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Both Net Revenue Retention (NRR) and Annual Recurring Revenue (ARR) are critical metrics for Customer Success, but they serve different purposes and tell unique stories about your business’s health and your effectiveness in retaining and growing your customer base.
NRR focuses on the revenue generated from existing customers, accounting for expansions, renewals, and churn, providing insights into the current base.
ARR, on the other hand, measures the total predictable revenue from all customers annually, including new acquisitions, offering a broad view of overall business health.
While NRR highlights customer loyalty, ARR reflects the company's growth trajectory and financial stability.
This article will break down NRR and ARR, clarifying their roles and showing you how to use them to not only track your progress but also to drive meaningful results. Whether you’re a seasoned CSM or just starting out, by the end of this read, you'll have a clear grasp of these key metrics and be ready to use them to elevate your Customer Success strategy.
What is NRR (Net Revenue Retention)?
Net Revenue Retention (NRR) measures the revenue growth or decline from existing customers over a set period. It accounts for expansions, contractions, and churn, providing a comprehensive view of customer value. This reflects how well a company is retaining and expanding its existing customer base.
You can use the following formula to calculate the NRR:
Net Revenue Retention (NRR) = (Starting MRR + Expansions + Upsells - Churn - Contractions)/starting MRR*100
You can break down the formula as follows:
- Expansion revenue: Additional revenue generated from existing customers through upselling or cross-selling.
- Renewal revenue: Revenue from customers who renew their subscriptions or contracts.
- Churned revenue: Revenue lost due to customers who do not renew or cancel their subscriptions.
A high NRR indicates strong customer relationships and effective retention, while also highlighting expansion revenue opportunities. Regularly monitoring NRR helps identify potential issues early, enabling timely interventions. Additionally, NRR boosts investor confidence by showcasing stability and growth potential. By focusing on NRR, CSMs can allocate resources effectively, prioritize customer interactions, and drive long-term growth and satisfaction.
If you want an easy method to find out the NRR of your company, check out this NRR calculator. Understanding the NRR for your business can be crucial, but the next section will show you that ARR has plenty of uses as well.
What is ARR (Annual Recurring Revenue)?
Annual Recurring Revenue (ARR) is the total revenue a company expects to receive from customers annually. It provides a snapshot of the company's financial health and growth trajectory.
ARR is a key performance indicator in subscription-based businesses, particularly in the SaaS industry, as it offers a clear picture of predictable revenue streams over a year.
To calculate ARR, you have to sum up all recurring revenue streams over a year. There can also be some businesses with monthly subscriptions, and for these, the ARR can be calculated by multiplying the Monthly Recurring Revenue (MRR) by 12. The formula for ARR is straightforward and it goes as follows:
Annual Recurring Revenue (ARR)=Monthly Recurring Revenue (MRR ) ✕ 12
Here’s a breakdown of how to calculate ARR:
- Monthly Recurring Revenue (MRR): This is the revenue a company earns each month from subscription services. It includes all recurring revenue from customers but excludes one-time fees or irregular revenue streams.
- ARR Calculation: Multiply the MRR by 12 to annualize the monthly revenue, giving a clear picture of the expected annual revenue from subscriptions.
ARR offers a predictable measure of annual revenue, and is essential for forecasting and growth tracking. It enables companies to plan financial investments, refine sales strategies, and focus on long-term contracts and high-value deals. Similar to NRR, a high ARR also boosts investor confidence. By analyzing ARR, businesses can segment customers, tailor strategies for high-value segments, and guide product development to align with market demands.
Next we will delve into the key differences between the concepts ARR and NRR.
Key differences between NRR and ARR
While both ARR and NRR serve as critical measures of a company's ability to generate consistent and repeatable revenue, which is fundamental for assessing long-term viability – they do differ in some ways:
Focus
- NRR: NRR emphasizes the performance of a company in retaining and growing revenue from its existing customer base. It considers the revenue changes due to upsells, cross-sells, and customer churn. Essentially, NRR highlights how well a company can maintain and increase revenue from the customers it already has, making it a critical metric for evaluating Customer Success and satisfaction.
- ARR (Annual Recurring Revenue): ARR, on the other hand, measures the total recurring revenue generated by all customers over a year, including both new and existing customers. ARR provides a comprehensive view of the company's overall revenue health, capturing the impact of new customer acquisitions alongside the retention and expansion within the existing customer base.
Impact
- NRR: The primary impact of NRR lies in its ability to reflect the effectiveness of a company's retention and upselling strategies. A high NRR indicates that the company is not only retaining its customers but also successfully increasing their spending through upselling and cross-selling. This metric is crucial for understanding the long-term value and satisfaction of existing customers.
- ARR: ARR indicates the overall revenue health of a company, offering insights into the total amount of predictable, recurring revenue it can expect annually. ARR is vital for understanding the company's growth trajectory and financial stability, helping to assess whether the business is expanding its customer base and retaining its existing customers effectively.
Usage
- NRR: Use NRR to assess and refine Customer Success initiatives. By focusing on NRR, companies can identify how well they are retaining customers and generating additional revenue from them. This metric helps in pinpointing areas that need improvement in customer engagement, satisfaction, and retention strategies.
- ARR: Use ARR for financial forecasting and long-term planning. ARR provides a clear picture of the company’s recurring revenue, which is essential for budgeting, financial planning, and setting growth targets. It helps in making informed decisions about resource allocation, investment in product development, and expansion strategies.
Revenue insights
- NRR: NRR provides insights into the revenue dynamics within the existing customer base, showing the net effect of renewals, expansions, and churn.
- ARR: ARR aggregates all recurring revenue, offering a straightforward measure of the company’s financial health and stability.
Strategic implications
NRR: High NRR indicates strong customer loyalty and the effectiveness of Customer Success strategies, leading to sustainable revenue growth.
ARR: High ARR indicates overall business growth, financial health, and the potential for scaling the business by acquiring new customers and retaining existing ones.
In summary, both NRR and ARR are crucial metrics for SaaS businesses, each offering unique insights into different aspects of the company's revenue and Customer Success. Understanding and leveraging these metrics can help companies drive growth, optimize Customer Success strategies, and ensure long-term financial stability.
Velaris can help you monitor both NRR and ARR with its advanced analytics and data-driven insights. This allows you to track both metrics, giving you the information you need to take your Customer Success strategy to the next level.
Conclusion
Understanding the nuances between NRR and ARR is essential for any Customer Success Manager looking to drive growth and retention. While ARR offers a broad view of a company’s annual revenue health, NRR dives deeper into the quality of your existing customer relationships by highlighting retention and expansion efforts.
In the fast-evolving SaaS landscape, balancing these metrics allows CSMs to navigate challenges effectively and contribute significantly to a company's long-term success.
Customer Success Software like Velaris can help companies get an in-depth understanding of these metrics, allowing them to identify more opportunities for retention and expansion. If you’d like to explore how Velaris works for yourself, request a demo today.
