Making money is easy…the hard part is keeping it.
Fortunately, that’s where the net revenue retention metric comes in.
Besides indicating your company’s overall health, it can be used to predict long-term revenue growth potential from your existing customer base.
But what exactly does net revenue retention mean for a SaaS company?
How do you measure it?
And more importantly, why should you track it?
In this post, you’ll find answers to all your NRR questions, including the industry benchmarks, tips to improve it, and related FAQs.
This Article Contains
- NRR SaaS: What Does it Mean?
- How to Calculate NRR?
- What Is the NRR Benchmark for SaaS Companies?
- Why Should SaaS Companies Measure and Track NRR?
- 3 Smart Strategies For Improving Your NRR
- 2 NRR-Related FAQs
Let’s get started!
What Does NRR Mean for SaaS?
Net revenue retention (NRR) or net dollar retention (NDR) refers to the percentage of revenue retained and generated from your existing customer base over a specific time.
Don’t worry! It’s pretty simple!
NRR accounts for three essential SaaS metrics.
- Monthly Recurring Revenue: The expected overall revenue based on all active subscriptions for a particular month.
- Expansion Revenue: Expansion revenue is the extra revenue earned from your existing customer base through upsells and cross-sells.
- Contracted and Churned Revenue: The revenue lost from downgrades, contract cancellations, and expirations.
Why is it Essential?
By accounting for expansion and churned revenue, NRR goes further than monthly recurring revenue (MRR) and annual recurring revenue (ARR).
Monthly recurring revenue and annual recurring revenue show the expected overall revenue from existing customers but neglect revenue churn.
For this reason, NRR provides a clearer picture of your company’s ability to generate sustainable revenue growth.
Who Should Use NRR?
Subscription-based companies value the NRR metric. It’s like their secret weapon to see how many customers stick around, how much they’re growing, and how much money they can make.
It’s simple! These companies rely on their loyal customers to keep the cash flowing in.
By monitoring the NRR rate, they can determine if they’re doing an excellent job keeping customers and getting them to spend more.
After all, it’s all about keeping the customers happy and bringing in more moolah!
Let’s find out how to calculate NRR.
How to Calculate NRR?
Follow these steps to calculate the net revenue retention for your SaaS company:
- Define the period.
- Determine the starting MRR.
- Now subtract the churned revenue (Contraction MRR + Churned MRR) from the MRR. Contraction MRR represents the revenue lost due to downgrades.
- Next, add the expansion MRR to the above value.
- Now, divide the resulting net revenue by starting MRR and multiply by 100.
Here’s the formula for calculating the NRR rate:
|NRR = (Starting MRR – Contracted MRR – Churned MRR + Expansion MRR) / Starting MRR * 100|
Let’s consider an example:
Suppose you’re calculating your company’s NRR rate for a quarter, and the starting MRR is $10,000.
Over the next three months, you lose $300 due to downgrades and $700 more from cancellations. However, you also generated $5000 via cross-sells and upgrades.
In this case, your NRR = ($10,000 – $300 – $700 + $5000) / $10,000 x 100 = 140%
The 40% increase over MRR indicates a reasonable customer retention rate and that a sizable chunk of your existing customer base values your offering.
How Often to Measure Your NRR Rate?
Most companies track the NRR rate monthly, quarterly, or annually.
But here’s the deal: While monitoring the NRR rate is essential, it’s a good idea to dive into the net dollar and customer retention for a complete picture.
That said, let’s discover what that magic NRR number looks like.
What Is the NRR Benchmark for SaaS Companies?
The net retention rate for SaaS companies can vary between 60 to 150% depending on the company size and other factors.
A net retention rate of 100% or higher indicates that you’re retaining existing customers and generating more revenue from them. It can also contribute towards a higher company valuation.
In comparison, a net retention rate of less than 100% signifies churn or a failure to upsell or cross-sell effectively.
If your SaaS business has a low net revenue retention rate, it’s time to evaluate your value proposition, customer experience, pricing, and customer success strategy.
Let’s discover how your SaaS company can benefit from measuring and tracking net revenue retention.
Why Should SaaS Companies Measure and Track NRR?
Net revenue retention is a key performance indicator (KPI) that can provide valuable insights into your SaaS company’s financial health and growth potential.
Here’s how your SaaS company can benefit from measuring and tracking NRR:
1. Helps Gauge Customer Satisfaction Levels
The net revenue retention rate reflects the extent to which current customers continue doing business and expanding their relationship with your SaaS company.
If a sizable portion of your existing customer base upgrades or makes additional purchases, it signifies high customer satisfaction.
And more happy customers equate to a better long-term revenue growth potential 📈
2. Identify and Address Customer Challenges
Net revenue retention analysis can help your SaaS company identify the number of customer downgrades and cancellations over a given period.
Additionally, customer data points could further reveal the reasons for customer churn, helping you fine-tune customer retention strategies.
For instance, if your retention rate is low due to cancellations, you could analyze ‘cancellation surveys’ to pinpoint customer pain points. You can then implement strategies to address those issues.
Alternatively, if your NRR rate lags due to stagnant expansion revenue, you could optimize your products and services or develop new ones to meet customer demands.
3. Increases Investor and Stakeholder Confidence
NRR shows your company’s potential to generate a steady recurring revenue stream.
It instills confidence in investors and stakeholders as they clearly understand your company’s ability to generate sustainable revenue growth without constantly acquiring new customers.
Want to know how to improve your SaaS company’s NRR?
Let’s find out!
3 Smart Strategies For Improving Your NRR
SaaS businesses can implement several strategies to improve their net revenue retention rate.
1. Identify Cross-Selling and Up-Selling Opportunities
SaaS companies should monitor customers’ usage and behavior patterns to proactively spot cross-selling and upselling opportunities.
For instance, if a customer frequently uses a particular feature, you can suggest upgrading to a plan that includes a more advanced version.
But how to track customer usage and behavior?
You can use Google Analytics and other predictive analytics tools to gain valuable insights, such as:
- Which page or feature are your leads and customers interested in the most?
- How long do users typically spend on each page or utilize specific features?
- What other valuable actions did they take? For example, filling out a form, checking your pricing page, etc.
These insights can help your sales team to cross-sell and up-sell effectively, boosting your net retention rate.
2. Offer Tiered or Usage Based Pricing Plans
Tiered and usage based pricing plans significantly increase your NRR as it appeals to a broader range of customers.
Below are some quick tips:
- Identify the core features of your SaaS product that provide the most value to customers.
- Create multiple pricing options based on usage, feature sets, and limitations.
- Emphasize the benefits and value provided by the features, illustrating how they can assist customers in accomplishing their objectives.
- Offer flexibility in pricing plans by allowing customers to upgrade or downgrade.
3. Focus on Customer Satisfaction and Retention
Satisfied customers are likelier to become loyal brand advocates, driving future SaaS business growth.
Besides, retaining existing customers is often more cost-effective than acquiring new ones.
Here are some tips to help improve customer satisfaction and retention:
- Use social listening tools to Identify and address customer complaints proactively.
- Monitor your customer churn rate closely.
- Segment the user base based on customer characteristics, such as demographics, usage patterns, subscription plans, and engagement levels.
- Find out why they canceled their subscription, what they liked and didn’t like about the product, and what could have been improved.
- Examine customer support interactions to identify common issues and gauge your support team’s effectiveness in addressing those issues.
- Offer extensive product training and resources to empower customers in maximizing the benefits of your product or service.
- Customize your marketing messages, product recommendations, and support to individual customers.
To sum it up: A customer-centric culture ensures their needs and challenges are addressed promptly and effectively, improving overall customer retention and satisfaction.
Still have some doubts?
2 NRR-Related FAQs
Here are the answers to some common NRR-related questions you may still have:
1. What NRR-Related Metrics Should You Track?
Sometimes, companies may need to track other SaaS-related metrics to get the complete picture 🖼️
These metrics include:
- Average Revenue Per Account (ARPU): The average revenue earned per customer account within a specified time frame.
- Net Promoter Score: The net promoter score is a SaaS metric that measures the likelihood of a customer recommending a company’s product or service to others.
- Customer Lifetime Value: The total revenue a business can expect to earn from a customer.
- Customer Acquisition Cost: The customer acquisition cost (CAC) is the overall cost incurred by a business to acquire a new customer.
- Net Dollar Retention: It measures the revenue your company retains and makes from its existing customer base.
- Customer Retention Rate: It’s a way to assess the percentage of customers happy and satisfied with what you offer.
2. What is the difference between gross revenue retention and net revenue retention?
Gross revenue retention (GRR) or gross dollar retention measures the revenue retained from current customers, but unlike NRR, it doesn’t account for upgrades and cross-sells.
So, gross revenue retention can only be the same or lower than your net revenue retention rate, but never more than 100%.
Here’s the formula for calculating gross revenue retention:
|GRR = (Starting MRR – Contracted MRR) / Starting MRR * 100|
NRR: The Key For Boosting Revenue Growth and Investor Confidence
Tracking the net revenue retention rate provides a holistic picture of your SaaS company’s success. It considers the impact of expansion revenue and revenue churn from existing customers.
A steadily growing NRR signifies that your customers value your products and services, increasing investor confidence. In contrast, a declining NRR means your customers are not satisfied.
Keep an eye on that metric, and you’ll be one step closer to retaining all that money you make!