.png)
Estd 4.22.2023
Introduction
For SaaS executives, few metrics carry as much weight as Net Revenue Retention (NRR). While customer acquisition often dominates strategic conversations, the ability to grow revenue from existing customers has proven to be the cornerstone of sustainable growth for the most successful SaaS businesses. According to OpenView Partners' 2023 SaaS Benchmarks report, companies with NRR above 120% command valuation multiples 2-3x higher than those with NRR below 100%. This stark contrast highlights why pricing strategy isn't just about setting initial rates but designing frameworks that facilitate expansion revenue over the customer lifecycle.
In this article, we'll explore the intricate relationship between pricing models and Net Revenue Retention, offering actionable strategies that SaaS executives can implement to unlock sustained growth from their existing customer base.
Understanding the NRR-Pricing Connection
What Net Revenue Retention Really Tells You
Net Revenue Retention measures the percentage of revenue retained from existing customers over a specific period, typically one year, including expansions, contractions, and churn. Unlike gross retention, NRR can exceed 100% when expansion revenue outpaces losses from downgrades and churn.
For SaaS executives, NRR serves as a critical indicator of:
- Product-market fit
- Customer success effectiveness
- Pricing optimization
- Overall business health
According to Bessemer Venture Partners' State of the Cloud 2023 report, top-quartile public SaaS companies maintain NRR above 120%, while the median hovers around 110%. This difference might seem small, but compound it over several years, and the growth trajectory diverges dramatically.
How Pricing Architecture Influences NRR
Your pricing model creates either ceilings or escalators for customer expansion. Traditional flat-fee subscriptions often create revenue ceilings, while consumption and value-based models can establish natural expansion paths.
Kyle Poyar, Partner at OpenView, notes that "the most successful SaaS companies don't just set prices—they design pricing architectures that align with customer value realization and create natural expansion opportunities."
Strategic Pricing Models That Drive Expansion Revenue
1. Value Metric-Based Pricing
Value metric pricing ties costs directly to a specific measurement of value that grows alongside customer success. The ideal value metric:
- Scales with customer value
- Aligns with your cost structure
- Is easily understood by customers
- Naturally expands as usage deepens
Case Study: Slack's per-active-user pricing model exemplifies this approach. As organizations adopt Slack more broadly, their subscription naturally expands. According to public filings before its acquisition, Slack maintained an impressive NRR above 130% for 12 consecutive quarters, largely attributable to this pricing approach.
2. Tiered Feature Packaging
Tiered pricing structures packages features into distinct service levels, creating natural upgrade paths as customer needs evolve. When designing tiers:
- Create meaningful differentiation between tiers
- Place expansion features in higher tiers
- Ensure transitions between tiers deliver obvious value increases
- Design with customer growth journeys in mind
Case Study: HubSpot's evolution from a marketing platform to a comprehensive CRM suite demonstrates the effectiveness of tiered packaging. By strategically placing advanced features in higher tiers and introducing new product hubs, HubSpot has achieved NRR above 110% for several years, according to their investor presentations.
3. Usage-Based/Consumption Pricing
Consumption-based models charge based on actual usage rather than fixed subscription fees. This approach:
- Lowers adoption barriers with pay-as-you-go models
- Creates natural expansion as customers increase usage
- Aligns perfectly with customer value realization
According to Openview's 2023 SaaS Benchmarks, companies with usage-based pricing components report 28% higher NRR compared to those with purely subscription-based models.
Case Study: Snowflake's consumption-based data warehousing pricing has fueled remarkable growth. Their "Data Cloud" pricing, based on actual compute and storage usage, allowed them to achieve a reported 169% NRR in 2021, among the highest in the industry.
Implementing Expansion-Friendly Pricing Strategies
Optimize Your Expansion Paths
Every pricing model should include clear, value-justified expansion paths:
- Vertical expansion – upgrading to higher-tier plans
- Horizontal expansion – adopting additional products or modules
- Usage expansion – increasing consumption of the core value metric
- Seat expansion – adding more users or licenses
ChartMogul's SaaS benchmarks indicate that companies employing multiple expansion paths simultaneously achieve NRR rates 15-20 percentage points higher than those relying on a single expansion vector.
Leverage Strategic Add-ons
Rather than bundling all capabilities into core packages, strategically unbundling high-value features as add-ons can drive significant expansion revenue:
- Target add-ons to specific customer segments with precise needs
- Price add-ons relative to the additional value they deliver
- Use add-ons to test market appetite for new features
Example: Salesforce has mastered the add-on approach, with offerings like Einstein AI, advanced analytics, and industry-specific solutions. These add-ons contribute significantly to their consistently strong NRR, reported at 119% in their FY2023 earnings.
Implement Strategic Price Increases
While often overlooked, well-executed price increases can significantly impact NRR:
- Value-based increases – tied to demonstrable new value delivery
- Segment-specific adjustments – targeting specific customer segments
- Grandfathering strategies – protecting loyal customers while adjusting for new ones
According to ProfitWell research, SaaS companies that implement strategic annual price increases see NRR improvements of 12-15 percentage points compared to those maintaining static pricing.
Measuring and Optimizing the Pricing-NRR Connection
Critical Metrics to Monitor
Beyond the headline NRR figure, track these metrics to understand pricing effectiveness:
- Expansion MRR Rate – percentage of new MRR from existing customers
- Average Revenue Per Account (ARPA) Growth – increase in average customer value
- Upgrade Rate – percentage of customers moving to higher tiers
- Time-to-Expansion – average months before first expansion
- Second-Order Revenue – revenue from customer referrals
Testing Frameworks for Pricing Evolution
Continuous pricing optimization requires systematic testing:
- Cohort analysis – comparing NRR across different pricing models
- A/B testing – testing pricing variants with comparable segments
- Value metric experiments – testing alternative value metrics with sample customers
SaaS Capital's research indicates that companies conducting regular pricing experiments (at least quarterly) achieve NRR rates 10-15 percentage points higher than those reviewing pricing annually or less frequently.
Conclusion
The relationship between pricing strategy and Net Revenue Retention isn't merely correlational—it's causal. Your pricing architecture either creates ceilings that limit growth or escalators that facilitate expansion as customer value increases.
For SaaS executives, the imperative is clear: designing pricing for initial customer acquisition isn't enough. The most successful companies architect pricing models that align with customer success, creating multiple natural expansion opportunities throughout the customer lifecycle.
By implementing value-metric based models, strategic tiering, consumption components, and well-designed expansion paths, you can transform your pricing from a static revenue generator into a dynamic growth engine that continuously improves your Net Revenue Retention.
Given that a 10-point improvement in NRR compounds to more than 2.5x the growth impact over five years, few strategic initiatives offer a higher ROI than optimizing your pricing for expansion revenue.