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July 31, 2022

If you’re in the business of selling software or subscriptions, then you’re probably always looking for ways to increase your Net Revenue Retention (NRR). But what is net revenue retention and How is NRR calculated?

Net Revenue Retention (NRR) measures the percentage of revenue that a company retains from its customers over a period of time. In other words, it’s a metric that shows how much repeat business a company is generating.

Two factors go into how is NRR calculated: customer churn and expansion MRR. Customer churn is the percentage of customers who cancel their subscription or stop using your product within a given period. Expansion MRR is the additional revenue generated from upsells, cross-sells, or price increases with existing customers.

To calculate NRR, you take the total recurring revenue at the end of a period and subtract any customer churn during that same period. Then, you add in any expansion MRR generated during that time frame.

How Is NRR Calculated?

NRR, or net retention rate, is a KPI for software-as-a-service (SaaS) businesses.

The NRR is of special importance to the SaaS sector because it is not only an indicator of customer churn but of how well a provider can retain its existing customers, as well as continually improve its offering to meet or exceed the evolving needs of customers.

Acquiring a new customer is just the first step, with retention being just as important. Also, the more you can expand your customer base, the more you can increase revenue.

Subscription or long-term contract revenue is essential for sustaining a SaaS company’s growth and cash flow.

With that being said, it’s important to keep your customers happy and engaged if you want to generate recurring revenue. That means having a high retention rate and constantly improving your product or service based on feedback.

Revenue Retention Rate

A strong revenue retention rate is a key metric for any business, but it’s especially important for startups looking to raise money from VCs or growth equity firms. A track record of predictable revenue makes it much easier to convince potential investors of the long-term viability of the business, as it signals that the company has found a product-market fit.

NRR is a key metric for measuring the health of a company’s revenue. It tells us how much revenue is being retained from existing customers and is, therefore, a good indicator of customer satisfaction and product stickiness.

By tracking NRR, companies can gauge how well their product or service is performing and make necessary changes to improve customer satisfaction.

NRR is a key metric for subscription-based businesses as it represents the percentage of revenue that is retained from month to month. A high NRR indicates that customers are sticking around and that the company is growing its customer base.

Net Revenue Retention (NRR) Formula

NRR is calculated by taking your starting MRR and adding any expansion MRR, then subtracting any churned MRR. This number is then divided by your starting MRR to get your NRR percentage.

NRR Formula Net Revenue Retention (NRR) = (Starting MRR + Expansion MRR − Churned MRR) / Starting MRR

Net Revenue Retention (NRR) is a metric that measures the percentage of revenue that a company keeps from month to month. To calculate NRR, take the starting monthly recurring revenue (MRR), add any expansion MRR, and subtract any churned MRR. This will give you the total NRR for that month.

The two most important factors impacting your company’s monthly recurring revenue stream are expansion growth and reduced customer turnover.

Upselling, cross-selling, and upgrading are all examples of expansion, or new, revenue streams. Churn, cancellation, and downgrading are all forms of lost revenue.

NRR is typically expressed as a percentage, which can then be multiplied by 100 for comparability purposes. This figure provides insight into a company’s recurring revenue and how it has changed from one period to the next.

SaaS Industry Benchmarks: Improving NRR

A SaaS company with an NRR of 100% or higher is generally perceived as being on the right track. This metric is a good indicator of the company’s overall health and performance.

Companies with an above 100 percent net return on assets (NRO) are likely to be growing quickly while efficiently allocating their capital and expenses. This can be attributed to the company’s ability to produce more than it consumes.

Top-performing SaaS companies can have NRRs well above 100% but most set a target of around 100%.

If the NRR is above 100, then a company is likely growing at a healthy rate, while efficiently allocating its capital and expenses.

SaaS companies that are top performers can have NRRs that are much higher than 100%. Most companies aim for an NRR of around 100%, but the best in the industry exceed this.

As implied by a higher NRR, a company’s outlook appears to be more secure when its customer base is receiving enough value from the provider. This suggests that maintaining close relationships with existing customers is key to improving NRR.

Understanding not just potential customers but keeping in touch with current ones is key to improving NRR.

Even if a customer has churned, they can still provide valuable insights to a company. By surveying them, companies can learn about the reasons for cancellations and take steps to prevent future cancellations through user retention strategies.

Net Revenue Retention (NRR) Example Calculation

Let’s say we are comparing the net retention between two competing software companies in the same industry.

Company A has a net revenue retention rate of 120%, while Company B has a net revenue retention rate of 90%.

Both Company A and Company B have started the month off with $1 million in MRR.

To calculate NRR, we take the ending MRR of $1.4 million and subtract the starting MRR of $1.2 million. This gives us net revenue retention of $200,000. Therefore, both companies have an NRR of 14.3%.

Starting MRR + new and expansion MRR – churned MRR

Once we calculate Net Revenue Retention (NRR), the differences between the companies become clear.

To calculate the net revenue retention (NRR), we take a company’s total revenue and subtract any customer churn or contraction. This number is then divided by the previous period’s total revenue. Company A has an NRR of 80%, while Company B has an NRR of 140%.

The stark contrast in net revenue retention (NRR) between the two companies is due to their existing customer bases. Company A’s churned MRR is masked by new MRR, meaning that losses are offset by new customers.

Since new customer revenue is offsetting the lost revenue from churning customers, the net loss is disguised.

The continued reliance on new customer acquisitions to uphold MRR is not a sustainable business model. Therefore, assuming from the MRR alone that the company is in good shape could be a mistake.

On the other hand, Company B acquired zero new MRR in the month.

Still, the ending MRR is identical between the two competitors. However, Company B has a much higher NRR due to the greater expansion MRR and less churned MRR. This implies that customers are more satisfied with Company B and that there is a greater likelihood of continued long-term recurring revenue for this company.

Since company A has higher acquisition costs, it will need to grow its customer base faster to offset those expenses.

Conclusion

NRR is a key metric for any company selling software or subscriptions. By understanding how is NRR calculated, you can take steps to increase your own NRR and grow your business.

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