high NRR. It shows your business has strong fundamentals and growth potential. Good to know: Revenue retention correlates positively with growth rate. By increasing NRR from 90% to 100% range to 100% to 110% range, your growth rate goes up 9 percentage points.
NRR assesses your competitiveness against others in the industry.
Companies often share their NRR publicly. And so, you can directly compare your NRR to competitors or industry averages. If you’re above average, that means customers prefer your product. In the SaaS industry, a net revenue retention rate of 100-120% is considered good, while 120%+ is excellent.
The verdict: here’s why NRR matters more than gross revenue
Here’s a direct explanation of why net retention takes the crown:
Gross revenue can be misleading.
No offense meant to gross revenue but it’s sometimes just flashy—it doesn’t reveal the true story. It might look impressive on paper, but if a significant portion of that revenue is coming from new customers while existing customers are churning, you’re still not in the position for sustainable growth.
NRR is a measure of efficiency.
Net revenue retention shows how efficiently you’re growing. It’s closely tied to how well a company can maximize customer lifetime value. A high NRR indicates that a company’s ability is not only retaining customers but also expanding their usage. Gross revenue doesn’t distinguish between efficient and inefficient growth.
Acquiring new customers is expensive.
Fact in check: Between 2013 and 2022, customer acquisition costs increased by 222%. And keeping existing customers happy could save American companies $35 billion annually. So, it’s evident that retaining customers is less expensive than acquiring new ones. And it’s not gross revenue but NRR you must track to check if you’re on the right track of retaining existing customers.
Comparing NRR and Gross Revenue
To further illustrate why NRR is so important, let’s compare it to gross revenue:
Gross Revenue (GR)
- Focus – Overall revenue generation
- What it measures – Total revenue from all customers, including new and existing
- Limitations – Doesn’t account for churn or expansion revenue, can be misleading for subscription businesses
Net Revenue Retention (NRR)
- Focus – Existing customer revenue growth
- What it measures – How much revenue existing customers keep over time
- Limitations – Doesn’t account for new customer acquisition, requires accurate tracking of customer data.
Long-term business impact
The impact of net retention rate on a subscription business is serious. Focusing on it is the foundation of financial stability—a compounding growth that’s more predictable and stable. And this predictability not only enhances operational efficiency but also significantly influences company valuation.
Last but not least, prioritizing NRR shifts your focus from short-term gains to building lasting customer relationships, creating a stronger, more sustainable business model.
Benefits of a high net revenue retention rate
A high NRR is a sign of a healthy, thriving company with a loyal customer base. Here’s why:
Enhanced customer loyalty
A high NRR indicates that your customers are not only satisfied with your product or service, but are also finding enough value to continue their subscription and even upgrade to higher-priced plans. This is a testament to the strength of your customer relationships and the effectiveness of your customer success efforts.
Sustainable revenue growth
A high NRR means you’re sustainable. With a solid base of monthly recurring revenue, from existing customers, you can focus on expansion opportunities like upsells, cross-sells, and add-ons. The result is not only more revenue per user but also increased customer engagement and loyalty.
Improved forecasting and planning
When your net recurring revenue is high, you’re better at forecasting sales. This makes financial forecasting and planning more accurate, enabling you to make informed decisions about resource allocation, hiring, and investments.
Stronger competitive position
A high net revenue and customer retention rate is a sign of a competitive business. It gives you a significant advantage over competitors who are struggling with high churn rates and low customer loyalty.
3 strategies to improve Net Revenue Retention
Now that you understand the importance of NRR (and maintain it high!), let’s explore some actionable strategies to improve it:
1. Create a better customer experience:
A loyal customer is one who is happy with the service—and their loyalty can be worth up to 10x more than their first purchase. So, invest in providing exceptional customer service, personalized experiences, and proactive support. Make sure you get customer feedback regularly and use it to make your product or service better. This is a good strategy to boost your revenue and customer retention rates.
Here’s how you can do it:
- Use data to personalize their experience, offer tailored recommendations, and provide timely support.
- Make it easy for them to get help when they need it, through multiple channels like phone, email, chat, or self-service options.
- Regularly collect and analyze feedback from your customers to identify pain points, areas for improvement, and opportunities for product development. As much as possible, make data-driven decisions and continuously improve your customer experience.
2. Focus on upselling and cross-selling:
Be vigilant in Identifying opportunities to upsell or cross-sell to your existing customers. Remember, net revenue retention important but retention is about expansion, too. Offer relevant upgrades, add-ons, or complementary products to the same customers maximize their worth.
Here’s how you can do it:
- Make personalized recommendations based on the preferences of your customers. Give customers a clear understanding of the benefits of upgrading or adding new products.
- Analyze customer data to identify segments that are most likely to upgrade or purchase additional products.
- Use targeted email campaigns, in-app messages, or even personalized consultations to promote your upselling and cross-selling offers.
3. Reduce churn:
You heard it a hundred times—churn is the silent killer of subscription businesses. Actively identify at-risk customers and take steps to address their concerns. Offer incentives, loyalty programs, or personalized outreach to keep them engaged and satisfied. That will ultimately boost your net revenue retention metric.
Here’s how you can do it:
- Keep in touch with them regularly, provide resources, and offer support to ensure they get the most benefits from your service.
- Create a tailored onboarding experience for new customers based on their specific needs and goals like customized tutorials, one-on-one sessions with a customer success manager, or automated emails with tips.
- Reward repeat customers with exclusive discounts. Your subscriber loyalty program should encourage recurring purchases.
Improve your net revenue retention to boost your bottom line
A shift in mindset from chasing new customers to nurturing and growing the ones you already have is the best way to grow your business. By understanding what’s behind good net revenue retention, knowing its calculation, and implementing the strategies outlined you’ll be well on your way to growing sustainably, improving profitability, and building a long-term subscription business.
But here’s another tip for you—implement dunning processes to retry failed payments and let customers know when their credit cards expire. Because involuntary customer churn like this has a direct negative impact on your NRR.
Let a failed payment recovery team like experts from Recover Payments help you decrease involuntary churn and strengthen relationships with your customers. Schedule a free consultation today!
