Mastering Net Revenue Retention (NRR): Key to Growth

The Net Revenue Retention metric offers more insights into a business’s performance than other metrics such as ARR (annual recurring revenue) or MRR (monthly recurring revenue).

Every business sets itself goals. Those may be sales targets or achieving a level of key metrics such as customer retention or sales figures. What happens if your business is subscription-based, such as SaaS? Over the course of a financial year, you could see fluctuating rates of new customers and customer churn – so what do you focus on??

Enter Net Revenue Retention (NRR). NRR can be your calm sea when things get stormy and see you through leaner periods when business is quieter than you’d hoped. Just what is Net Revenue Retention, though? How do you calculate it and how do you ensure that it means your business is healthy throughout the year?  

Definition and Explanation of NRR

The NRR is a metric expressed as a percentage that shows how much revenue you get from your current customers at the beginning of a specific period (often a month or a quarter).

The NRR is a metric expressed as a percentage that shows how much revenue you get from your current customers at the beginning of a specific period (often a month or a quarter). It’s more accurate and offers more insights into a business’s performance than other metrics such as ARR (annual recurring revenue) or MRR (monthly recurring revenue). We’re going to explain why in this article.

Importance of Net Revenue Retention

Why should SaaS businesses look at NRR? What importance does it have to any subscription-based business?

• Generate more revenue from existing customers. CACs (customer acquisition costs) can be expensive depending on business type and customer type but can be as high as a staggering $14,772. NRR is more about focusing on growing your revenue from your current customer base. 
• Analyze customer satisfaction levels. Happy customers are loyal customers and if you have a high NRR, then it’s a good indicator that your current customers are satisfied with your product and/or your brand. 
• Improve external perceptions of your SaaS brand. There are times when a business will seek external investment to fund expansion. A healthy NRR can be a good sign that a business is doing well and can help swing decisions when it comes to investment. 
• Ensure sustainable growth to help you scale. If you truly want your business to grow, then your sales and marketing teams need to focus on customer retention as well as acquiring new customers. A good NRR figure can show that they may be doing that and that any growth you are experiencing is sustainable over time. 

Applications of NRR in SaaS Industry

NRR is ideal for the SaaS model as it is subscription-based and targets long-term relationships with customers who will look to upgrade their products when you release new ones or even add to their current package through upselling. 

One area you should be focusing on is your customer service. When you consider that a customer who has positive experiences with your customer service is 5.1 times more likely to recommend your company (and 3.5 times more likely to make another purchase), then you can see it’s crucial to maintain good service. 

Another important area of SaaS that NRR focuses on is upselling. Your upselling tactics should aim to provide customers with greater value (and you with greater revenue). Never push something on a customer that they don’t need. Instead, think about how you can maximize the value of any product and also improve their satisfaction levels. 

This doesn’t mean you should ignore the acquisition and onboarding of new customers but it does mean you value your current customers so that any growth is steady and sustainable.

Methods to Calculate Net Revenue Retention Rate

If you’re looking at NRR, then you’re looking at the percentage that shows how much income comes from customers at the beginning of any specified period. That income figure should not be calculated until you have accounted for any expenditure on business expansion. 

You may already be using other financial metrics such as ARR (annual recurring revenue) and MRR (monthly recurring revenue). But your NRR figure is more accurate as it takes into account any fluctuations in your revenue that come from things such as upselling or cross-selling or even any of your customers who choose to downgrade to a less lucrative (for you) plan. 

To calculate your NRR, you will need the following data for the time period you’re looking at. 

• Monthly recurring revenue (MRR) figure at the start of the month 
• Any expansions 
• Any upsells
• Your churn rate
• Any plan contractions. 

The net revenue retention formula will then be: 

Net Revenue Retention (NRR) = (Starting MRR + Expansion MRR – Contraction MRR – Churned MRR) / (Starting MRR) x 100

To facilitate this, you can use SQL functions such as LAG to calculate revenue over rolling periods to query and manipulate your data efficiently. SQL can help you sum up expansions, upsells, churn, and contractions directly from your database, providing a swift and accurate calculation process.

This emphasis on data manipulation underscores the importance of developing skills in data science, offering numerous career paths in data science for those interested in leveraging data for strategic decision-making.

Determining a Good Net Revenue Retention Rate

Ideally, your NRR should be at least 100%. This indicates that you’re generating revenue from your existing customer base, so can continue to be profitable even without new customers. 

But, the ideal rate will vary according to the size of your business and what your growth plans are. A good guide is to identify which of the following categories your SaaS business fits into.

Business size	Ideal NRR
SMB (small or medium business)	100%
SMB/Enterprise mix	105-115%
Enterprise level	120%+

The other part of the equation is your targeted customers. If your customers are enterprise-level, then you should be looking at a minimum of 110%. 

With higher price points, customers have more reasons to stay and are less likely to churn. Having invested more in your service, they’re likely to perceive it as being better quality and more valuable. 

Chances are they took time to make that decision and saw it as a bigger commitment, making them less likely to leave for a different provider—assuming, of course, that the quality of your product meets their expectations. 

Enterprise-level SaaS products are also more likely to come with more robust features that become integral to a business’ operations, making it costly and complex for users to switch to a competitor.

However, if your NRR is below average, there could be various reasons. If you’re between 80%-100%, it’s likely your business is still growing. But, anything below 80% is a warning flag. In this case, it’s worth digging into some additional metrics to get to the root of the problem. 

Look at your churn rate and customer lifetime value (CLV) to determine the cause of your low NRR rate. It could be that the team is missing out on upselling and cross-selling opportunities. Or it could due to customers leaving altogether, in which case it’s worth reviewing your customer retention strategy.

Distinguishing Net Revenue Retention and Gross Retention

One thing you need to know is the difference between gross revenue retention (GRR) and NRR. GRR excludes any revenue generated by upselling and cross-selling and can be ideal if you want to know how good your customer retention is. 

NRR includes those revenue streams but also identifies revenue lost through customer churn or where existing customers have downgraded to a less-expensive plan or product. 

Calculation Methods for Gross Retention

Ideally, you want to calculate both your GRR and your NRR. To work out your GRR rate: 

Gross Retention (GRR) =  (Starting MRR – Churn – Downgrades) / Starting MRR 

Strategies to Enhance Net Revenue Retention

So, you can see that NRR is a hugely important metric for any SaaS business so the question is; how can you enhance your NRR figure? 

Income Demographics Impact on NRR

A major contributor to your NRR is your targeted customers. If you are selling to SMBs, or individuals, then your ideal NRR should be 105% and up. You will have smaller price points in this market and will also likely experience more churn. 

If your customers are enterprise-level, then you should be looking at a minimum of 110%. With higher price points, customers have more reasons to stay and are less likely to churn. This is why you see pricing tiers for SaaS products and services. If your customer base comprises ‘low-income’ clients, then you need to work a little harder to retain them. 

Customer Satisfaction’s Role in NRR Improvement

If you provide poor customer service, or your products offer low value, then you will see a lot of customer churn. A small SaaS company should be aiming for a maximum churn rate of 5-7%, while an enterprise-level company should be aiming to keep it under 5%. 

Ensure that your customer service provision is of high quality. It can mean that your customer retention metrics will remain high especially if you solve issues quickly when they arise. 

Expansion Strategies for Boosting NRR

You won’t get anywhere by standing still. Every business wants to grow but it needs to be sustainable growth. A SaaS business needs to look at ways to expand its product and service range to keep existing customers happy and attract new ones. 

This is not just about identifying new products that customers want and need, it’s also about improving what you already offer. For example, you could look at adding CRM and VoIP system integration to an existing call center SaaS product you offer. 

Securing business loans can be a strategic move to fund these expansion efforts. With the necessary capital, you can accelerate product development, enhance customer service capabilities, and implement key upgrades that increase the perceived value of your offerings, thereby improving NRR.

Expansion can’t be rushed but it should be based on the idea that the extra products or features you will provide fulfill needs. It can also be based on customer feedback which has identified features that would improve one of your products. 

Of course, if you want to grow, it has to be based on various other factors too. Ideally, you want revenue streams to be healthy and to be attracting new customers. 

You also need to look at internal factors. Are productivity levels good? Do you promote employee satisfaction through robust career development plans and by promoting staff-friendly programs such as implementing paycards? 

Managing Churn Potential to Increase NRR

No business likes to lose customers but it’s sometimes unavoidable. For example, if a customer goes out of business, there is little you can do. However, if you are experiencing higher-than-average churn rates, then you need to look at what’s causing it and take steps to halt or reverse it. 

Churn rates vary industry by industry and company by company. Just look at the Baremetrics report below. Here, metrics are grouped by average revenue per user, from SaaS products costing under $10 to over $250. Going by this data, the average churn rate is about 7.5% per month.

But what causes churn? Two major factors are pricing and customer service. Are your competitors offering similar products at a cheaper price point? Is your customer service poor quality? 

Gathering customer feedback is a great way to find out what’s causing customer churn. You could consider rolling out surveys and offering discounts or other incentives as part of a win-back strategy. This not only boosts retention but helps you pinpoint reasons for churn in the first place.

Regardless of their reasons, it’s essential to fix them. You need to ensure everything from product quality and features to customer service meets customer expectations and aligns with your price points. 

You may need to adjust your marketing or sales messaging so customers understand the added value of your product, introduce low-tier plans, or provide more customer support channels.

The Influence of Free Trials on NRR

Free trials are a great way of introducing new customers to you and your products and can let them see how good a fit your products are. There are four main types of free trials for SaaS products.

• Opt-in free trial: Users must actively sign up for this by providing their information and giving explicit consent. This trial often attracts interested and engaged users who are more likely to convert into paid subscribers.
• Opt-out free trial: Users are automatically entered into a free trial, often as part of a sign-up process. They have to actively cancel their free trial if they don’t want to continue. This option might result in a high number of initial users but a lower conversion rate if those users are less interested to begin with.
• Unlimited free trial: Users can access your product or service for an unlimited time period but with restricted features compared to the paid plan. This method is a great option for building a large user base and encouraging engagement, often leading to steady conversions and higher retention rates over time.
• Limited free trial: Users have full access to your product or service but for a limited time period, whether that’s 7 days or a month. The limited time offer creates a sense of urgency. This can lead to higher initial conversion rates, however, if the time period is too short for users to experience the full value, it can result in lower conversion and retention rates.

Your free trial can be for any period though they usually range from 7 to 60 days. Free trial customers can have a positive effect on your NRR as they aren’t paying anything while in the free trial period and will boost your NRR rate if they convert. With an average conversion rate of 18.2% for opt-in and 48.8% for opt-out, this can be a great way of attracting new customers. 

Emphasizing Value to Enhance NRR

When a customer sees value in your products and brand, then they are more likely to be loyal to you and to recommend you to others. When you have a ‘high’ value, then that means customers think they are getting their money’s worth, if not more. 

There are a few ways to measure how high-value your product is. 

The first is real value, or actual value. This refers to how much it costs to produce your SaaS solution, including the value of individual components of the product, how useful it is to customers, and the financial impact on them and their business. 

You may already have calculated this in your Quantified Value Proposition, a statement that defines the value of your product or service through a quantified assessment of its cash value.

Then there’s the perceived value of your solution. This is more difficult to measure as it’s an abstract representation of how customers feel your product is worth. It’s also more readily impacted by external factors like brand reputation, novelty, and marketing messages.

For example, two CRM software solutions like HubSpot and Deskera may have identical real values. That is, it costs the same to produce the solutions and bring them to market, and the features and price points are similar. 

But HubSpot’s solid content marketing strategy has put it at the front of customers’ minds, elevating its visibility and reputation. This may influence people’s perceptions, and they will see the product as being more high-value.

Remember, emphasizing value isn’t about reminding customers of how much they paid for your product. It’s about demonstrating the value it brings to their business in terms of benefits like cost savings, productivity, and impact. By ensuring that your customers see the value in what you offer, you can enhance your NRR. 

The Relationship Between NRR and Company Valuation

How do you see your future? Do you want to grow organically by investing profits? Do you have an exit strategy where your business will be acquired by investors or another company? Or do you want to seek external investment? If the latter two, then you want your company to have a healthy valuation. 

If you can demonstrate a consistently healthy NRR rate of over 100%, then your business will be more attractive to investors or another business thinking about acquiring you. Even with seasonal fluctuations, a good NRR rate over time will keep that valuation healthy. 

Challenges in Monitoring Revenue Retention Rates

The challenge doesn’t lie in the actual monitoring of your NRR and GRR, it lies in understanding the reason for those rates. Both of these metrics are just one part of the overall story that can involve multiple relevant metrics, such as churn rate, customer lifetime value, average revenue per user, and expansion revenue. In many cases, this data is spread across different sources, too, making integration a challenge. 

You need to look beyond the NRR and GRR figures to understand why they are at a certain rate, how those rates may affect you in the future, and what you need to do (if anything) to improve them. 

Look at all your major metrics, especially GTM (go-to-market) ones like Net Promoter Score and demo bookings. Consider what they mean on their own and what they mean in relation to each other. 

Improve Your SaaS Financial Health With Net Revenue Retention Tracking

You want to be sure that your business is financially healthy, not only now but in the future too. By tracking your NRR, and ensuring it remains steady and above average, you can use the insights gained to both forecast business growth and to maintain financial health. 

Net Revenue Retention FAQ

How do you calculate retention rate?

MRR at the start of the month + expansions + upsells – churn – contractions then divide that figure by the MRR at the start of the month.

What is the difference between arr and nrr?

NRR measures how well you retain customers while expanding revenue from that customer base. ARR refers to the recurring revenue (such as long-term subscriptions) that your business earns annually. 

What does 100% net retention mean?

If you have an NRR of 100% or more, it means that your existing/retained customers are generating more income for your business than you are losing through customer churn. 

What is a good retention rate for SAAS?

You should be aiming for an NRR rate of 100%. Depending on your business size and customer type, a rate of between 100% and 120% is very good while 130% or higher would be viewed as exceptional.