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What is Net Revenue Retention?
Net revenue retention (NRR) is a SaaS metric software companies use to measure their ability to retain and expand their existing customer base. Expressed as a percentage, it calculates total revenue from current customers (including revenue from upsells and cross-sells) minus revenue churn (expired contracts, cancellations, and downgrades) for a given month, quarter, or year.
An important distinction between NRR and other SaaS metrics is it only focuses on an organization’s existing customers — churn rate, customer retention, and sales into current accounts are the main drivers of NRR.
Essentially, net revenue retention answers the question, “How much of the total revenue generated by users last period are we still seeing this period?”
- Revenue retention rate
- Net dollar retention
The Importance of NRR
Predictability is what makes the SaaS business model so scalable. Most businesses rely on ad hoc purchases, so they’re constantly looking for the next customer. SaaS companies can count on predictable revenue each month without producing new leads (though lead generation is a critical part of their strategy).
Internal company members rely on NRR to understand product performance.
NRR underscores the stability of a subscription company’s recurring revenue streams — a high revenue retention rate indicates customers are sticking around and/or expanding their product use.
Since revenue retention is pegged to customer churn, NRR also tells companies a lot about how customers feel about their products. A low percentage of revenue retained almost always implies an issue with the product, product-market fit, customer experience, or value proposition.
Investors focus on NRR to estimate future performance and stability.
Acquiring a new customer is six to seven times more expensive than retaining an existing one. And companies only have a 5% to 20% chance of selling to new customers versus a 60% to 70% chance of closing new revenue from an existing customer.
NRR’s ability to highlight a company’s overall health and ability to grow sustainably also makes it a main focal point for investors, who use it to make informed decisions about investing in the business.
Historically, the SaaS industry specifically has been characterized by a “growth at all costs” mentality, where companies were willing to sacrifice profitability to expand their customer base.
However, today’s most successful businesses (and those who invest in them) understand that net revenue retention is a much better indicator of long-term success than pure user growth and focus heavily on optimizing NRR.
Snowflake, for instance, had a net revenue retention rate of 158% during its September 2020 IPO. This indicates that existing customers are not just sticking around but expanding their usage — a major success for any SaaS business.
How to Calculate Net Revenue Retention (NRR)
To calculate NRR, you need to consider two primary components: recurring revenue from existing customers and revenue churn.
Here’s the formula:
|Net Revenue Retention = (Total Revenue – Revenue Churn) / Total Revenue at the Start of the Period|
- Total revenue includes the starting revenue from your existing customers at the beginning of the period plus any additional revenue obtained through upsells or cross-sells during the period.
- Revenue churn represents all the lost revenue due to contract expirations without renewal, cancellations, and downgrades.
The NRR gives you the percentage of revenue retained from existing customers, with the potential to exceed 100% if expansion revenue outpaces churn.
What is the Optimal NRR Rate in the SaaS Industry?
Anything under 100% means a business is losing its recurring revenue streams faster than it is expanding within its customer base.
Increasing the amount of revenue generated from each customer isn’t very difficult. A SaaS company using a “per user per month” pricing model, for example, gains new revenue every time a customer onboards a new user.
In that sense, a high retention rate should almost always yield a NRR greater than 100%.
As far as “optimal” rates are concerned, most SaaS companies that IPO successfully have NRR rates well over 120%. Twilio, for instance, was operating at 140% NRR, and Snowflake’s NRR rate was even higher.
How Customer Churn Impacts Net Revenue Retention
Customer churn and revenue churn are two slightly different concepts.
Customer churn refers to the number of customers who stop doing business with a company during a particular period. Revenue churn signifies the amount of lost revenue due to customers downgrading or canceling their subscriptions.
In all cases, customer churn negatively impacts net revenue retention. But not all customer churn has an equal impact on the NRR equation.
A small customer of a lower subscription tier, for instance, would create a proportionately smaller revenue churn upon cancellation than a large customer on the highest tier.
Although both would have an equal impact on the churn rate, they would have dramatically different effects on NRR.
Strategies for Improving Net Revenue Retention
At a basic level, improving net revenue retention is simple. All a business has to do is keep itself from losing more revenue (i.e., customers) than it’s gaining through upgrades, larger contracts, and other forms of customer expansion.
Actually accomplishing this, however, is much more difficult. Here are a few strategies to improve net revenue retention:
Focus on Perceived Value
“Perceived value” is the notion that customers don’t just buy products and services based on their actual value — they also make decisions based on how valuable they perceive them to be.
It goes beyond a product or service’s tangible features and benefits, encompassing the overall impression and emotional response customers get from their interactions with a company and its products.
In the context of net revenue retention, customers are more willing to continue using a product and expand it to new users and business units when they clearly see the value it provides.
There are several ways to improve the perceived value of a product.
- Onboard new customers effectively. Customers are more likely to stop using a product when they don’t understand its value (or, rather, how to get value out of it). A solid customer onboarding process can help show customers how to use the product effectively and get maximum value.
- Develop meaningful customer relationships. Understand your customers’ needs, anticipate their challenges, and build relationships with them that go beyond just providing a service or product.
- Provide ongoing support. Offer customers support beyond the initial onboarding process. Whether it’s in-app chat, email, or phone calls, make sure you have a system to respond to them when they run into problems using the product.
- Send customers helpful content. Blogs and emails with product updates, how-tos, business use cases, and industry-relevant tutorials can help customers learn about new features and use cases, allowing them to uncover ways to get more value from using your product.
Plenty of subscription businesses integrate free trials into their business model using freemium pricing.
Free trials are great for NRR because they start with customers who aren’t paying. Since they won’t skew the calculation negatively, free trial users can only help boost the NRR rate when they convert to paying customers.
A significant amount of customers want to “try before they buy” as well. Offering a free trial or freemium price with a few core features will increase the chances of them converting.
Especially if your organization has achieved product-market fit, allowing customers to familiarize themselves with the product beforehand dramatically increases sales volume and NRR.
In a way, your pricing strategy is an extension of your value proposition — how you price your product respective to others in the market tells customers a lot about your product.
The key to pricing is offering the right combination of features at prices that make sense for each customer segment. If customers feel they’re overpaying for their subscription plan, they’ll be more likely to cancel it or downgrade to save money.
Setting prices isn’t an exact science. Most SaaS businesses use tiered pricing because it allows them to deliver the right amount of value to each customer while giving them room to scale up (thereby increasing NRR) when they’re ready.
However, what constitutes a “fair price” goes back to perceived value. When customers agree the product you’re offering is worth what you’re charging for it, they’ll be less likely to abandon their subscription plan or downgrade it.
Reduce Churn Rate
Since churn and retention have an inverse relationship, lowering the churn rate will have an equal and opposite effect on the customer retention rate.
As previously discussed, customer churn and revenue churn impact your net revenue retention formula differently. But reducing churn rate across the board will almost always have a positive impact on your NRR.
A few strategies for reducing churn rate include:
- Improving customer service
- Making sure onboarding is effective and straightforward
- Using loyalty programs to reward long-term customers
- Regularly running surveys and gathering customer feedback
- Analyzing which features are most used by customers
The added benefit of weaving churn reduction strategies into your NRR formula is that it helps you identify improvement areas and increase customer satisfaction.
Switch From Monthly to Annual Revenue
Monthly recurring revenue (MRR) from existing customers is the most common metric used in the NRR calculation, but it has a critical flaw: it’s incredibly sensitive to short-term fluctuations.
If customers leave or downgrade their plans, your MRR is immediately affected, which can cause significant swings in NRR even when the number of customers remains relatively consistent.
To offset this volatility, encouraging annual payments over monthly ones dampens the effects of customer churn. Since an annual payment represents 12 months of revenue, you’ve guaranteed that money for the entire year.
This gives you plenty more opportunities to nurture relationships with these customers, help them find value in your product, and solve any issues that may come up.
For already-loyal customers, it’s also a way to give them a better deal on something they’ll continue to use anyways.
Most companies offer annual plans alongside monthly for this very reason — businesses offer one or two months free as an incentive, so they save customers money while insulating themselves from short-term revenue loss.
It’s unlikely an enterprise customer that deployed a system companywide will forget to renew their contract, but smaller contracts especially often slip through the cracks.
In any case, when a customer success team member needs to approach a customer about renewing their contract, it adds unwanted friction to the process.
A subscription management platform that automates contract renewals helps minimize this friction and decreases the chances of customers forgetting to renew.
Reduce Involuntary Churn
Involuntary churn — turnover that happens without the customer’s intention — makes up a large portion of the average SaaS churn rate (typically between 20% and 40%).
There are several reasons for involuntary churn, most of which are preventable:
- Credit card expirations
- Billing errors and issues with payments
- Data errors or incorrect setup in billing or CRM
- Server errors
- Insufficient funds
A cloud-based subscription management platform automatically takes care of all these concerns by proactively flagging any irregularities and alerting customer success teams (or the customer themselves) when user accounts are in jeopardy.
Increase Upselling and Cross-Selling
To upsell customers, you need to identify the features they’re not currently using and offer them an upgrade plan that includes them. It isn’t always possible, but upsells are a fantastic way to deliver more value to the same customer.
Plus, they’re far likelier to convert than a new prospect (and don’t carry a customer acquisition cost with them).
Cross-selling requires an understanding of which products or services your customers can use in tandem with each other. SaaS companies with native app integrations or microservices are already well-suited for cross-selling, as it’s easier to recommend an additional purchase that complements the one a customer is already making.
Consulting, implementation, IT services, and training for large teams are other cross-sells a subscription company can offer its customers.
In addition to improving NRR, upselling and cross-selling can also help differentiate your product in the market. Customers will see your product as one that offers more value than other competing solutions.
Integrate Subscription Management with CRM, CPQ, ERP, and Billing
To truly drive operational efficiency, improve customer retention, and provide an all-around stellar experience, tech stack integration is an absolute must.
Integrating a subscription management platform with your CRM, CPQ, ERP, and billing software (if it doesn’t have billing already) allows customer success teams to quickly respond to customer issues while providing a personalized experience tailored to each customer.
It also improves data flow, so sales and customer success team members will know exactly which customers subscribe to which products and how they use them.
When customer purchase data from CPQ software is automatically relayed to CRM or ERP, for example, the sales team can identify opportunities for new revenue from upsells and cross-sells.
People Also Ask
Is net dollar retention the same as net revenue retention?
Net dollar retention is the same as net revenue retention. Both terms refer to the same metric — the amount of revenue retained by a company from one period to the next.
Is net revenue the same as gross profit?
Net revenue and gross profit are practically the same. Net revenue is defined as “sales minus expenses,” while gross profit is “revenue minus cost of goods sold”. While the two may not be precisely equal, they are closely related and measure similar values.
What is the difference between net and gross revenue retention?
Gross revenue retention describes the total amount of revenue from a certain period that was retained compared to revenue churn. Net revenue retention accounts for revenue increases for current customers, such as upsells, cross-sells, upgrades, and new seats added, when calculating the total revenue retained. This makes net revenue retention a more accurate measure of customer health.