When it comes to SaaS businesses, you'll want to use specific metrics to help you determine the health and growth of your company. While customer churn rate and customer lifetime value (LTV) are necessary measures to track, your net revenue retention rate (NRR) is a metric that can give you deeper insights into the health of your business.
Since we've already created a blog post that dives into net revenue retention in more detail, we're going to focus on how to calculate your NRR and what scores you should aim for.
What is net revenue retention?
Net revenue retention is a crucial metric for understanding the health of your business and its growth potential. It measures the recurring revenue that is collected from customers during a given period, minus any customer churn or downgrades.
Because it doesn't include new customers, NRR is an essential complement to customer acquisition metrics. When used together, these metrics can give a complete picture of a SaaS business's health and growth potential.
Use NRR alongside customer acquisition metrics to get a complete picture of your company's performance.
How To Calculate Net Revenue Retention?
In order to calculate your Net Revenue Retention, you'll want to subtract the amount of revenue your company has lost, including any account contractions or revenue churns, from your total revenue. From that number, you'll want to divide it by the amount you had at the beginning of that time period. The basic formula is:
NRR = Starting MRR + Expansion MRR - (Contraction MRR + Churn MRR)/ Starting MRR
Let's expand on that a little bit. Say you are calculating your NRR for any given month. You'll need to figure out the things listed below. Note that MRR here stands for monthly recurring rate.
- Starting MRR, which is how much revenue you were generating from customers in the previous month.
- Expansion MRR, which is how much new revenue you generated from existing customers this month from upsells and cross-sells.
- Contraction MRR, which is how much revenue was lost from existing customers due to downgrades and
- Churn MRR, which is how much revenue you missed out on as a result of customers leaving your platform (churning).
Example: Let's say you want to calculate NRR for April 2022. You look at the numbers are see that you generated $5000 in revenue the previous month and that you have upsold or cross-sold existing users to the tune of $3000 this month. You also see that you have lost out on $1000 as a result of downgrades and $1000 as a result of existing customers churning. Your MRR for April 2022 would be 120. We've plugged the numbers into the image below to take you through the process:
What is a good net revenue retention rate?
In the world of business, your net revenue retention rate is a telling metric. SaaS industry benchmarks put this number at 109% — meaning that for every dollar of revenue earned in a given period, an additional 9 cents is generated. This number is important because it speaks to a company's ability to generate repeat business and expand its customer base. In other words, it shows that a company is growing.
Anything above 100% is considered good, and so companies should always aim for this number. However, some of the most successful SaaS companies in recent years have had net revenue retention rates that averaged 143%.
Here is the NRR of some well-known companies:
- Snowflake - 158%
- Twilio - 155%
- Elastic - 142%
- PagerDuty - 139%
- AppDynamics - 123%
Your net Revenue Retention Rate is a crucial metric for understanding the health of your business and its growth potential. Use our guide to calculate your company's NRR and see where you stack up against some well-known companies in the industry. Aim for a score above 100%, and always strive to improve your number.