Net Revenue Retention (NRR), also know as Net Dollar Retention (NDR) is a fundamental SaaS metric that's becoming more and more looked at by both investors and management teams. It measures how much recurring revenue a company generates from existing customers when you factor in churn, contractions, expansions and upgrades.
Sound complicated? It's actually pretty simple: how much would your revenue grow (or shink) if you landed zero new customers? That's your NRR.
How to calculate Net Revenue Retention in SaaS?
To calculate NRR you have to: sum starting MRR, contraction MRR (eg: customers downgrading) and expansion MRR (customers upgrading, adding more users, etc.), subtract churned MRR, and then divide everything by the initial MRR x 100. Simpler if you look at the image below :)
If you look at the graph below, 90% NRR means that your revenue would shink if it wasn't for new customers you land. On the other hand, NRR above 100% means your company would still be growing, even without closing new customers.
Why is Net Revenue Retention Important in SaaS?
Net retention rate is an important metric to track because it gives you insights into the health of your customer base. It can help you identify churn and take corrective actions to avoid losing users.
Net retention rate is a more accurate measure of your business’s health than new MRR because it takes into account customers who cancel, as well as those you are able to expand. New MRR only takes into account new customers and ignores those who cancel their subscriptions and stop using your software.
Why Should You Measure Net Revenue Retention Scores?
Understanding net retention rate will help you understand how loyal your SaaS customers are. If your net retention rate is low, you may want to consider taking some actions to boost it. You can do this by following up with your customers, sending them personalized messages, and including thank you gifts or discounts.
What is a Good Net Revenue Retention Score?
When it comes to net retention rate, there is no one standard or correct score. In fact, net retention rate is not a standalone metric. Rather, it’s an indicator of other important metrics in your business, such as customer satisfaction, churn rate, and retention rate. It can also help you gauge your performance against competitors.
That being said, you can use net retention rate as a benchmark to determine your business's health and growth potential. For example, a net retention rate of 50% suggests that half of your customers from a given time period will remain after one year. Therefore, you could say a good NRR is anything in excess of 100% because that would mean you are gaining rather than losing customers.
15 Ways to Improve Net Revenue Retention
Now that you know what NRR is and why it’s important for SaaS businesses, you might be wondering what you can do to improve your company’s net revenue retention. Well, there are a number of strategies that have proven to be effective. Let's go over 15 of the best ways that you can improve your SaaS company's NRR so that you can reduce churn and increase customer loyalty.
Improve Your Customer Support
The first thing you can do to improve the net retention rate of your SaaS is to improve your customer service. If you have unhappy customers, they are more likely to churn, which will negatively impact your net retention rate. To improve your customer support, you should aim to create a customer-friendly culture that is always welcoming and positive. You should also make sure you are taking advantage of tech like cobrowsing and session replays to proactively diagnose and fix issues, and speed up resolution time.
Optimize the Onboarding Experience
When customers first sign up for your software, they go through a process called onboarding. The onboarding experience is critical to the overall user experience and can make or break a new user’s decision to continue using your software. If your onboarding efforts are not optimized, you could be losing a lot of potential customers.
Collect and Analyze Feedback
Net retention rate is heavily influenced by your customers’ satisfaction with your product. So, you should make sure that you are regularly collecting feedback from your customers to see what they think of your product. If you are not collecting feedback from your customers, you are missing out on valuable insights that can help you optimize your product and improve your net retention rate.
Build upsell triggers within your product
When you upsell to your customers, you are offering them additional products, services or usage thresholds as part of their plan. This is not only your sales team or customer success team responsibility, and you should make sure your product is built in a way that maximises the potential for upsells and expansions.
Implement Usage-Based Pricing
Usage-based pricing is a pricing model in which you charge your customers based on how much they use your software. Regardless of what type of SaaS you run, you should consider implementing usage-based pricing. This is because it encourages customers to use your software more often, which will increase your net retention rate.
Contact Customers Proactively
You should make it a habit to regularly reach out to your customers. When you contact your customers, you can identify potential issues, request feedback, and upsell to your customers. You should also make sure to customize these efforts and include personalized messages, offers, and content. This will help you to connect with your customers better and increase your net retention rate.
Reward Your Loyal Customers
One of the best ways to improve your net retention rate is by rewarding your loyal customers. You can provide a variety of rewards to your customers, such as discounts, credits, free upgrades, or gifts. This will increase your net retention rate and make your customers happier in the process.
Keep Adding Value
The most important thing you can do to keep customers happy is to keep adding value to the product or service that you’re offering. It's critical to keep your users' needs met and to always be exceeding their expectations; otherwise, they'll eventually churn. So, as you're planning new features, keep your users and their challenges in mind.
Offer a Free Trial
Another way to keep customers happy is to offer a free trial. Although you may worry that a free trial might lead to an increase in cancellations, the opposite is likely true. A free trial lets customers try out your software and decide whether or not it meets their needs. If it doesn’t, they’re more likely to cancel their subscription than if they didn’t get a free trial.
Identify Users Who Might Churn
After users submit tickets to your support team, you can use those tickets to identify trends. For example, if you see a large volume of tickets related to a specific issue, you can reach out to those users and offer them a solution. If you notice that a significant number of users are canceling their accounts, you can follow up to better understand the reasons why. You can then try to solve those problems to prevent further churn.
Provide Offers to At-Risk Users
If you know that certain users are at risk of churning, reach out to them proactively and offer some type of discount. You can use data from your customer support system to segment your users based on their usage patterns. Then, you can reach out to those segments with offers to reduce the price of your product or extend their contracts.
Don't Immediately Cancel Service for Failed Payments
If a customer fails to pay for their service, don’t immediately cancel their account. Instead, send that customer an email that lets them know about the missed payment and gives them a grace period to correct the issue before cancellation. By giving your customers this grace period, you’re much more likely to prevent them from churning.
Offer Discounts for Longer Commitments
Another way to reduce churn is to offer longer commitment contracts to existing customers. For example, you can offer a discount if users commit to a one-year contract instead of a six-month contract. If you offer longer contracts, your user base might grow at a slightly slower pace; however, this will help your team focus on providing better customer service and significantly reduce churn.
Build a Support Community
Support communities allow users to help each other while using your product. One way to build this sort of community is to host online and offline events that engage users and encourage them to provide support to each other. Hosting regular events in person can also help you build a stronger relationship with your customers, which can improve your NRR.
Don't Keep Making The Same Mistakes
Finally, don’t keep making the same mistakes. If you’ve been losing customers, look for patterns. What mistakes are you making that lead to churn? What can you do better? Track your support tickets to see if there are any recurring issues you can address. Remember, if you keep making the same mistakes, you’ll never improve your net retention rate.
Net Retention Rate or Net Dollar Retention give you insights into the health of your customer base and how sticky your product is, allowing you to accurately forecast revenue, and helps you take corrective actions to avoid churn.