Net revenue retention (NRR) is an important SaaS metric, indicating companies' ability to retain customers and grow sustainably. Let's take a closer look at NRR as it applies to subscription businesses.
Net Revenue Retention, also known as Net Dollar Retention (NDR), measures the recurring revenue retained from existing customers over a time period after accounting for upgrades, downgrades, and cancels. It captures the positive impact of your customer retention strategies and the negative impact of customer churn. NRR differs from gross revenue retention (GRR), the percentage of recurring revenue gained in a given period.
While revenue growth indicates that your SaaS company is doing well, it is not a predictor of sustainable growth, which results from retaining your current customers and generating additional revenue from them. NRR is a good yardstick to assess your ability for scalable growth.
NRR describes your recurring revenue fluctuations due to revenue churn (e.g. downgrades and cancels) and expansion revenue (e.g. cross-selling and upselling). It does not include new customers. If you're gaining new customers even as your existing customers are churning or downgrading to cheaper plans, your monthly recurring revenue (MRR) can still look solid. NRR alerts you to issues causing existing customers to switch to a competitor or regard you as just another vendor rather than a strategic partner, a harbinger of future churn.
Your customers may need a feature you don't provide or cheaper options. Prioritizing the addition of the feature or tweaking your pricing strategy can help lower your churn rate. If lowering prices isn't an option, you can reach out to a 'better' customer.
Net revenue retention is also a useful indicator of profitability. It costs 5-25 times more to acquire a new customer than to keep an existing one. By telling you whether your customer base is expanding or not, NRR helps you take stock of your customer acquisition cost to increase your profitability.
A higher NRR can make you look even better before investors. SaaS companies with successful IPOs have impressive NRR rates, as exemplified by Twilio (155%), Snowflake (158%), and AppDynamics (123%).
To calculate net revenue retention rate, subtract the lost revenue during the period from the total revenue (sum of the recurring revenue at the beginning of the period and account expansion) and divide by your recurring revenue at the beginning of the period.
The formula for revenue retention rate is:
Starting MRR + Expansion MRR - Contracting MRR - Churn MRR/Starting MRR x 100
Contracting MRR: The total reduction in MRR from cancellations and downgrades
Churn MRR: The amount of monthly recurring revenue lost due to cancellations
Expansion MRR: The additional revenue from existing customers
Starting MRR: The amount of recurring revenue from customers in the previous month
Company X makes $400 per month from each of its 300 customers. Starting MRR is $300,000. During the month, 1 customer adds $800 in MRR upgrade, 1 customer cancels, and 2 customers downgrade by $200 each.
Net revenue retention = (120,000 + $800 - $400 - $400)/120,000 = 100%
The median net retention rate for SaaS businesses is approximately 100%, and anything more is an indicator of growth. 125% is a good NRR for enterprise SaaS, while an NRR of over 90% is encouraging for startups. The higher, the better; this key metric is a valuation of customer success and sales performance.