Net Revenue Retention (NRR) Rate is a metric that helps businesses identify how much recurring revenue your business could increase from your existing customer base alone, without acquiring any new customers.
Net Revenue Retention is the percentage of Recurring Revenue retained including upgrades, downgrades and churns from existing customers over a given period. This metric is a key indicator that shows positive and negative changes with respect to Customer Retention .
Net Retention Rate is also called as Net Negative Churn Rate, Net Revenue Churn, Net MRR Renewal Rate or Net Dollar Retention Rate.
Net Retention Rate and SaaS
Churn is a critical metric for any SaaS business. Net Revenue Rate is a key churn metric that needs to be constantly monitored to understand how much impact your churning customers have on your revenue.
Churn is inevitable in any SaaS business and given how easy it is for unhappy customers to switch to your competitors, the churn metrics must be monitored closely and appropriate action has to be taken if you find that your churn is higher than the incoming business.
If the Net Revenue Retention rate is above 100% it shows that your business is healthy and is growing as a result of upgrades and additional product purchases from your business and you’re doing well even without acquiring new customers. Given the compounding nature of SaaS businesses’ revenue, even a slight change in these numbers will end up being huge down the line.
So, staying on top of the Net Retention Rate is critical for a growing SaaS business to be successful.
How to Calculate NRR
- You have 250 customers paying 100 USD a month, so your Monthly Recurring Revenue at the beginning of the month is 25,000 USD.
- 4 Customers double their licences, so they pay 200 USD each instead of 100 USD. So, the Expansion Revenue is 400 USD at the end of the month.
- 1 customer has churned so the churn at the end of the month is 100 USD.
If the value is above 100%, the business is growing even without addition of any new customers. If the value is low, efforts must to be taken to reduce churn and investing in the right customer success strategy has to be the highest priority.
Net Revenue Retention vs Gross Revenue Retention
As explained above, Net Revenue Retention (NRR) helps to understand how your revenue will look over a period if you don’t add new customers. A NRR of 100% or higher shows that your customers are happy and are getting value from your product. NRR also provides an insight into how your revenue will grow from existing customers over time.
Gross Revenue Retention (GRR) shows the Recurring Revenue from your existing customers minus cancellations and downgrades. It does not include business expansion revenue from existing customers. The primary goal of GRR is to understand how customer churn is affecting your revenue. GRR will always be less than or equal to NRR (as expansion revenue is not included).
Both NRR and GRR should be monitored as part of your customer success strategy. Where NRR shows you how much growth and revenue you can expect from your existing customers, GRR would show the revenue you would have made if the customers didn’t churn.
Your goal should be to try and increase your NRR above 100% and your GRR as close to 100% as possible.
