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.
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)?
A SaaS company with an NRR in the ballpark of 100% is perceived positively, i.e. that the company is on the right track.
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)
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.
How to Analyze the NRR Rate in the SaaS Industry?
A track record of predictable revenue makes raising capital from venture capital (VC) or growth equity firms much easier, as the long-term revenue sources reduce the risk of future cash flows, as well as signal the potential for product-market fit.
Technically, NRR could be categorized as a revenue churn metric since it calculates the percentage of recurring revenue from existing customers that remains over a specified period.
The main use-case of tracking NRR is to gauge how “sticky” a company’s revenue is, which is affected by the product or service’s value proposition and overall customer satisfaction.
In general, a higher NRR suggests a greater customer lifetime value (LTV) and a more optimistic growth outlook for the company.
NRR vs. MRR vs. ARR: What is the Difference?
- Monthly Recurring Revenue (MRR): The normalized, predictable revenue on a per-month basis as generated from active accounts on subscription-based payment plans.
- Annual Recurring Revenue (ARR): The estimated predictable revenue generated per year by a SaaS company from customers on either a subscription plan or a multi-year contract, i.e. MRR × 12 Months.
MRR and ARR are both measures of recurring revenue from existing customers. However, the effects of future revenue churn are neglected.
Therefore, NRR takes the MRR/ARR metrics a step further by describing a SaaS company’s recurring revenue fluctuations that are attributable to factors like expansion revenue (e.g. upselling, cross-selling) and churned revenue (e.g. cancellations, downgrades).
Given enough time, a low NRR will catch up to a SaaS company and cause ARR to slow down until the underlying problems are fixed.
By only focusing on a metric like MRR, a company could be ignoring the decline in revenue from their existing customers, i.e. less consumption and more churn, which is due to prioritizing new customer acquisitions over ensuring that existing customers are satisfied.
Since ARR is based on MRR and assumes the most recent month is the most accurate indicator of future performance, it suffers from the implicit assumption that there is no future churn.
ARR cannot be analyzed on its own because a SaaS company’s ARR could be projected to grow 100%+ each year – yet the net dollar retention could be poor (i.e. <75%).
Net Revenue Retention Calculator (NRR)
We’ll now move to a modeling exercise, which you can access by filling out the form below.
SaaS NRR Calculation Example
Suppose we’re calculating the net revenue retention of two SaaS companies that are close competitors in the same market.
The two SaaS companies – Company A and Company B – have reported the following financial data.
SaaS Company A
- Starting MRR = $1 million
- New MRR = $600,000
- Expansion MRR = $50,000
- Churned MRR = –$250,000
SaaS Company B
- Starting MRR = $1 million
- New MRR = $0
- Expansion MRR = $450,000
- Churned MRR = –$50,000
Both Company A and Company B have begun the month with $1 million in MRR.
The ending MRR is equal to the starting MRR plus the new and expansion MRR minus the churned MRR.
After applying the formula, the ending MRR for both companies is $1.4 million.
- Ending MRR = $1.4 million
The differences between the companies appear once we calculate the net revenue retention (NRR).
- Net Revenue Retention (NRR), Company A = ($1 million + $50,000 – $250,000) ÷ $1 million = 80%
- Net Revenue Retention (NRR), Company B = ($1 million + $450,000 – $50,000) ÷ $1 million = 140%
There is a stark contrast between the two companies – 80% vs. 140% NRR – which stems from their existing customer bases.
In the case of Company A, the churned MRR is masked by the new MRR, i.e. losses are offset by the new customers.
However, the continued reliance on new customer acquisitions to uphold MRR is not a sustainable business model, so 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 – which we assumed for illustrative purposes.
Still, the ending MRR is identical between the two competitors, and the NRR is much higher for Company B from the greater expansion MRR and less churned MRR, implying more customer satisfaction and an increased likelihood of continued long-term recurring revenue.
In conclusion, the insights derived from analyzing the net revenue retention (NRR) of our two SaaS companies is that Company B’s future growth potential appears to be less reliant on acquiring new customers because of its greater expansion MRR and lesser churned MRR.