Retention is the most important factor to growth, as Alex Schultz, CMO at Meta, aptly puts it.
Net Revenue Retention is a benchmark metric for SaaS businesses looking to drive sustainable growth. And customer success teams play a critical role in that journey.
In this post, we’ll particularly cover how to calculate Net Revenue Retention (NRR), its components, and examples.
Let’s break the NRR calculation down, starting with the basics.
What is Net Revenue Retention in SaaS?
Net Revenue Retention (NRR) is a revenue metric that measures the growth and health of a SaaS company's customers. It calculates a SaaS business's ability to retain and expand revenue from its current customers over a specific period, typically a year.
NRR takes into account the changes in recurring revenue from existing customers due to upsells, cross-sells, contractions, and churn.
It underscores the importance of delivering ongoing value to your customers and driving expansion revenue. That’s why NRR is one of the North Star metrics for SaaS Customer Success teams.
Difference between NRR, GRR, and ARR
That’s a lot of acronyms! Net Revenue Retention (NRR), Gross Revenue Retention (GRR), and Annual Recurring Revenue (ARR) are all revenue metrics. However, they differ both in definition and significance.
This table encapsulates the difference between NRR, GRR, and ARR:
Components of Net Revenue Retention (NRR)
Now that you know what NRR means, let’s explore the components you need to calculate NRR.
MRR
Monthly Recurring Revenue (MRR) is the monthly revenue your SaaS business generates from all the active subscriptions. For example, if your company has 10 active customers paying $100 each per month, your MRR would be $1000.
Expansion MRR
Expansion MRR measures the additional revenue coming in from your existing customers. To calculate expansion MRR, simply add all your upsells, cross-sells, and subscription add-ons.
Churn
When a customer cancels the subscription, it reduces your MRR. Customer Success teams work hard to prevent it, but sometimes churn is inevitable.
Contraction MRR
Sometimes, customers choose to downgrade their subscription instead of canceling it altogether. For example, customers can choose a lower price tier or reduce the number of seats. Contraction MRR is the revenue you lose to such subscription downgrades.
How to Calculate NRR
Use this formula to calculate NRR:
Net Revenue Retention (NRR) = (Monthly Recurring Revenue (MRR) at the start of period + Expansion MRR - Churn - Contraction MRR) / MRR at the start of period
Let’s say that your business’s recurring revenue (MRR) is $2,00,000. You’ve added an expansion MRR of $10,000. But you also faced a $5,000 churn.
So applying the above formula, your Net Revenue Retention rate for the same pool of customers is 102.5%.
NRR can be calculated monthly, quarterly, or annually.
What is a Good NRR?
When calculated correctly, NRR values for SaaS businesses range from 80% (low) to 150% (excellent). Here are the NRR benchmarks:
- > 100%
An NRR of more than 100% is generally considered a great sign for the SaaS business. It means that the company is retaining most of its customers and can generate expansion revenue from them. An analysis of SaaS IPOs finds the average NRR of top-performing SaaS companies to be 119%.
- 80-100%
An NRR rate between 80 and 100 is still good, but there’s scope for improvement. NRR in this range indicates that the business is able to retain its customers, but is not growing revenue as much as it should. Keep a close eye on churn rates and customer lifetime value (LTV) to find areas of improvement.
- < 80%
NRR below 80% is considered to be low. It indicates that the business is struggling with customer retention.
How Can Customer Success Teams Improve Net Revenue Retention?
At the end of the day, satisfied customers are at the heart of a healthy NRR. So what exactly can customer success teams do to improve expansion revenue and avoid churn?
Here’s an overview of tried-and-tested strategies:
1. Optimize your customer onboarding workflows
A great onboarding flow goes a long way in reducing time to value. The sooner customers adopt your product and realize its true value, the less likely are they to churn.
2. Engage with customers regularly
This viral LinkedIn post says it all:
It’s more important now than ever to analyze customer usage patterns regularly, proactively offer help, and demonstrate value.
3. Make data-driven decisions with customer insights
Regularly track customer satisfaction scores, adoption of critical features, churn rates, etc. Leverage this data to identify at-risk accounts and deploy segment-specific retention strategies.
4. Excel at customer support
Implement a multichannel customer support system. Be quick, proactive, and empathetic. Remember, the quality of customer support can make or break your retention metrics in the long run!
5. Automate your revenue retention workflows
Customer Success teams have a lot on their plates! Automation can help you set up targeted email campaigns for upselling, cross-selling, renewal reminders, etc.
We’ve covered these strategies (and more) in detail in our Ultimate Guide to SaaS Revenue Retention for Customer Success teams.
How to Track NRR?
Customer Success teams need to look at copious amounts of data. This data often needs to be sourced from multiple sources. Using spreadsheets to crunch complex data for tracking metrics like NRR is not only time-consuming but also prone to errors.
Robust Customer Success Platforms, like Velaris, come with in-built analytics. These dashboards can give you a snapshot of critical Customer Success metrics like NRR, MRR, CSAT scores, NPS scores, etc at a single glance.
Customer Success Platforms empower CS teams to make informed decisions and refine their customer engagement strategies. With real-time customer insights, analytics dashboards enable customer success teams to proactively address customer needs, identify areas for improvement, and ultimately drive retention.
Conclusion
NRR is one of the most critical metrics for SaaS Customer Success teams today. NRR not only serves as a barometer for the health of your customer base but also offers insights into the effectiveness of your expansion and retention strategies.
Armed with this knowledge, customer success teams can fine-tune their approach to fostering lasting customer relationships.
Want to get started with tracking the right Customer Success metrics? Check out our Customer Success Platform today!
