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Net Revenue Retention (NRR) – What It Is, Why It’s Important, and How You Can Calculate It

Want to know what Net Revenue Retention is and how it can benefit your SaaS company? Learn how to calculate it, how it differs from GRR and ARR, and why it’s so important.

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Acquiring new customers is a challenging task for most SaaS companies. Retaining your existing customer base and getting a bigger share of their wallet (expansion ARR) is the best way to minimize customer acquisition costs. Net Revenue Retention (NRR) plays a critical role in this regard.

So what is Net Revenue Retention? Net Revenue Retention or NRR is the percentage of recurring revenue a SaaS company retains from its existing customers over a specified time period. It excludes new customer revenue. NRR is a key SaaS metric that measures how well a SaaS company retains its customer base and generates additional revenue from it over time, which can be a good indicator of its sustainability and scalability.  

NRR indicates how scalable and sustainable a company’s customer base is. This article shows how to calculate NRR and explains why SaaS companies should monitor this metric along with challenges that arise when analyzing NRR.

Table of Contents
Why is net revenue retention important for SaaS companies?
How to calculate net revenue retention
Why analyzing NRR can be challenging
How Drivetrain simplifies net revenue retention analysis
FAQs

In this section, we’ll examine why it’s crucial that SaaS companies monitor their NRR rate. After all, with so many metrics for businesses in the SaaS space to choose from, why is NRR important in particular? Let’s dive into all the reasons below.  

NRR signifies growth

If your company’s NRR is above 100%, then you can rest assured that the business is growing. Its revenues are compounding on an annual basis, which makes it attractive to investors.

High NRR can take the pressure off sales

When a company’s NRR is above 100%, the business doesn’t need to worry as much about making new sales to compensate for churn. It can rest assured that its revenue from existing customers is compounding over time. A high NRR indicates your company does not have to rely on customer acquisition as the sole growth strategy.

High NRR leads to high valuations

This metric matters to investors because it indicates your company’s ability to retain and expand contracts along with helping you figure out where you’ll land by the end of the year. A high NRR is an excellent indicator of a company’s customer success and generally means that the company is doing a good job of controlling its customer acquisition costs (CAC). If your company is growing quickly and valued on growth, NRR offers investors a quick way to value it.

RevOps Squared recently highlighted that the R-squared correlation between the Rule of 40 and NRR is high. This indicates NRR is increasingly a powerful predictor of a company’s valuation.

Lastly, NRR is relatively easier to compute compared to LTV and churn rate, making it tougher metric to manipulate. This gives investors more confidence when using NRR as a means to valuation.

NRR impacts growth exponentially

A high NRR implies a company retains and expands its customer base on a net basis efficiently, boosting LTVs, and this compounds its growth. Companies with low NRR must expend significant resources replacing churn, thus losing ground to competitors that retain existing customers well.

Here are three simple steps to calculate net revenue retention:

  1. Calculate the annual recurring revenue (ARR) of a customer cohort during a previous period (typically, 12 months ago).
  1. Calculate the current ARR of that cohort.
  1. Divide the result of the second step by the first. Multiply that number by 100 to express your NRR as a percentage.

For a detailed step-by-step process for calculating and plotting NRR with examples, read: How to Track and Plot Net Revenue Retention (NRR) Month Over Month

Here is the Net Revenue Retention formula:

To calculate NRR, add expansion ARR to the ARR at the start of the period and subtract contraction ARR and churn ARR from the same period, then divide the result by the ARR at the start of the period and multiply by 100.
How to calculate NRR for a specific cohort.

Note that some companies and investors include price increases as a part of their NRR calculation.

When you’re learning how to calculate Net Revenue Retention, it’s important to understand the various terms in the formula:

  • ARR = The total amount of recurring revenue in a year  
  • Expansion ARR = Revenue from subscription upgrades via upsells and cross-sells by existing customers
  • Contraction ARR = Loss of revenue from subscription downgrades  
  • Churn ARR= Loss of revenue from subscription cancellations

Let’s walk through an example:

Start with ARR of 1.5 million dollars at the beginning of the period, then add 500,000 dollars in Expansion ARR and subtract 260,000 dollars for the combined churn and contraction ARR for the same period to date. Divide the total by 1.5 million dollars (the ARR at the beginning of the period) and multiply the result by 100, which produces an NRR of 116 percent.
Example calculation for a SaaS company’s NRR.

What is a good net revenue retention rate?

The higher your NRR, the better. For instance, an NRR of 116% means you’re growing by 16% even if you did not acquire a single new customer. If your customers were paying you $100 in the beginning of the year, they’re now paying you $116.

Having said that, what are the benchmarks for NRR? OpenView Partners’ 2022 SaaS Benchmarks Report listed NRR benchmarks based on company ARR and funding stages.

The median NRR (or NDR) grouped by ARR is as follows:

  • Less than $1M – 100%
  • $1-2.5M - 105%
  • $2.5-10M – 105%
  • $10-20M – 111%
  • $20-50M – 110%
  • Greater than $50M – 110%
Table showing financial and operating metrics by ARR
Financial and operating metrics by ARR (Source).

The median NRR (or NDR) grouped by funding stage is as follows:

  • Angel/Seed – 101%
  • Series A - 108%
  • Series B – 110%
  • Series C – 114%
  • Series D+ – 110%
Table showing financial and operating metrics by funding stage.
Financial and operating metrics by funding stage (Source).

While these benchmarks will help you place your performance in context, note that NRR depends on a few factors:

  • The maturity stage of your company – Mature companies tend to experience higher retention rates and expansion rates.
  • Segment focus – SMB customers are less inclined to sign long contracts compared to enterprises and churn more, thereby decreasing your NRR.
  • Pricing model – A usage-based model will likely result in more expansion, leading to higher NRR.
  • Sales motion – Freemium and land-and-expand models tend to have higher NRR rates.

What is the difference between gross and net revenue retention (GRR versus NRR?)

GRR includes account churn but excludes expansion revenue while NRR includes both. As a result, the maximum value GRR can have is 100%. It shows how well your company retains its customers – if all of your customers from the beginning of the year renew their contracts, your GRR will be 100%.  

On the other hand, NRR accounts for expansion and so can be over 100%. NRR indicates your company’s ability to both retain customers and expand contracts.

Here is the formula for Gross Revenue Retention:

 GRR equals the total of ARR at the start of the period minus the churn ARR and contraction ARR for the same period divided by ARR at the start of the period, then multiplied  by 100 percent.
How to calculate GRR.

Is measuring GRR or NRR better? The answer is, neither is better than the other. In reality, GRR and NRR simply track different things. If you want to know whether your company is keeping its customers happy with its products and customer service, then GRR is a good choice because it measures how much revenue you’re losing to customers leaving and downgrading their subscriptions (churn and contraction).  

On the other hand, if you’re looking to understand more holistically what’s happening with your customer base, then NRR is the best metric to use because it takes into account not only the negative impact of churn and contraction, but also the positive impacts of upsells and cross-sells.  

So, both metrics provide insights into your business. The choice of which metric to use really just depends on what you want to know.  

NRR vs. ARR

ARR is the recurring revenue a SaaS company earns annually while NRR measures how well the company retains its customer base and expands revenue from it. Despite sounding similar, they’re completely different.  

NRR, GRR, and ARR are all metrics commonly used to conduct KPI-based SaaS financial planning.

Although it’s a good idea for all SaaS companies to monitor their NRR rate, doing so can be difficult. Calculating NRR isn’t usually an issue, assuming you can find your current recurring revenue and compare it to a month or year ago. It is understanding the story behind the numbers that often proves more challenging.  

Remember that NRR is only one metric of many. You may have to look at several metrics to determine what’s really going on with your business. There are relational interplays between the various numbers and it’s up to you to tease out exactly what’s happening.  

When working with NRR and other interrelated metrics, Excel-based planning doesn’t cut it for SaaS companies because:

  • Manual data entry leads takes a lot of time and invariably leads to errors.
  • Spreadsheets require manual updates and as a result, quickly become outdated.
  • Spreadsheets aren’t conducive to collaboration.
  • Aggregating data from multiple sources and other spreadsheets is time-consuming.

This process can be simplified dramatically with an FP&A platform that can serve as a centralized location for all of this information, in addition to automating data sourcing and giving finance professionals the power to build whatever models they need.

Drivetrain’s financial planning and analysis software automates data gathering/uploading so your Finance team can focus on financial modeling, monitoring progress, and making adjustments to stay on target instead.  

Some of the benefits that Drivetrain offers:

  • Key metrics all in one place
  • Actionable insights to make confident decisions
  • Snapshots of business performance in real time
  • Visualizations that narrate the story behind the numbers
  • Built-in collaboration functionality for financial modeling

NRR is just one of many SaaS metrics. And it can literally take several days at a time for a finance team to build and update the NRR the business needs to understand its performance.  

Simplify your SaaS metrics-based planning processes and save significant time by using Drivetrain. Request a demo today.
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FAQs

What is Net Revenue Retention?

A key SaaS metric, Net Revenue Retention (NRR) is the percentage of recurring revenue retained from existing customers over a defined period of time.

Does Net Revenue Retention include new customers?

No, NRR excludes new customer revenue.

Why is NRR important for SaaS companies?

It is important for SaaS businesses to track NRR because it indicates growth potential, stability, and overall company health.

What is the difference between GRR and NRR?

Unlike NRR, GRR excludes expansion revenue (which caps it at 100%). On the other hand, NRR accounts for expansion and so can be over 100%.

What is a good NRR rate?

100% is the minimum NRR you must aim for if you’re seeking investment and growth. Typically, NRR increases with your company’s maturity stage. The following factors play a role in determining your NRR:

  • Segment focus – SMB customers are less inclined to sign long contracts compared to enterprises and churn more, thereby decreasing your NRR.
  • Pricing model – A usage-based model will likely result in more expansion, leading to higher NRR.
  • Sales motion – Freemium and land-and-expand models tend to have higher NRR rates

OpenView Partners’ 2022 SaaS Benchmarks Report lists NRR benchmarks based on company ARR and funding stages.

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