TL;DR
- You need to understand the significance of net revenue retention (NRR) benchmarks to gauge the health of your SaaS business and its customer retention success.
- NRR is crucial for evaluating how well you're maintaining and growing revenue from existing customers, including aspects like expansions, downgrades, and churn.
- Calculating your NRR involves looking at monthly recurring revenue changes and comparing your figures against industry benchmarks to determine if your retention strategies are effective.
- NRR calculation includes expansion, downgrade, and churn MRR, offering a comprehensive revenue retention metric.
- A "good" NRR is above 100%, indicating not just retention but revenue growth from existing customers. However, benchmarks vary, and even an NRR below 100% can be healthy in some contexts.
- To improve your NRR, focus on reducing customer churn, discouraging downgrades, and encouraging upgrades or cross-selling, thereby maximizing revenue.
- Togai's pricing implementation platform offers effective NRR management.
Imagine this: You've closed transactions, gained new customers, and enjoyed success. What occurs next, though? How do you make sure that your business partnerships endure and that you keep getting paid for your efforts? The compass directing companies toward exceptional customer retention and growth is net revenue retention (NRR). The long-term health and prosperity of a B2B business rest on revenue retention. After all, it is significantly more economical and productive than always seeking new leads. But how can you quantify the effectiveness of your retention efforts?
Here is where net revenue retention (NRR) comes in. NRR offers priceless insights into the state of your customer relationships, allowing you to evaluate your capacity to keep and increase income from current customers. We shall examine the nuances of net revenue retention in the B2B market throughout this article. We'll discuss benchmarks that show strong revenue retention, decode how it's calculated, and provide you with useful tactics for NRR optimization.
If you are a SaaS business, NRR or Net Revenue Retention is a vital parameter to gauge business health and understand how successful you are amongst your customers.
An Introduction to Net Revenue Retention
In SaaS businesses, net revenue retention is a metric that assesses the amount of revenue maintained from existing customers over a period of time. The total NRR includes:
- Expansion of revenue
- Customer downgrades
- Service cancellations
Essentially, NRR takes into account four types of MRR or Monthly Recurring Revenue.
1. Churn MRR where the customer leaves your service completely.
2. Downgrade MRR, where customers downgrade their service plan by choosing a lesser-paying tier.
3. Upgrade MRR where the customer pays and chooses a higher-paying tier.
4. Expansion MRR where the existing customers buy a new product from your company.
Importance of Net Revenue Retention for SaaS Businesses
There’s an entire list of reasons why NRR is a vital aspect of your SaaS business. It helps you:
- Understand how healthy your customer base is and how loyal they are.
- Identify churn and take timely actions to prevent customer loss
- Understand the offerings which are failing or succeeding in the key market segments.
- Unearth inefficiencies in sales, marketing, and user acquisition funnels.
- Create budgets and expense plans
- Measure the efficacy of your retention strategies
- Evaluate the overall performance of your business
- Identify issues at an early stage and implement appropriate solutions.
- Explore your potential for future growth.
How to Calculate Net Revenue Retention
NRR is all about customer retention. Your net revenue retention tells you how successful your business is at renewing and retaining existing customers and making money from them. NRR is an important metric that helps you visualize an increase or decrease in your revenue.
The formula for calculating NRR is thus:
Depending on your company’s business model and the insights you need, NRR can be calculated on a monthly, quarterly, and yearly basis. You can use it to study specific markets, seasonal sales, specific customer segments, and sales campaigns.
What Are Net Revenue Retention Benchmarks?
Generally, net revenue retention benchmarks are a set of industry standards that organizations use to compare their performance with other companies. Every industry has its own NRR benchmarks. These benchmarks are based on data gathered from various players within the same industry or business models. They are used as an indication of what constitutes "good" or "average" net revenue retention.
The best way of comparing your SaaS company’s retention and growth trends is to compare three things:
- Your current NRR
- Your historical NRR
- Industry benchmarks
So, what is a “good NRR”?
If your net revenue retention is above 100%, it is considered a “good NRR.” It indicates good revenue growth and ideal levels of customer retention.
Here’s what each NRR tier indicates:
- NRR > 100% - This means you are doing everything right to retain most or all of your existing customer base. Additionally, your company has seen good revenue from expansions and upsells.
- NRR between 80 - 100% - This indicates that although you retain most of your customers, you may not be growing as much or making enough revenue.
- NRR below 80% - Your NRR rate is considered low if it goes below 80%. This percentage means you are struggling to retain customers. It is a clear indication that you need to improve your retention efforts.
However, that being said, there is no one specific or ideal score for the net retention rate. This is because there are several scenarios to consider.
- An NRR rate below 100% in some businesses is still considered healthy. Their revenue could increase significantly if they gain more customers faster than they lose existing ones.
- Similarly, a company with more than 100% NRR may not have retained its existing customers. How does such a scenario take place? Well, here are the reasons:
Increase in the price of products or services
Gaining new customers with a higher buying power
Selling higher-priced products or services to existing customers
If you are a SaaS business, the ideal NRR rate can average anywhere between 90-130%. If you are a new entrant to the SaaS industry, you can set your NRR benchmark objectives to a more realistic range of 90-100% since all bigger players will have more leeway in gaining customers and upselling their offerings.
Your NRR will be higher when your upgrade and expansion MRRs exceed your downgrades and net revenue churn losses.
Also Read: An In-depth Exploration Of Net Value Retention For SaaS Businesses
So, how will you fulfill the gap if you aren’t gaining a net revenue retention rate that is not within the ideal limits? Let’s check out some guidelines to get your NRR rate upto to where you want it to be.
3 Effective Strategies to Improve Your Net Revenue Retention
There are two ways to improve NRR:
- Minimize the customer churn
- Maximize your revenue
If you take care of one issue, the next one is solved. Here are three exclusive strategies to boost your NRR.
1. Bring down your churn rate
In the subscription business, you must combat involuntary and voluntary churn because they will directly impact your retention rate. There are two ways to bring down your customer churn rate. You can:
- Recover transactions that have failed by predicting and preventing recurring declined payments.
- Spruce up your dunning campaigns by bringing your customers’ attention to failed transactions.
2. Take measures to curb downgrading
To keep your existing customer accounts alive and valuable, you must understand and focus on fulfilling their needs. You can:
- Create a streamlined sign-up process or platform onboarding to encourage your customers to stay with you for long.
- Give your customers the freedom to pause their subscriptions instead of canceling them.
- Make your billing and subscription plan more flexible to promote customer engagement and loyalty, motivating them to renew their subscriptions.
3. Consider upgrading and cross-selling
Train your focus on improving user experience when revamping your expansion strategy. This tactic works better than raising the price of your products or services. Instead, you can:
- Deploy attention-grabbing techniques like in-app messages or pop-ups with action-provoking CTAs whenever a customer clicks on a feature that is unavailable to them.
- Understand the average customer lifetime from when they subscribed to when they opted out of your offerings and use this insight for cross-selling.
Let’s Conclude
Net revenue retention helps you understand:
- How healthy your customer base is.
- How effective your offerings are.
- The various tactics to accurately forecast revenue.
- The corrective measures you need to take to avoid churn.
NRR can have a direct impact on your SaaS business prospects as well as open up new growth opportunities.
Get to know more about net revenue retention and pricing strategies from the Togai team. Togai is a pricing implementation platform that helps you implement any pricing strategy ten times faster and within a day.
