10 min read
If you’re in SaaS, we don’t have to tell you that competition is stiff. With increases in automation, technology, and innovation, it can be rough to stay ahead of the game. A stellar customer experience can help you get there, though. Even a few years ago, 81% of industry leaders reported that they expected to be competing mostly on the basis of customer experience, according to Gartner.
If that’s really the case, customer success, sales, and marketing teams need access to more and better information to ensure they’re delivering value to customers day in and day out. Net revenue retention (NRR) is the mission-critical data point that can provide companies with subscription-based models with the information they need to engage customers and beat out the competition.
In this article, we’re exploring what net revenue retention is, why it matters, and how to calculate it. We’re also sharing how our own customer platform, Planhat, is delivering more efficient customer operations to help teams drive their net revenue retention rate to new heights.
To begin, let’s look at net revenue retention vs net dollar retention. These terms essentially mean the same thing, and they can be used interchangeably.
Why the two terms, then? It really comes down to language. There are several countries where the official currency is the dollar—including places like the United States, Australia, Canada. In these locations, the term net dollar retention (NDR) makes sense—their revenue is measured in dollars—and businesses that operate in these countries typically calculate NDR using dollars.
In countries with different currencies—like euro, yen, pound, or krona, for example—the term net revenue retention (NRR) makes more sense. For companies operating in these countries, net revenue retention (NRR) is typically calculated using their official currency.
To summarize: NRR and NDR are the same metric. In this article, we’ll use both terms interchangeably.
A simple net revenue retention definition is this: Net revenue retention is a metric that is used to measure increases or decreases in a company’s existing revenue streams. In other words, NRR—which is presented as a percentage—looks at changes to a business’s existing customers and subscriptions. So, then, does net dollar retention include new customers? No, it does not. The focus here is with existing customers.
NRR takes into account key metrics such as:
Annual recurring revenue (ARR) or monthly recurring revenue (MRR), depending upon the time period you wish to analyze.
Account upsells or upgrades for the time period you will analyze.
Account downsells or downgrades for the time period you will analyze.
Customer churn for the time period you will analyze.
As compared to other high-level metrics that look solely at new customers or overall revenue, NRR provides a fuller picture of a company’s financial health—especially for SaaS companies that rely on ongoing subscriptions.
Companies with a high NRR (higher than 100%) are performing well. Even if their number of customers isn’t rising, their net revenue could be with the right amount of upsells. Companies with a low NRR, on the other hand, may need to look into what’s causing it.
Increasingly, NRR has become the north-star for companies—and customer success (CS) teams especially—to better track customer satisfaction, engagement, and overall CS performance. Not only that, but it really underscores the essential role that customer success managers (CSMs) play in revenue generation.
NRR is an often underestimated metric, but it’s one that more and more businesses–especially those in the SaaS market—can’t afford to ignore. We know that adding another metric that needs to be tracked into existing workflows can seem like a challenge up front, but there’s a reason why some of the highest-performing businesses use it. With Planhat by your side, tracking NRR couldn’t be easier. Our customer platform makes it easy for companies to track, refine, and grow their post-sale strategies. We’ll talk more about what Planhat can do for your business later in this article. First, here are just two of the many reasons why we think tracking net revenue retention in SaaS and other verticals is mission critical.
The fact is, net revenue retention is one of the most important metrics available for companies that operate on a subscription model. Tracking prospects in the pipeline can offer a glimpse into potential future revenue. Tracking won deals can give you an idea of new revenue. Tracking MRR or ARR can provide your predictable annual revenue. All these metrics are important, of course. But tracking net revenue retention gives teams deep insight into upsells, downgrades, churn, and more. Understanding your NRR can help customer success teams—and entire companies—better understand customer retention, growth, and overall financial health.
To become more business-critical in your operations, it’s important to develop strategies that allow you to proactively communicate with customers to build and maintain relationships; it’s not enough to connect when there’s an issue or it’s renewal season. Tracking NRR can help teams build workflows that can help boost customer retention, customer health—and ultimately improve upsells and cross-sells. All of these are hyper critical for companies looking to grow their revenue and expand operations, with McKinsey & Company reporting that NRR is one of the keys to generating real, sustained growth.
With the right key metrics in front of you, calculating the net revenue retention rate formula is a breeze. To get started you’ll need the following pieces of information:
Annual recurring revenue or monthly recurring revenue from the beginning of the time period you wish to analyze.
The dollar amount earned from account upgrades, upsells, or cross-sells.
The dollar amount lost from account downgrades or downsells.
The dollar amount lost from customer churn.
The bottom three bullet points from the list above should only include numbers from the time period you wish to analyze. If you have those numbers on hand, simply use the formula below. If you need assistance calculating ARR or MRR, skip down to the “Other Important Calculations” section.
Net revenue retention is equal to your ARR or MRR (again, depending on the time period you wish to analyze) plus any upsells, minus any downgrades, minus any churn, divided by your ARR or MRR. Written mathematically, that looks like this:
NRR = (Beginning ARR or MRR + Upsells - Downgrades - Churn) / (Beginning ARR or MRR)
In the next section of this article, we’ll explore an example to walk you through the process from beginning to end.
To begin, an important note: With both MRR and ARR, you should be looking at annual or recurring revenue. One-time fees, projects, or month-to-month contracts aren’t generally considered in these metrics
There are a few different ways to calculate MRR. The easiest formula is simply to take the total number of annual customers you have and multiply that by your average monthly revenue per customer. Written mathematically, that would look like this:
MRR = Number of Annual Customers X Average Monthly Revenue Per Customer
For companies with more complex subscription models, it’s important to understand how different price points impact your average monthly revenue per customer. You may wish to reflect that in your calculations.
Once you’ve calculated MRR, finding your ARR is easy! Simply multiply that number by 12. Written mathematically, that would look like this:
ARR = Number of Annual Customers X Average Monthly Revenue Per Customer X 12
ARR = MRR X 12
Let’s take a look at a quick example to walk you through the entire process. Our imaginary business, QRS Company, is a SaaS company that offers two subscription levels. They have the following key metrics.
Average monthly revenue per customer = $400 dollars Number of existing annual customers = 160 Amount of upsells for the month = $300 Amount of upsells for the year = $5,800 Amount of downgrades for the month = $200 Amount of downgrades for the year = $1800 Churn for the month = $250 Churn for the year = $1600
To get started, let’s calculate the MRR and ARR.
To calculate the MRR, we’ll multiply $400 X 160 for a total of $64,000.
To calculate the ARR then, we’ll take $64,000 and multiply it by 12 for a total of $768,000.
Now that we have these figures in place, we can calculate the NRR for both the month and the year. Let’s start with the NRR using the monthly recurring revenue.
($64,000 + $300 - $200 - $250) / $64,000 = .997, or about 99%. Now let’s take a look at what the numbers look like using annual recurring revenue and yearly figures.
($768,000 + $5,800 - $1800 - $1600) / $768,000 = 1.003, or 100%.
Although just a slight difference—one percent—it’s certainly not always this close. Other times, a month with a larger or smaller than average amount of upsells or downgrades could certainly make the disparity between these two calculations quite large. That’s why it’s always important to take any metric, including net revenue retention, in context.
Now, this might seem like a lot to do—from gathering the metrics to completing the calculations to figuring out how it all applies to your existing customers. Fortunately, you don’t have to do that on your own. With Planhat, every team in your business can access customer data, including health scores and NRR to improve customer experience and engagement across the board. In fact, THRIVE Learning integrated Planhat with their Hubspot CRM to better track NRR and saw a 24% increase in their license upsells in just one year!
Once you have your raw NRR rate, you might be wondering if you’re hitting net revenue retention benchmarks for your industry. Generally speaking, enterprise-level companies should be striving for over 100%, while small- and mid-sized businesses may find that an NRR that falls between 90-100% will suffice.
Generalizations, however, aren’t always the most useful. At times, it can be more helpful to compare your NRR to a net dollar retention benchmark in your vertical. While not all companies share this information, there are a fair amount of publicly traded companies that share their NRR from time to time. In 2018, for example, CrunchBase compiled a list of companies that shared their NRR scores. You’ll see that most companies fall somewhere between 95% and 125%, with some outliers coming in slightly lower or higher. A quick online search of your competitors or others in your industry may yield you even firmer benchmarks to aim toward.
At Planhat, we’re on a mission to help CS teams—and SaaS organizations as a whole—transform their customer success initiatives. Our customer success platform makes it easy to track data including NRR, usage, upsell opportunities, and more. Not only that, but you’ll be able to easily build out customized customer health scores, collaborate with other teams, and create automations to reach out to customers when it matters most. In today’s marketplace, using the insights that your net revenue retention rate provides can truly define your competitive advantage.
Ready to learn more about how tracking NRR can transform your customer success operations? Check out our webinar with Edward Pedini, Head of Customer Success at SeekOut, Daphne Lopes, Head of Customer Success (EMEA) at HubSpot, and Ben Murrary, founder of SaaS CFO as they discuss how and why NRR is taking the SaaS world by storm. And, reach out to us today for a demo to learn more about what Planhat can do for you.
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