Net Revenue Retention is a business standard that helps to calculate the retained revenue percentage.
Analysis and understanding of revenue metrics are highly beneficial for any business. It helps business owners to get insight into the current performance of organizations and their upcoming goals and visions.
Customer retention is a crucial metric that business owners must consider. A business professional can hike the business profit from 25% to 95% with a 5% customer retention improvement. So we can analyze the value of it.
According to Statista, the SaaS market, there was an estimation of around 197 billion US dollars in 2023. In the coming time, it might grow to 232 billion US dollars. SaaS businesses successfully achieve growth while adopting retention strategies for improvement. At this point, the consideration of NRR takes place.
What Is NRR (Net Revenue Retention)?
The NRR meaning is associated with the revenue of the company. Net Revenue Retention is defined as a SaaS metric that calculates the recurring revenue from the current customer. This calculation is for a particular period.
Its other name is Net Dollar Retention (NDR) and includes downgrade, upgrade, and churn of customers. Thus, it presents the business growth potential from the existing customer base. New customers are excluded from NRR.
How To Calculate Net Revenue Retention?
After identifying the net revenue retention meaning, it is also important to know how to perform NRR calculations. Suppose there is a net increase in the revenue of the company from its current customer for a specific time. Afterward, divide it by the beginning period revenue from those same customers.
The NRR formula is as follows:
Net Revenue Rate = Starting MRR – Downgrade MRR – Churn MRR + Expansion MRR / Starting MRR x 100
Monthly recurring revenue (MRR): This represents the amount of recurring revenue the company expects to earn every month.
Expansion MRR: This metric is useful to calculate the expansion amount from cross-sells and upsells in a month from current customers.
Downgrade MRR: This is inconsistent with expansion MRR. This metric is useful to calculate the revenue decline occurring in a month by existing customers.
Churn MRR: It measures the amount of lost revenue within a month due to customer cancellation.
Lets understand the calculation of NRR with an example.
The company had $100,000 in recurring revenue at the beginning of March from the existing customers. At the March end, the company generated a revenue of $120,000 from the same customers. At the same time, the company lost $5000 in MRR due to customer churn and $1000 in MRR as a result of downgrades. Along with it, the company earned $8000 from upgrades.
Now the net revenue retention is calculated as follows
NRR = ($120,000-$5000-$1000+$8000)/ $100,000 x 100
NRR = 1,22,000/$100,000 x 100
NRR = 122%
This Net Revenue Rate can be calculated quarterly, monthly, or annually as per the company’s business nature.
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Difference Between Gross Revenue Retention and NRR
NRR and gross revenue retention are non-identical metrics. The following points justify the differentiation between these two.
Gross Revenue Retention (GRR) computes the annual revenue loss from existing customers.
Gross Revenue Retention is always measured on MRR, Contraction MRR and Churn MRR like Net Revenue Retention. It excludes Expansion MRR.
There is always confusion and conflict in deciding which metric is more appropriate. NRR includes more information, but when it comes to long-term business growth, Gross Revenue Retention is a better option.
Net Revenue Retention Formula –
NRR = Starting MRR – Downgrade MRR – Churn MRR + Expansion MRR / Starting MRR x 100
Gross Revenue Retention Formula –
GRR = Monthly Recurring revenue at the beginning of the month – churn – downgrades / MRR at the beginning of the month x 100
Net Revenue Retention Benchmarks
Benchmarks for a good NRR (Net Revenue Retention) vary depending on the size of the business. Small, medium, and large enterprises have different benchmarks.
A 90-100% NRR rate is good for small and medium businesses, while enterprise businesses need an NRR of above 100% that indicates good growth.
What Is an Ideal Net Revenue Retention Rate to Consider?
As discussed above, the NRR benchmark varies according to the business size. Following are the different NRR tiers.
- Less than 80% – It is considered to be low and indicates the company’s struggle to retain customers. In this scenario, companies should find different ways to refine retention efforts.
- 80 to 100% – It is a satisfactory NRR rate, and it means the business can retain most of the customers but is not able to grow its revenue. In this scenario, Customer lifetime value and churn rate should be considered by business professionals.
- More than 100% – It is a higher net revenue retention. This indicates that the business is successfully able to retain most of its existing customers along with revenue growth from expansions and upsells.
In some conditions, businesses are still considered to be healthy even with a net retention rate of below 100%. Let’s have a look at those conditions as follows.
Upselling
If there is a successful upselling of the existing customers to higher-priced products, then there could be a revenue increment.
Example – Suppose a company has 10 customers, and each pays $200 per month for the basic service. It upsells 5 out of those customers to the premium service, and it costs $200 per month. There could be a loss of 4 customers, but still the company will avail the revenue.
Price increase
The price increment in the product and service can lead to revenue increment from the existing customers. It is applicable even if a business loses 4 customers who have not upgraded it.
Example – Imagine a company has 10 customers who pay $100. Later on, the company increased the cost to $150 and lost one customer then also the company will observe the overall revenue retention.
Getting new customers with higher revenue potential
If the company loses some customers but gets new customers who have higher revenue potential, then it sees a hike in net revenue retention.
Example – Suppose a company loses 4 customers who pay $100 per month but get 2 new customers who pay $200 per month. It will be a net revenue increment.
Tips to Increase Net Revenue Retention Rates in SaaS Companies
We have already covered the roles and value of NRR in the business. An NRR rate is good, but the question here is how to hike it. So, here are the points for increasing net revenue retention.
- Modify your onboarding process to satisfy the needs of each customer.
- Determine the chances to upsell or cross-sell additional features that complement the customer’s current subscription.
- Analyze the customer behavior and also identify the signals of potential churn.
- Product improvement based on customer feedback and other market insights.
- Introduce a customized package that enables customers to scale their usage as per their needs and budgets.
- Offer proactive support and resources to let your client utilize maximum benefit from your product or service.
Why Is Net Revenue Retention a Valuable Term for SaaS Business?
Revenue retention is helpful to calculate revenue, and businesses can identify where the money is coming from and where it is going.
In the case of SaaS businesses, this revenue metric helps in identifying which products and services are thriving or faltering in market segments. It also unveils shortcomings in marketing, user acquisition, and sales.
The following reasons justify the importance of NRR in SaaS businesses.
Indicating the Future Growth Potential
NRR is mainly used in conjunction with other metrics like LTV and churn rate. This offers better insight into the company’s achievements and status.
Early Detection of Issues
NRR offers a business view of its revenue performance over time. This helps to identify issues early. Businesses offering subscription-based services prevent revenue loss while identifying retention issues.
Measuring the Effectiveness of Retention Efforts
A low NRR shows the company’s struggle to retain customers. It needs to improve customer satisfaction.
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Conclusion
Net revenue retention is a crucial standard metric for businesses including SaaS professions. It helps you to understand your customers’ views about your business. Moreover, it also helps to identify your company’s current performance situation and future goals. Hope, you have a solid understanding of net revenue retention.
