Net Revenue Retention (NRR)
Definition
Net Revenue Retention (NRR) is a metric that essentially tracks your ability to retain and grow your customers over time. It's the percentage of recurring revenue retained from existing customers over a specific period, after accounting for revenue lost due to cancellations and downgrades (Churn), as well as revenue gained from upsells, cross-sells, and other expansions. NRR is mainly used by SaaS companies to assess customer retention and revenue growth within the existing customer base.
Importance of Net Revenue Retention
NRR is the best indicator of a company's ability to create and capture more value for its customers over time. Here’s why NRR matters:
Revenue Growth: Most customers won't open their entire wallet on day one. If you're not expanding your customers, you're leaving a lot of money on the table.
Higher ROI: Selling to existing customers is always cheaper than the Customer Acquisition Cost (CAC) for completely new clients.
Customer Success: NRR is the most revealing metric for the effectiveness of your customer success team.
Investor Confidence: Strong NRR is seen by many investors as a signal for reliable long-term business viability and stability.
How to Calculate Net Revenue Retention
The formula for calculating NRR is:
NRR = (Starting ARR + Upsell and Cross-sell - Churn) / Starting ARR x 100%
Key Components:
Starting ARR: Annual Recurring Revenue at the beginning of the period you're measuring.
Upsell and Cross-sell: Revenue gained from upselling or cross-selling during the period you're measuring, but exclusively with the same customer base.
Churn: Revenue lost due to customer cancellations and downgrading during the period with the same customer base.
Example Calculation:
Suppose a company starts with $1,200,000 in ARR at the beginning of January:
Gains $240,000 in expansion revenue from upsells.
Loses $60,000 due to churn.
Loses $40,000 due to downgrades.
The NRR would be calculated as follows:
NRR = ($1,200,000 + $240,000 - $60,000 - $40,000) / $1,200,000 x 100% = ~112%
This means the company retained 112% of its starting revenue, indicating growth within its existing customer base.
Applications of Net Revenue Retention
NRR serves a variety of purposes across business operations:
Customer Retention Analysis: Shows which customer segments are most likely to stay versus churn and which are more likely to make additional purchases.
Revenue Forecasting: Enables revenue forecasting beyond new customer acquisition and offer a more realistic overview of future expectations.
Performance Benchmarking: Depending on your industry, maturity, and ACV, companies should hit certain industry standards.
Growth Strategy Development: Allows for data-driven decisions about investments in customer success initiatives and future product development.
What Is a Good Net Revenue Retention Rate?
A good NRR varies by industry, maturity, and most importantly: Average Contract Value (ACV). Here are some general guidelines based on your ACV::
$100 ACV: NRR between 0.9 and 1.0
$1,000 ACV: NRR between 1.0 and 1.1
$10,000 ACV: NRR between 1.1 and 1.2
$100,000 ACV: NRR between 1.2 and 1.4
$1,000,000 ACV: NRR beyond 1.4
As a general rule of thumb: the bigger the contract size the more expensive the sales process. It's more important to retain and grow customers when you have an army of Senior Enterprise Sales agent than when you acquire customers through an ad campaign.
Net Revenue Retention vs Gross Revenue Retention
NRR differs from Gross Revenue Retention (GRR):
NRR includes expansion revenue (upsells/cross-sells), making it more comprehensive.
GRR excludes expansion revenue and focuses solely on churn and downgrades.
For example:
If a company starts with $200,000 in MRR but loses $15,000 due to churn/downgrades while gaining $35,000 in expansions:
NRR = ($200,000 + $35,000 - $15,000) / $200,000 x 100% = 110%
GRR = ($200,000 - $15,000) / $200,000 x 100% = 92.5%
Conclusion: Why Is NRR Important?
Net Revenue Retention (NRR) is the best indicator of a company's ability to create and capture more value for its customers over time. NRR allows SaaS companies to assess customer retention and revenue growth within the existing customer base. Only by tracking NRR, businesses can make intelligent decisions about resource allocation within sales, marketing, and product teams.
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