6 min read
As a SaaS organization, it’s important to constantly stay on top of your company’s health. After all, the competition for customers is fierce, and if you lose focus you may find yourself at a disadvantage. Since the SaaS industry has become saturated with similar products, services, and platforms, one of the biggest differentiators between businesses is customer experience.
That begs the question, how do you measure customer experience? One way customer success departments (or entire companies for that matter) can do so is by looking at net revenue retention (NRR), also known as net dollar retention. Calculating net dollar retention can help customer success teams understand:
How satisfied customers are
Whether customers are upgrading or downgrading their subscriptions
Whether customers are remaining loyal customers or churning
The following article will discuss net revenue retention, what all goes into it, and what NRR means in terms of customer success.
Net revenue retention refers to the metric used to measure how much revenue you are generating from existing customers. That means you won’t be looking at new customer data—this is all about your current customers
Before we can break down the net revenue retention rate formula, there are a handful of terms we need to discuss first.
As we mentioned before, these two terms are essentially interchangeable. The main difference between them is that net dollar retention is generally only used in countries where the dollar is the primary form of currency. In other parts of the world, or when discussing the concept globally, net revenue retention might be a better substitute.
Annual recurring revenue (ARR) can be a component of net revenue retention, but is not a direct substitute. Annual recurring revenue illustrates the amount of money that comes in from a subscription or contract over the course of one year. NRR (when looking at a year as opposed to a month) takes ARR into account, but also requires variables like churn and expansion revenue in order to calculate it. Similarly, monthly recurring revenue or MRR can be used to calculate NRR for a month-long period of time.
Net revenue retention and gross revenue retention (GRR) look at fairly similar data points. The one major difference is that net revenue retention accounts for expansion revenue (upsells, cross-sells, upgrades) and gross revenue retention does not. NRR answers the question of how much revenue did you retain and expand over a period of time, whereas GRR only answers how much revenue you retained. This will likely make more sense when we look at how to calculate gross revenue retention and NRR.
The formula for calculating net revenue retention is fairly simple. Depending on whether you want to look at NRR over a year or a month, the formula for net revenue retention is as follows:
NRR = (Beginning ARR or MRR + Expansions - Contractions - Churn) / (Beginning ARR or MRR)
If you wanted to look at gross revenue retention, the formula would look very similar. You would simply not include expansions:
GRR = (Beginning ARR or MRR - Contractions - Churn) / (Beginning ARR or MRR)
It is worth noting that both the NRR and GRR formulas shown above will produce a ratio. That means in order to get a percentage, you just need to multiply the ratio by 100. For example if your NRR ratio is 1.01, you will multiply that by 100 to get a NRR rate of 101%.
To answer the title question of this blog: You will notice that neither NRR nor GRR includes new customer data. That is because the point of these metrics is to identify the success of your existing clients, which is why they can be so helpful for customer success teams. While there are some helpful metrics similar to NRR which do include new customers, take note that those ones simply help tell a different story.
Net revenue retention is one of the most important metrics for customer success, full stop. In fact in one of Planhant’s blogs, we argue that it is critical to SaaS companies. It’s a next level, comprehensive, and quantifiable look at customer experience. Retention, expansions, churn, and contractions are the most important indicators of customer satisfaction. For example:
Is a customer happy enough with your product to continue their subscription?
Are they satisfied with the customer support they receive enough to stay a loyal customer?
Do they see so much value in your company that they want to buy additional products and services from you?
And if the answer to any of these questions is no, are they downgrading or even churning their business?
All of these questions are answered in NRR and are tangibly measured. When you look at the net revenue retention rate, essentially you are looking at the percentage of customers that CS is satisfying. Just ask the experts on this webinar.
Keeping track of all your customer success data can be daunting. Combine that with trying to constantly remember how to calculate NRR, and you might have the makings of a real hassle and headache on your hands. Not to worry though, with Planhat’s customer success platform, it’s never been easier to:
Track customer success data like NRR, usage, expansion opportunities, and more
Set up automations to contact customers at the most opportune times
Collaborate with other teams seamlessly
Create customer health scores
Discover valuable insights that can increase your overall company-wide success
What’s more, our platform integrates easily with other major SaaS tools like Hubspot, for example. In fact, in one case study of integrating Planhat with Hubspot, a SaaS company saw an increase of 24% in upsell revenue. So, if you’re ready to level up your CS and NRR with Planhat, reach out today for a demo!
Discover the success factor behind PushPress’ customer success, with Director of Customer Success, Gavin Danfelt-Martin.
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