Paddle Billing
ProfitWell MetricsSustainable business growth relies on retaining and growing with your existing customer base. For this, reporting your monthly recurring revenue (MRR) doesn’t quite cut it. Here’s why net revenue retention (NRR) is the new benchmark metric for SaaS.
What is net revenue retention (NRR)?
Net revenue retention is a SaaS metric that measures the recurring revenue generated from existing customers over a set period. Also referred to as net dollar retention (NDR), NRR considers upgrades, downgrades, and customer churn to indicate business growth potential from the current customer base. Net revenue retention does not include new customers.
This video, originally created for Paddle Studios, includes a breakdown of NDR:
Why is net revenue retention important?
NRR is a key metric for subscription companies and SaaS leaders looking to assess how sustainable their business’ revenue growth is. The volatility of the current era sees a shift away from “growth at all costs” to a focus on sustainable growth, particularly among investors. Sustainable growth in SaaS relies on retaining your existing customers and growing their accounts with you. For this, reporting your monthly recurring revenue (MRR) doesn’t quite cut it.
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High churn rates or account contraction can indicate issues with your product value proposition, pricing strategy, customer experience, etc. But if your yardstick for success is MRR growth, these challenges can be masked by high acquisition rates. A high net revenue retention rate shows predictable and scalable growth. And the higher the rate the better your company’s prospects with investors. Just look at the NRR rates of SaaS companies with some of the most successful IPOs in recent years:
- Snowflake - 158%
- Twilio - 155%
- Elastic - 142%
- PagerDuty - 139%
- AppDynamics - 123%
How to calculate net revenue retention?
To calculate net revenue retention, subtract lost revenue (revenue churn and account contraction) from total revenue (starting recurring revenue plus account expansion) and divide by your starting amount.
So the simple net revenue retention formula is:
(Contraction MRR – (Churn MRR + Expansion MRR)) / Starting MRR
Say you’re calculating your NRR for April 2022. You need to know:
Starting MRR: How much recurring revenue you were receiving from your customer base the previous month.
Expansion MRR: How much new revenue was generated from existing customers this month from upsells and cross-sales.
Contraction MRR: How much revenue was lost from existing customers from downgrades.
Churn MRR: How much recurring revenue was lost from the customers churning.
What is a good net revenue retention rate?
You’re looking for over 100% — with industry benchmarks telling us that 109% is what you should be aiming for. Realistically though, the higher the better, as it indicates your customers are happy and get value from the relationship — and that they can be a driving force for growth. As we saw above, the most successful companies at IPO have been those with NRR rates well above 120%. Anything less than 100%, and you should be investigating why your customers are churning or contracting at the rate they are.
What’s the difference between NRR and GRR?
Similar to NRR, gross revenue retention (GRR) subtracts churn from total revenue in a given time period, but it excludes account expansion and contraction from consideration. It follows the formula: (Total revenue - churn) / Total revenue. Unlike NRR, your GRR rate can not exceed 100%, as it doesn’t consider the growth rate of existing customer revenue. While NRR measures sustainable revenue growth, analysts use GRR to get a clearer measure of income retention.
How to improve your net revenue retention
There are three areas to focus on to improve your net revenue retention rate:
1. Reducing churn
There are different ways to analyze churn in a SaaS business, and different types of churn to consider. For many SaaS companies, issues with customer support result in cancellations. Friction in the user experience within the product is also a common driver of churn. A customer may only have occasional use for your product, or require features you’re not yet supporting. And sometimes churn is unintentional.
The best tactics for improving churn are based on the real reasons why customers are leaving in the first place. So start there. Look for low-hanging fruit, like better signposting to self-serve materials for troubleshooting, for instance. Then invest in the areas that will make the greatest impact, like new features, building out your support or success teams, investing in UX, or revisiting your pricing strategy.
2. Limiting downgrades
Downgrades are preferable to churn and can be used as a churn prevention tactic. You could, for instance, give customers who have started a cancellation flow or reached out to end their subscription the option to pause or reduce their subscription tier instead. You can expect a lot of the tactics you implement to reduce churn to reduce downgrades too. But downgrades are also the result of purchasing the wrong subscription or product upfront or upgrading at the wrong time. Similar to churn analysis, you’ll want to dig into why customers are downgrading to find any underlying trends that you can resolve and improve customer retention rate.
Depending on what you discover, tactics for limiting downgrades could include:
- Better enabling customers to choose the right package for their needs
- A more flexible pricing strategy
- Reworking your value proposition
- Reconfiguring your packages to drive more renewals
- A more considerate timeline for upselling or cross-selling maneuvers
3. Improve upselling and cross-selling
One of the best ways of expanding revenue from your existing customer base is to focus on the value metrics that matter most to your customer segments. Once you understand the value of the solution your product offers, you can design your pricing and packaging in a way that nudges customers to grow their spending over time. This requires testing and revisiting as the market evolves and whenever you expand into new markets or segments.
You can take steps to remind customers of the value they're getting from your product. Writing improvement tool Grammarly, for instance, uses weekly insights emails that summarize a user’s usage statistics, highlighting where the product has helped them the most. You can also remind them what they’re missing out on by not upgrading their access or buying a new product line when they’re logged into their account. Just don’t be too pushy — that’ll likely lead to a faster churn or downgrade.
If you want to learn more about expansion revenue, here’s a useful resource on the topic.
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Net revenue retention (NRR) FAQs
What is NRR in SaaS?
Net retention rate is one of SaaS companies' key customer success metrics. It is an important metric that indicates the profitability of a SaaS business generated solely from your existing customers.
What is the average net revenue retention for SaaS companies?
The average net revenue retention for SaaS companies is between 60% and 148%. For public SaaS companies, the average NRR is around 114%.
What is the difference between NRR and MRR?
Net revenue retention (NRR) shows the percentage of earned revenue from existing customers and indicates business growth potential. Monthly recurring revenue (MRR) predicts total revenue by factoring in all active subscriptions for a particular month.
