What is NRR?
The Net Revenue Retention (NRR) is the percentage of revenue retained from existing customers at the start of a period after accounting for expansion revenue and churn.
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How to Calculate Net Revenue Retention (NRR)
NRR stands for “Net Revenue Retention” and is a crucial key performance indicator (KPI) for SaaS and subscription-based companies.
The net revenue retention (NRR), also known as “net dollar retention (NDR),” is of particular importance in the SaaS industry because it is not only a measure of customer retention but also a company’s ability to maintain high engagement and continuously improve its current offerings to meet (and surpass) the needs of its customers.
The ability to acquire new customers is just one piece of the puzzle, with the other being the long-term retention of those customers, as well as facilitating more expansion revenue.
A consistent stream of recurring revenue from subscription or multi-year contracts is necessary for SaaS companies to sustain current (and future) growth.
With that being said, repeat customers – i.e. long-term customer relationships – are the source of recurring revenue, which is a function of high retention rates, constant engagement, and tangible improvements post-feedback.
Net Revenue Retention Formula (NRR)
NRR is equal to the starting MRR plus expansion MRR minus churned MRR – which is then divided by the starting MRR.
Expansion revenue and churned (or contraction) revenue are the two primary factors that impact a company’s recurring revenue.
- Expansion Revenue → Upselling, Cross-Selling, Upgrades, Tier-Based Price Increases
- Churned Revenue → Churn, Cancellations, Non-Renewals, Contraction (Account Downgrades)
NRR is typically expressed as a percentage for purposes of comparability, so the resulting figure must then be multiplied by 100.
Conceptually, the NRR formula can be thought of as dividing the current MRR from existing customers by the MRR from that same customer group in the prior period.
What is a Good Net Revenue Retention (NRR)?
As a general rule of thumb, a financially sound SaaS company would have an NRR in excess of 100%.
If the NRR is greater than 100%, the company is likely to expand rapidly while remaining efficient with its spending and capital allocation relative to competitors with a lower NRR.
- NRR >100% → More Recurring Revenue from Existing Customers (i.e. Expansion)
- NRR <100% → Less Recurring Revenue from Churn and Downgrades (i.e. Contraction)
A SaaS company with an NRR in the ballpark of 100% is perceived positively, i.e. that the company is on the right track.
Top-performing SaaS companies can far exceed an NRR of 100% (i.e. with NNRs of >120%), but most set a target of around 100%.
In short, the higher the NRR, the more secure a company’s outlook appears, as it implies that the customer base must be receiving enough value from the provider to remain.
Improving NRR stems from understanding not just future customers but also maintaining close relationships with existing customers.
Even churned customers can be informative resources, as a company could survey them to figure out the reasons for the cancellation, leading to actionable insights and user retention strategies to prevent future cancellations.
