TL;DR
- You can measure your SaaS business's health and predict future growth using the net revenue retention formula, which focuses on revenue from existing customers, including upgrades and churn.
- Net revenue retention (NRR) is key to increasing customer lifetime value (CLTV), ensuring revenue stability, and enhancing cost efficiency by focusing on existing customers rather than acquiring new ones.
- NRR's role as an indicator of product-market fit and competitive advantage is crucial for understanding its impact on business sustainability and growth.
- To boost your NRR, focus on reducing churn, managing downgrades effectively, securing long-term contracts, highlighting upgrade benefits, and motivating your team to identify upsell opportunities.
- Achieving a high NRR means your SaaS or subscription-based business is on the right track, with a 100% NRR considered healthy and indicative of scalable, predictable growth.
- Remember, a robust NRR strategy not only helps in retaining customers but also in leveraging upsell and cross-sell opportunities, thereby reinforcing your company's market position and paving the way for expansion.
Customer churn is an all-too-common affliction for B2B businesses. Just when you think you've won them over, they suddenly vanish into the arms of your rivals, leaving you to wonder what went wrong.
Retaining your existing customers becomes a matter of utmost importance. It's no longer about a one-time transaction; it's about securing their commitment to a recurring fee, ensuring a steady and reliable stream of revenue for your business. This is the secret to sustainable growth, the holy grail of success.
That's why, you need the right set of metrics – the compass that guides you through the stormy seas of business.
Enter net revenue retention. It measures the ability to retain and expand revenue from existing customers over a given period, shining a light on the true pulse of your SaaS enterprise.
What Is Net Revenue Retention?
Net Revenue Retention, or NRR, is a vital SaaS metric used to measure the percentage of revenue derived from existing customers over a specific period of time and also helps predict future growth. It is one of the most widely used KPIs in the SaaS industry or subscription-based businesses because it tells them about their:
- Ability to retain and expand customers.
- The health of the SaaS subscription-based business.
Net revenue retention is also called Net Dollar Retention or NDR. To ascertain the business growth from the current customer base, NRR takes into account the following aspects:
- Downgrades
- Upgrades
- Customer churn
However, it excludes new customers and measures the overall impact on the revenue generated only from existing customers.
Here are some of the cases where your revenues are affected by existing customers:
- Customer churns
- Customer upgrades their existing tier.
- Customer downgrades their current tier.
- Customer stops using some of your products but not all of them.
- Customer buys more products from you.
- Customer adds more users if they are paying per user.
- Customer removes users if paying per user.
All these cases will directly impact your total revenue generation every month or year. Adding these changes to the recurring revenues your customers are paying gives you a clear picture of how much revenue these existing customers generate. This is called Net Revenue Retention.
Reasons Why Net Revenue Retention is Important for SaaS Businesses
1. Customer lifetime value
By retaining and expanding revenue from existing customers, businesses can increase customer lifetime value (CLTV). Higher CLTV means increased profitability and better return on customer acquisition costs.
2. Revenue stability
SaaS businesses with high NRR have a more predictable revenue stream. By minimizing churn and increasing expansion revenue, they can reduce revenue volatility associated with acquiring new customers. This stability is essential for financial planning, investor confidence, and overall business sustainability.
3. Cost efficiency
Acquiring new customers typically involves higher costs compared to retaining existing ones. By focusing on NRR, SaaS businesses can optimize their cost structure and allocate resources more efficiently. The incremental revenue gained from expansion within the existing customer base is generally more cost-effective than acquiring new customers.
4. Upsell and cross-sell opportunities
NRR provides a lens into the effectiveness of upselling and cross-selling efforts. By identifying growth opportunities within the customer base, SaaS businesses can leverage their existing relationships, customer knowledge, and product expertise to offer additional features, modules, or upgrades. This not only drives revenue growth but also enhances customer satisfaction and strengthens loyalty.
5. Indicator of product-market fit
A high NRR indicates that a SaaS company's product or service is meeting the ongoing needs of its customers. It suggests that customers are finding value in the offering and are willing to expand their usage or upgrade to higher-priced plans. This positive feedback loop reinforces the company's product-market fit and validates its value proposition. A high NRR is a good indicator of predictable and scalable growth.
6. Competitive advantage
SaaS businesses operating in competitive markets can gain a significant advantage through high NRR. By consistently delivering value and maintaining strong customer relationships, they create barriers for competitors attempting to poach their customers. A high NRR also provides a positive reference point for potential customers, boosting the company's reputation and credibility.
7. Expansion into new markets
SaaS companies with strong NRR can leverage their customer base and success to expand into new markets or target new customer segments. The revenue stability and customer loyalty derived from high NRR provide a solid foundation for growth beyond the initial target market, allowing the company to explore new avenues for revenue generation.
Also Read: Understanding Accrued Revenue: Definition, Examples, and Recording Methods
NRR SaaS Calculation: How to Calculate Your Net Revenue Retention
As we know, NRR is the overall total of expanded, retained and contracted revenue over a given time period of a month or year.
NRR calculates total income, which includes expansion revenue. From this, the net revenue churn is subtracted. This revenue churn comprises all the contract cancellations, downgrades, and expirations.
Thus, the net revenue retention formula is applied as:
Where,
- Churn MRR is the amount of recurring revenue lost due to customer churn.
- Contraction MRR is the amount of revenue lost from already existing customer downgrades.
- Expansion MRR or the revenue generated from existing customers for the current month from cross-sales and up-sales.
- Starting MRR is the recurring revenue collected from the previous month’s customers.
Here’s an example to illustrate the calculation:
Suppose Company A collected a monthly recurring revenue of $50,000. They increased their revenue by upgrading and cross-selling at $5,000. Some customer downgrades result in a loss of $2000. They also end up losing $1000 in churn.
In this case, NRR = (50,000 + 5000 – 2000 -1000) / 50,000 = 104%
Since the NRR is 104%, it indicates growth despite the churn and downgrades. This phenomenon is known as Net Negative Churn. This is a perfect demonstration of how a company can still attain growth without garnering any new customers. This is a goal that every SaaS company should strive to achieve.
This brings us to the next question.
What is a good NRR?
Generally, a 100% NRR is considered reasonable if you are a SaaS or subscription-based company. This indicates a low churn rate and a consistent customer base. When analyzed in conjunction with the gross revenue retention metric, NRR provides you valuable insights into a company's profitability.
A high NRR is a good indicator of scalable and predictable growth. The higher the rate, the better your prospects with investors.
The median NRR for all SaaS companies is generally placed at 100%. However, products with higher ACV or Annual Contract Value can have a much higher NRR. Besides, an NRR of 90% is good enough for SaaS companies dealing with small and medium businesses. However, if you are an Enterprise SaaS, a 125% NRR is a positive sign for your business.
Hence, the objective is to increase your NRR. Let’s explore how it can be done.
5 Brilliant Ways to Increase Your Net Revenue Retention Rate
1. Reduce customer churn
Companies that thrive on NRR feel the pinch of losing high-value customers more in comparison to low-value clients. In a SaaS business, there are various methods to analyze the churn. Besides, there are different types of churn to consider, such as:
- Customer support issues that result in cancellations.
- Friction with the product’s user experience.
- Lack of supportive features in the product.
- Occasional use rather than regular service for the product.
- Unintentional churn that’s sometimes unavoidable.
To handle customer churn, it is best to analyze and list the fundamental reasons driving it. For e.g., ensure your self-service troubleshooting materials are clear and understandable.
Next, invest in aspects that will make maximum impact. Add new features to your product, build a good support team, invest in UX, or simply reassess your pricing strategy.
2. Limit your downgrades
Compared to customer churn, downgrades are better and can be used to prevent churn.
It works this way: List down the customers who have started cancelling. Offer them the option to pause or reduce their subscription tier instead.
Also, to improve customer retention rates, you'll need to investigate why customers are downgrading. You can develop your tactics based on what you uncover. These measures may include:
- Enabling customers to choose the package that best suits their needs.
- Adopting a more flexible pricing strategy.
- Redefining your proposition value.
- Optimizing your packages to bring in more renewals.
- Offering a better timeline to upsell or cross-sell.
3. Offer long-term contracts
Long-term contracts at a discounted price will give your customers more time to stay with you and see how they benefit from your products. Once they realize the benefits, they are less likely to move away from you towards your competitors.
4. Highlight the benefits of prompt upgrades
Churn may happen because your customers have yet to realize the value of your product. If that’s the case, it’s time to step up your efforts in reminding them about it. Take, for instance, Grammarly, the writing improvement tool. Every week it sends emails that summarize the user’s usage statistics. It explains how the product has helped the user the most.
Capitalize on FOMO or Fear Of Missing Out. Remind your customers what they are missing out on not buying your product. Making it easy for them to get the extra value will lead to more expansion revenue.
5. Incentivize teams to drive expansion
You can increase your team's motivation by adding a variable pay component to help them focus on proactively surfacing upsell and growth opportunities. This makes CSMs (Customer success managers) more accountable by directly aligning their responsibilities to the team’s overarching goals.
While the above ways will help you increase your expansion revenue or curb churn, we also recommend that you pay attention to your SaaS pricing. And when it comes to pricing implementation, look no further than Togai - metering & pricing software that offers the quickest way to implement any pricing strategy.
Net Revenue Retention: The Game Changer
Do not underestimate NRR as just another metric to curb customer churn. It is a major indicator of company growth and performance.
For more such information on critical SaaS metrics to apply for your business, dive into our resources section.
