Net Revenue Retention (NRR) is one of the most important metrics in SaaS and ultimately determines whether a company's revenue will shrink or grow if it stops acquiring new customers. In a nutshell, it analyses the effect on income generation from existing clients, and helps businesses understand how their churn rate impacts overall revenue.
Want to know more about NRR? Then keep reading to get an in-depth understanding of the Net Revenue Retention formula and how it can help you track your customer success.
What is NRR?
Net Revenue Retention (NRR) rate, also known as Net Dollar Retention (NDR), is the percentage of recurring revenue maintained from current customers during a specific period. It’s typically measured either monthly, quarterly or annually. It let’s SaaS companies analyse both positive and negative changes in client retention, including income generated from upgrades, cross-sales, downgrades and cancellations. It also helps SaaS businesses understand how their churn rate is impacting overall revenue.
How to calculate NRR?
The Net Revenue Retention formula is –
When multiplied by 100, it will give NRR as a percentage - also known as Net Revenue Retention Rate.
Why NRR is important?
Firstly, NRR is important because it has links to SaaS businesses recovering their subscriber Return on Investment (ROI). It tells us how well a company can renew existing customers and also get more revenue from those customers following the first sale - helping to cover the costs of acquiring the customer in the first place.
Profitability is also impacted by the Net Revenue Retention Rate. According to a Harvard Business Review report acquiring a new customer can be significantly more expensive than retaining current customers– 5 to 25 times more expensive. If a business can expand existing customers while also decreasing Customer Acquisition Cost (CAC), there will be a positive impact on profitability.
What is a good NRR?
Net Revenue Retention Rate of more than 100% indicates predictable and scalable business growth. That’s because companies that achieve an NRR of more than 100% don’t need to onboard another customer to grow.
For a new SaaS company 90% to 100% NRR is acceptable. Whereas, for established SaaS enterprises, you’d expect to see a NRR above 100%. If you look at 200 private VC funded SaaS companies in the Bessemer Venture Partners portfolio you’ll see the middle 50% of companies have an NRR between 105% to 145%. So if you are working toward a raise in the near future, this is important to pay attention to.