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Estd 4.22.2023
In the competitive landscape of SaaS businesses, tracking the right metrics can make the difference between sustainable growth and stagnation. Among these metrics, Net Revenue Retention (NRR) stands out as perhaps the most critical indicator of long-term success. While customer acquisition metrics grab headlines, NRR offers a window into something potentially more valuable: your ability to grow revenue from existing customers over time.
Why NRR Matters to SaaS Leaders
Net Revenue Retention measures how well you maintain and expand revenue from your existing customer base, even accounting for churn and downgrades. Unlike gross retention, which only tracks how well you retain revenue, NRR includes expansion revenue—making it a comprehensive health metric for your business.
According to OpenView Partners' 2023 SaaS Benchmarks report, companies with NRR above 120% are valued significantly higher and grow faster than those with average retention rates. In fact, public SaaS companies with NRR above 120% trade at 13-15x ARR multiples, compared to 6-8x for those with lower retention rates.
How to Calculate Net Revenue Retention
The formula for calculating NRR is straightforward:
NRR = (Starting MRR + Expansion MRR - Contraction MRR - Churned MRR) ÷ Starting MRR × 100%
Let's break down each component:
- Starting MRR: The Monthly Recurring Revenue at the beginning of the period from your existing customers.
- Expansion MRR: Additional revenue from existing customers (upsells, cross-sells, usage increases).
- Contraction MRR: Revenue lost from existing customers who downgraded.
- Churned MRR: Revenue lost from customers who canceled entirely.
A Practical Example
Let's illustrate with a real-world example:
Imagine your SaaS company starts January with $100,000 in MRR from existing customers. During the month:
- You upsell premium features to several customers, generating $15,000 in expansion revenue.
- Some customers reduce their number of seats, resulting in $5,000 in contraction.
- A few customers cancel their subscriptions entirely, representing $10,000 in churn.
Applying the formula:
NRR = ($100,000 + $15,000 - $5,000 - $10,000) ÷ $100,000 × 100% = 100%
This gives you an NRR of 100%. While this indicates you're maintaining your revenue base, top-performing SaaS companies typically aim for 110-130% NRR.
What Your NRR Is Telling You
Your NRR percentage carries significant meaning:
- NRR > 100%: Your business is growing even without adding new customers.
- NRR = 100%: Your business is stable but not growing from existing customers.
- NRR < 100%: Your existing customer base is shrinking, requiring new customer acquisition just to maintain revenue.
According to Bessemer Venture Partners, "best-in-class" SaaS companies maintain NRR of 120% or higher, indicating they grow 20% annually just from their existing customer base.
Best Practices for Measuring NRR
To ensure your NRR calculations provide actionable insights:
1. Track NRR by Customer Segment
Different customer segments typically show varying retention patterns. Enterprise customers often have higher NRR (sometimes exceeding 130%) than SMB customers. Breaking down NRR by segment can reveal where to focus expansion efforts.
2. Measure NRR over Multiple Time Periods
While monthly tracking is common, also calculate your NRR on a quarterly and annual basis. Annual NRR often provides the clearest picture of true retention by smoothing out seasonal variations.
3. Separate Logo Retention from Revenue Retention
Track both the percentage of customers retained (logo retention) and revenue retained. This helps distinguish between losing many small customers versus a few large ones.
4. Account for Seasonality and Contract Timing
Many SaaS businesses experience seasonal patterns or contract renewal cycles that can temporarily distort NRR. Be sure to normalize for these factors when evaluating performance.
Strategies to Improve Your NRR
If your NRR isn't where you want it to be, consider these proven approaches:
Proactive Customer Success
Companies with dedicated customer success teams report 26% higher NRR than those without, according to Gainsight. Implement health scores and early warning systems to identify at-risk accounts before they churn.
Value-Based Pricing Models
Usage-based and value-based pricing automatically aligns growth in your revenue with the value customers receive. Stripe found that companies with usage-based models have 10-15% higher NRR than those with strictly seat-based pricing.
Strategic Expansion Paths
Design your product and pricing to create natural expansion opportunities:
- Feature-based upsells
- Usage-based expansion
- Seat/user expansion
- Cross-selling complementary products
Regular Business Reviews
Implementing quarterly business reviews (QBRs) with customers has been shown to increase expansion opportunities by 36%, according to ChurnZero research.
Beyond NRR: Complementary Metrics
While NRR is essential, pair it with these metrics for a complete picture:
- Gross Revenue Retention (GRR): Measures retention without including expansion.
- Expansion Revenue Rate: The percentage of new revenue coming from existing customers.
- Customer Lifetime Value (CLV): The total value of a customer over their relationship with your company.
- Customer Acquisition Cost (CAC): How much you spend to acquire each new customer.
Conclusion
Net Revenue Retention stands as the definitive growth metric for SaaS businesses. When your NRR exceeds 100%, you've achieved the holy grail of SaaS: a business that grows even if you stopped acquiring new customers entirely. By meticulously tracking and optimizing your NRR, you place your company on the path to sustainable, efficient growth.
For executive teams, board presentations, and fundraising conversations, few metrics carry more weight than a strong and improving NRR. Make it your North Star, and you'll naturally align your organization around delivering ongoing customer value—the foundation of all successful SaaS businesses.