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 shrink) if you landed zero new customers? That's your NRR.
In this blog post, we'll cover:
- What NRR is
- The different types of revenue retention
- How to calculate NRR
- Why NRR is important
- What a good NRR is
- How often you should measure NRR and
- 15 ways to increase your revenue retention rate
Net Revenue Retention (NRR) in SaaS
In SaaS (Software as a Service), net revenue retention (or NRR) is a key metric that measures the revenue growth and retention of your customers over a specific time span — typically a year. NRR calculates the net change in revenue from existing customers taking into account the following things:
- Account expansions (cross-sells and upsells) and
- Account contractions (downgrades and churn)
Different kinds of revenue retention
The different kinds of revenue retention in SaaS are as follows:
- Gross revenue retention: This calculates the revenue retained from existing customers without taking into account upsells or cross sells.
- Net revenue retention: As mentioned above, NRR calculates revenue retention while also taking into consideration account expansions and contractions.
How to calculate revenue retention in SaaS
In this section, we'll give you several formulas that you can use to calculate revenue retention for the two types of revenue retention mentioned above.
How to calculate Gross Revenue Retention
To calculate gross revenue retention, you need to use this formula:
(Total revenue at the end of the period - Revenue churn)/ revenue at the beginning of the period x 100
How to calculate Net Revenue Retention
To calculate NRR, you need to use this formula:
NRR = (Total Revenue at the end of the period - Revenue Churn + Expansion Revenue) / Revenue at the beginning of the period x 100
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 revenue.
- 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).
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%.
How often should you calculate NRR?
You can calculate NRR for any period of time, but it's most often done monthly, quarterly or yearly.
What is a good net revenue retention rate?
In the world of business, your net revenue retention rate is a telling metric. Industry benchmarks for SaaS as a whole put the average NRR at 109%. 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 SaaS companies:
- Snowflake - 158%
- Twilio - 155%
- Elastic - 142%
- PagerDuty - 139%
- AppDynamics - 123%
Why is net revenue retention important?
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.
- By analyzing your NRR, you can identify and exploit opportunities for growth (upsells and cross-sells) within your existing customer base.
- NRR directly impacts Customer Lifetime Value (CLV); if you retain customers over a longer period of time, their CLV will go up.
- Shifting your focus from new customer acquisition to revenue retention can save you money — acquiring new customers is 5 times as expensive as retaining existing ones.
- Your revenue retention can tell you a lot about how happy and satisfied your customers are. High revenue retention indicates happy customers.
- Investors often consider NRR a key performance indicator for SaaS companies. High NRR indicates that you have a strong customer base and a healthy business model.
- Monitoring NRR can give you clues about where you product or service is coming up short.
- NRR also provides more stability and predictability to revenue forecasting, which is crucial for making the right resource-prioritization and budgeting decisions.
If you look at the graph below, a NRR of 90% means that your revenue will shrink if you don't land new customers. On the other hand, an NRR above 100% means your company will still grow even without closing new customers.
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. We'll discuss ways to do so in the next section.
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. There are a number of strategies that have proven to be effective.
15 of the best ways to improve net revenue retention include:
- Improving customer support
- Optimizing onboarding
- Collecting and analyzing customer feedback
- Building upsell triggers in your product
- Implementing usage-based pricing
- Proactively engaging with your customers
- Rewarding loyal customers
- Continually adding value
- Offering a free trial
- Identifying users who may be about to churn and offering incentives to stay
- Not immediately cancelling service for delayed payments
- Offering discounts for larger commitments
- Building a support community
- Identifying what isn't working
Improve your customer support
The first thing you can do to improve the net retention rate of your SaaS company 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. This 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 don't do this, you're 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 or customer success team's 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 because it tends to boost revenue.
Contact customers proactively
You should make it a habit to proactively 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 and incentives, 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 exceed their expectations. If you fail to do so, 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. This is a proactive way to prevent churn, as it prevents the wrong customers from signing up and churning at a later date.
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 relevant 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.
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. 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.
Wrapping things up
Net Revenue Retention (NRR) is a pivotal metric for SaaS companies, offering valuable insights into revenue growth, customer retention, and overall business health. By considering both churn and account expansions, NRR provides a comprehensive view of how a company's existing customer base contributes to its revenue growth.
As a key performance indicator, NRR allows businesses to identify opportunities for upselling and cross-selling, thus increasing Customer Lifetime Value (CLV). By shifting the focus from acquiring new customers to retaining existing ones, companies can achieve cost savings and build a loyal customer base.
Successful SaaS companies aim for an NRR above 100%, indicating growth even without new customer acquisition. Utilizing various strategies to improve NRR, such as optimizing customer support, enhancing onboarding experiences, and leveraging customer feedback, SaaS companies can foster long-term customer loyalty and sustainable revenue growth. By consistently analyzing and tracking NRR, businesses can make informed decisions, strengthen customer relationships, and remain competitive in the dynamic SaaS market.